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New SBA Guidance on PPP Loan Forgiveness and Review of Forgiveness Applications

On May 22, seven days after releasing the Paycheck Protection Program (“PPP”) loan forgiveness application and instructions, the Small Business Administration (“SBA”) released an Interim Final Rule on Loan Forgiveness (the “Forgiveness Rule”) and an Interim Final Rule on SBA Loan Review Procedures (the “Review Rule”). Key takeaways for borrowers with respect to the Forgiveness Rule and the Review Rule are summarized below.

Forgiveness Rule

While the Forgiveness Rule is generally consistent with the forgiveness application and instructions (previously described discussed in-depth here), it also includes several important additions and clarifications, which are summarized below. This summary should be read together with our prior article linked to above.

Payroll Costs Incurred or Paid During the Applicable Covered Period are Eligible for Forgiveness[1]

  • The Forgiveness Rule clarifies that payroll costs incurred or paid during the applicable covered period (either the standard 8-week covered period or the delayed-start alternative 8-week covered period) are eligible for forgiveness.
  • Thus, payroll costs paid to employees on the first day of the applicable covered period are eligible for forgiveness, even if such payroll costs were incurred before the applicable covered period.
  • Also, payroll costs incurred during the applicable covered period but not paid during that period are eligible for forgiveness if paid on the next regular payroll payment date following the applicable covered period. However, in the event the payroll cycle related to that next regular payment date includes payroll incurred (i.e., earned by the employee) after the end of the applicable covered period, the portion of that payroll cycle related to the post-covered period payment date would not be eligible for forgiveness.
  • Therefore, it is not necessary that payroll costs be both incurred and paid during the applicable covered period to be eligible for forgiveness (which remained a subject of debate given the language in the CARES Act and uncertainty regarding language in the forgiveness application instructions).

Bonuses and “Hazard Pay” are Eligible for Forgiveness

  • Previously, it was unclear whether “bonuses” were included in the definition of “payroll costs” because they were not specifically mentioned in the CARES Act’s definition of that term.
  • The Forgiveness Rule, however, expressly states that bonuses are “payroll costs” (as supplemental to wages/salary) and therefore eligible for forgiveness.
  • “Hazard pay” is also a “payroll cost” and eligible for forgiveness.
  • Borrowers should ensure such bonuses or “hazard pay” do not cause the employee’s salary/wages for the covered period to exceed $15,385 (i.e., the equivalent of 8-weeks at an annual rate of $100,000). An employee’s pay over that amount is not eligible for forgiveness.

Exemption for Rejected Offers to Rehire

  • The Forgiveness Rule clarifies earlier SBA guidance that a borrower’s forgiveness amount will not be reduced because of reductions in full-time equivalent (“FTE”) employment levels or pay if the borrower makes a good faith, written offer to rehire a former employee for the same salary/wages and the same number of hours but that employee rejects the offer.
  • Importantly, the Forgiveness Rule added a new requirement in order to be eligible for this exception: a borrower must inform the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.
  • The Forgiveness Rule applies this exemption to FTE reductions made prior to February 15, 2020, as well as reductions made after that date (previously, the exemption under the CARES Act applied only to reductions in FTE made between February 15, 2020 and April 26, 2020).

Reductions Based on FTE Levels Relative to Reductions in Salary/Wages

  • To avoid penalizing a borrower twice, the Forgiveness Rule provides that a reduction to an employee’s hours (if the rate of wages/salary stays the same) is treated as a FTE reduction, not as a salary/wages reduction.
  • For example, reducing an employee’s hours from 40/week to 20/week results in a reduction based on FTE levels (and not as a 50% reduction to the employee’s salary/wages). Similarly, this would allow a full time employee’s salary to be reduced by 40% if the individual’s expected work hours were reduced for 5 days a week to 3 days week, without triggering the Salary/Hourly Wage  Reduction. A borrower therefore does not have to calculate such an employee’s compensation under the “Salary/Hourly Wage Reduction” section of the PPP loan forgiveness application Schedule A or related worksheet.
  • Thus, when determining whether an employee’s salary/wages have been reduced, the SBA appears focused on the employee’s rate of pay, not gross compensation.
  • Note that the SBA has not issued guidance instructing borrowers how to treat furloughed employees (as a 100% reduction in compensation or a reduction in FTE count). While it is not clear, the foregoing provisions of the Forgiveness Rule seem to suggest that furloughed employees should be treated as an FTE reduction and not a salary/hourly wage reduction, because their reduction in compensation is a result of the employees no longer working.

Review Rule

The Review Rule provides borrowers and lenders more clarity with respect to what to expect in connection with the review of borrowers’ PPP loan forgiveness applications.  Key takeaways for borrowers are summarized below.

Lender Review of Loan Forgiveness Applications

  • The Review Rule clarified that lenders will have primary, but somewhat limited, responsibility in reviewing a borrower’s loan forgiveness application.
  • The lender must confirm:
    • that the borrower has made the certifications included in the loan forgiveness application;
    • that the borrower submitted all of the documentation that the instructions to the loan forgiveness application require a borrower to submit as evidence of its payroll and nonpayroll costs;
    • the borrower’s calculations on the loan forgiveness application, including its calculations of cash and non-cash compensation, business mortgage interest, business rent or lease payments and business utility payments, by reviewing the documentation submitted by the borrower; and
    • the accuracy of the borrower’s calculation as to whether it met the requirement that at least 75% of the loan forgiveness amount be for payroll costs.
  • It is unclear whether the lender must review the documentation submitted by the borrower in confirming the accuracy of the borrower’s calculation of any reductions to the loan forgiveness amount as a result of reductions in FTE. While the Review Rule does not specifically so state (as it did in connection with review of payroll and nonpayroll costs), it is a calculation on the loan forgiveness application, and the loan forgiveness application instructions require a borrower to submit documentation showing its FTE numbers over the two periods of time relevant to determining whether or not there is any pro rata reduction to the loan forgiveness amount.
  • The lender does not appear to be required to confirm the accuracy of the borrower’s calculation of any reductions to the loan forgiveness amount as a result of salary/hourly wage reductions. The instructions to the loan forgiveness applications provide that this information must be maintained by the borrower, but need not be submitted with its loan forgiveness application. Therefore, it appears that the accuracy of this calculation will only be reviewed by the SBA in the event the SBA requests such back-up documentation.
  • The Review Rule provides that lenders are expected to perform a good-faith review, in a reasonable amount of time, of the borrower’s loan forgiveness calculations and supporting documents. If the borrower submits payroll records from a recognized third-party payroll processor, minimal review is required. However, payroll records from other sources might require a more extensive review by the lender.
  • As with lenders’ review of borrowers’ PPP loan applications, lenders may rely on borrower representations. However, if lenders identify errors in the borrower’s calculations or material lack of substantiation in the supporting documents, the Review Rule directs the lender to work with the borrower to remedy the issue.

SBA Review of Loan Forgiveness Application

  • The Review Rule broadly states that the SBA may review any PPP loan, as it deems “appropriate,” in its discretion. The Review Rule further provides, by way of example, that the SBA may review a loan if the documentation submitted with the loan forgiveness application, or any other information, indicates that the borrower may be ineligible for a PPP loan, that the loan amount was incorrect, or the loan forgiveness amount claimed was incorrect.  It is unclear in what instances any of the foregoing would be “indicated” to the SBA, and therefore, there is no criteria helpful to a borrower in predicting whether the SBA will review its loan or loan forgiveness application.
  • In reviewing a PPP loan, the SBA has broad authority to review all aspects of eligibility, loan amount, use of loan proceeds and loan forgiveness amounts claimed.
  • The Review Rule provides that if the SBA determines that a borrower was ineligible for a PPP loan (by way of affiliation rules, failure to meet the required certifications, as a result of specific ineligibility parameters set forth in the SBA’s standard operating procedures, or otherwise), then the loan will not be forgiven and the SBA may seek repayment of the PPP loan or pursue other remedies.[2] Furthermore, the Review Rule notes that the limitation on the SBA’s recourse against a borrower’s individual shareholders, members or partners for non-payment of a PPP loan only applies if the borrower was indeed an eligible recipient of the loan.

Process and Timing of Loan Forgiveness Review

  • A lender has 60 days after receipt of a borrower’s loan forgiveness application to submit to the SBA its determination on partial, full, or no loan forgiveness.
  • If the lender denies the loan forgiveness application, it must notify the borrower in writing, and the borrower has 30 days after receipt of such notice to request review of the lender’s decision by the SBA.
  • Once the SBA receives the lender’s determination on loan forgiveness, subject to SBA review of the loan, the SBA has 90 days to remit the appropriate loan forgiveness amount to the lender. If the SBA initiates a review of the loan during this time, the 90-day deadline does not appear to apply.
  • If the SBA undertakes a review of a PPP loan, it will notify the lender, and the lender is required to notify the borrower in writing within five business days. The SBA may require the lender to request additional information from the borrower, or the SBA may contact the borrower directly.
  • If the SBA determines that a borrower is ineligible for a PPP loan, ineligible for the loan amount received, or ineligible for the forgiveness amount claimed, the Review Rule provides a borrower may appeal that determination, and that further guidance regarding the appeal process will be forthcoming.


[1] In an example calculating the covered periods for loan forgiveness purposes in the Forgiveness Rule, the SBA includes dates in July and August, which fall after the June 30, 2020 deadline set forth in the CARES Act for expending PPP funds. As currently written, the CARES Act does not permit borrowers to use PPP funds after that date (despite the SBA’s example). While Congress has discussed extending the June 30, 2020 deadline, it has not yet done so.

[2] The prospect of immediate repayment in the event of a determination of ineligibility, which is consistent with prior SBA guidance in FAQ #46, appears inconsistent with provisions in the Forgiveness Rule that might be interpreted as meaning that if the borrower lacked an adequate basis for the certifications made in its PPP loan application (which would make that borrower ineligible for the loan), then the balance on the loan must be repaid by the borrower on or before the two-year maturity of the loan.  We believe that in reading the provisions of the Review Rule, the language referring to repayment over the two-year term was intended to apply only in circumstances where the borrower was eligible for the loan, but the loan forgiveness was denied in whole or in part for other reasons.

This summary does not include or address every provision of Paycheck Protection Program under the CARES Act, which should be read in its entirety. Furthermore, pursuant to the CARES Act, the SBA continues to promulgate regulations for the implementation of the Paycheck Protection Program and, as such, there is still uncertainty relating to details of implementation.

We are here to help answer specific questions and offer advice on your options. Please contact any member of our Corporate & Business Group to discuss.

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