Another week down and another Friday evening (10:30 p.m. on May 23rd) release of additional guidance on the Paycheck Protection Program. Two documents, the “Interim Final Rule on Loan Forgiveness” and “Interim Final Rule on SBA Loan Review Procedures and Related Borrower and Lender Responsibilities” were released.
The new guidance answers some of our questions, yet leaves several existing topics unaddressed. We continue to expect additional guidance and Q&As from the SBA and Treasury. Here are the highlights from these two documents, including our firm interpretations:
Interim Final Rule on Loan Forgiveness
- Salary, wages, or commission payments to furloughed employees; bonuses; and hazard pay during the covered period ARE eligible for forgiveness.
MKS Interpretation: As we expected, bonuses and hazard pay to non-owner employees will be forgiven if those payments do not exceed the annualized compensation cap of $100,000 ($15,385).
- Caps on loan forgiveness for owner-employees and self-employed individuals’ own payroll compensation are:
- Lesser of 8/52 of 2019 compensation or $15,385 per individual in total across all businesses, more specifically —
- Owner-employees – capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf
- Schedule C filers – capped by the amount of their owner compensation replacement, calculated based on 2019 net profit
- General partners – capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as such expenses are paid out of their net self-employment income.
MKS Interpretation: Owner-employees who thought their health insurance costs or retirement contributions would be eligible for forgiveness are disappointed with this ruling. Additionally, those who operate two businesses with PPP loans will need to cap their total compensation of forgivable funds at $15,385 between the two entities.
- Prepayment of any loan/mortgage interest is prohibited.
MKS Interpretation: There has been no mention to-date of prepayment of rent and utilities. For Borrowers struggling to spend all of the PPP funds, we understand prepayment of eligible expenses has been considered. We still believe prepayment of rent and utilities is an aggressive approach to date. See bullet below regarding nonpayroll costs paid/incurred.
- Nonpayroll costs are eligible for forgiveness if they are paid during the covered period OR incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.
Example: A borrower’s covered period begins on June 1 and ends on July 26. The borrower pays its May and June electricity bill during the covered period and pays its July electricity bill on August 10, which is the next regular billing date. The borrower may seek loan forgiveness for its May and June electricity bills because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of its July electricity bill through July 26 (end of covered period) because it was incurred during the covered period and paid on the next regular billing date.
MKS Interpretation: This guidance gives the Borrower a chance to ultimately have between 8 weeks and 3 months of rent and utilities forgiven, depending on how the billing cycles fall in comparison to the covered period. Unfortunately, some Borrowers are going to benefit more from this depending on when they received the PPP funds. With this clarification, we presume the 25% cap on nonpayroll expenses will remain a restriction.
- The Alternative Payroll Covered Period (APCP), discussed in our previous communication, is only eligible for businesses with a bi-weekly (or more frequent) payroll cycle.
MKS Interpretation: The APCP allows a Borrower to start their 8-week covered period at the beginning of the NEXT PAYROLL CYCLE after receipt of PPP funds. Based on this guidance, if a Borrower processes payroll twice a month (paid on the 15th and 30th of each month, for example) they would not be allowed to elect the APCP since twice a month payroll (24 pay periods) is less frequent than bi-weekly payroll (26 pay periods).
- If a borrower offers to rehire an employee (to restore FTE), that employee would be excluded from the loan forgiveness reduction calculation if all the following are true:
- The borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or APCP.
- The offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours.
- The offer was rejected by the employee.
- The borrower has maintained records documenting the offer and its rejection.
- The borrower informed the applicable state unemployment insurance office of the employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.
MKS Interpretation: the final bullet is new to the guidance, requiring the employer to ‘report’ the offer rejection to the state unemployment office. This creates an added step to the already overwhelmed Borrowers, and an uncomfortable moral dilemma for many.
- FTE calculation – in our previous communication we described the ‘simplified method’ for calculating FTE in the covered period for part-time employees (all employees working less than 40 hours per week = 0.5). The new guidance clarifies that you need to use the same FTE method in both the base period and the covered period.
MKS Interpretation: This clarification was expected to allow for an ‘apples to apples’ comparison of part-time FTE and prevent Borrowers trying to game the system.
- Recall that a reduction in an employees’ salary of at least 25% will result in a reduction in loan forgiveness amount. The borrower must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25% of base salary or wages between 1/1/20 and 3/31/20 (reference period). This reduction is performed on a per employee basis, not in the aggregate. This is also not relevant for individuals that made over $100,000 in 2019.
MKS Interpretation: Important piece here is the calculation by employee, not at a total company level. The forgiveness application provides a worksheet to assist with this. Also, keep in mind that this is a non-factor if the Borrower restores reduced wages and salaries by 6/30/20 (safe harbor date).
- Loan forgiveness calculation – how does the FTE reduction interact with salary/wage reduction?
To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.
Example: An hourly wage employee had been working 40 hours per week during the borrower selected reference period (FTE employee of 1.0) and the borrower reduced the employee’s hours to 20 hours per week during the covered period (FTE employee of 0.5). There was no change to the employee’s hourly wage during the covered period. Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE employee reduction and the borrower is not required to conduct a salary/wage reduction calculation for that employee.
MKS Interpretation: We believe this is a Borrower friendly ruling, as reduction in hours was likely more common than cuts in wages. If a reduction in hours did not accompany a reduction of pay, the salary/wage reduction rule will not come into play.
- If a borrower restores reductions made to employee salaries and wages or FTE employees by not later than June 30, 2020, can the borrower avoid a reduction in its loan forgiveness amount? Yes, if employee salaries and wages were reduced between February 15, 2020 and April 26, 2020 (the safe harbor period) but the borrower eliminates those reductions by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in salaries and wages. This does not change or affect the requirement that at least 75% of the loan forgiveness amount must be attributable to payroll costs.
MKS Interpretation: This further emphasizes and clarifies that the safe harbor exemption remains for Borrowers who have furloughed or laid off employees between 2/15/20 and 4/26/20. How does this interact with the 75% payroll costs threshold? Is there a potential to hire back employees in week 8 of the covered period and pay out a bonus/hazard pay (up to $15,385) to maximize forgiveness? This is an aggressive approach but not out of the question…yet.
- Lenders have 60 days from receipt of the PPP Forgiveness Application to issue a decision to the SBA on whether the funds are fully or partially forgiven.
MKS Interpretation: We are waiting on further information as to how the lenders will handle forgiveness. We expect them to move quickly on forgiveness decisions in order to receive reimbursement from the government and avoid servicing small loans at 1% annualized interest.
Interim Final Rule on SBA Loan Review Procedures and Related Borrower and Lender Responsibilities
- Clarifies that ANY PPP loan may be subject to review by the SBA, regardless of size
- Reiterates what we learned from the PPP Forgiveness Application, the borrower must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.
- If the SBA determines that a borrower is ineligible for a PPP loan, can the loan be forgiven?
- If SBA determines that a borrower is ineligible for the PPP loan, SBA will direct the lender to deny the loan forgiveness application. Further, if SBA determines that the borrower is ineligible for the loan amount or loan forgiveness amount claimed by the borrower, SBA will direct the lender to deny the loan forgiveness application in whole or in part, as appropriate. SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.
- May a borrower appeal SBA’s determination that the borrower is ineligible for a PPP loan or ineligible for the loan amount or the loan forgiveness amount claimed by the borrower?
- SBA intends to issue a separate interim final rule addressing this process.
- If SBA undertakes a PPP loan review, SBA will notify the lender in writing and the lender must notify the borrower in writing within 5 business days of receipt.