The Small Business Administration’s (SBA) fourteenth in the continuing saga of Interim Final Rules (IFR) for the paycheck protection program (PPP) loans is out and provides details PPP borrowers need for obtaining loan forgiveness. (All of the IFRs can be found here.) This IFR, issued May 22, comes on the heels of the SBA loan forgiveness application, which we covered here. Overall, the IFR conforms to the guidance provided by the forgiveness application and provides more details, but the primary addition in this IFR is the new guidance for the SBA’s evolving treatment of payroll costs for owners of businesses.
The key takeaways from the IFR include:
The IFR provides for the following process:
As described by the SBA, the process “applies only to loan forgiveness applications that are not reviewed by SBA prior to the lender’s decision on the forgiveness application.” However, because the lender decision (Step 2 above) appears to be the first time the SBA learns of the forgiveness application with respect to a particular borrower, it is unclear when a different process applies. We suspect that the SBA will clarify this limitation — for example, that the SBA can extend its 90-day deadline if it determines that it needs more time to review the lender’s decision and the forgiveness application.
The payment by the SBA to the lender includes “any interest accrued through the date of payment.” Further, nothing in the IFR indicates that the SBA will attempt to collect this interest amount from borrowers. This may indicate that borrowers will not owe any interest on the forgiven portion of a PPP loan. However, the “PPP Loan Amount,” defined in the forgiveness application as “the disbursed principal amount of the PPP loan (the total loan amount you received from the Lender)” is a cap for the forgivable amount, so we are not sure how the interest could be waived.
Borrowers must start making payments on PPP loans six months after receiving the PPP loan. The process described above could take 150 days (60 days for lender to submit decision + 90 days for SBA to submit payment). Further, the process cannot start until day 56, at the earliest. Accordingly, borrowers could have made one or more PPP loan payments with respect to PPP loan amounts later forgiven. The SBA helpfully clarified that in this situation the lender “must remit the excess amount, including accrued interest, to the borrower.” We suspect some borrowers will simply not (or will be unable to) make their scheduled PPP payments to the extent they anticipate deferral and, frankly, it is hard to imagine enforcement remedies during that period.
As we discussed in our article about the forgiveness application, the SBA adopted a broad, pro-borrower interpretation that allows forgiveness for both (1) payroll costs paid during the eight-week period and (2) payroll costs incurred during the eight-week period. The forgiveness application also allows borrowers to use an “alternative payroll covered period” if they use semi-weekly or more frequent payroll periods.2 The IFR provides more details for these beneficial rules. In particular, the IFR confirms that, subject to the $100,000 cap annualized ($15,385 during the eight-week period):
The IFR describes caps on loan forgiveness for owner-employees and self-employed individuals. The rule is ambiguous because it starts with a cap of “the lesser of 8/52 of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual in total across all businesses.”3 On first reading, this statement seems to suggest that the $15,385 limit, which is supposed to apply only to cash compensation, now also applies to additional amounts for employer payments for retirement benefits and healthcare contributions. However, the next paragraph appears to override this restrictive view, by providing different caps depending on the type of business:
This provision indicates that a business cannot increase forgivable payroll costs by accelerating or increasing cash compensation, retirement contributions or health care contributions for owner-employees so that the total of all compensation (wages and noncash benefits) exceeds 8/52 of total 2019 compensation. In other words, for employees who are not owner employees, a business can increase payroll costs by increasing wages (subject to the $15,285 cap) and/or the employer contributions to retirement and healthcare (subject to no cap), both compared to 2019. However, the same strategy cannot be used for owner employees.
The limitation creates several questions, the first being who is an employer-owner. For example, does it include a less than one percent shareholder with no control over management? What about an employee with unvested restricted stock or stock options? Questions also arise for owners who were not employees in 2019 but have had to provide services precisely because of the pandemic. Are these payroll costs entirely ineligible for forgiveness? What about owner employees who are working less in 2020, maybe because their business has been closed by government order? We suspect courts will be skeptical about enforcing such a vague and ill-defined rule that lacks any statutory authority. At this point, however, we simply flag this ambiguous language and promise another article soon addressing the grafting of yet another set of rules on an ill-defined group of owner-employees.
As we discussed in our article about the forgiveness application, the SBA adopted a broad, pro-borrower interpretation that allows forgiveness for both (1) nonpayroll costs paid during the eight-week period and (2) nonpayroll costs incurred during the eight-week period. The IFR provides that payments eligible for forgiveness include payments during the eight-week period for amounts incurred before the eight-week period.5
In addition, as with the forgiveness application, the SBA (1) states that nonpayroll costs eligible for forgiveness include amounts “paid during the covered period” and (2) provides a specific rule prohibiting treatment of advance payments of mortgage interest as forgivable. Since interest only accrues based on the passage of time, this limitation makes perfect sense (and is included in the CARES Act). However, as we discussed in our prior article about the forgiveness application, the SBA stating this truism for interest expense indicates that advance payments of rent and utilities are eligible for forgiveness. Although this potentially could lead to abuse, as the SBA itself notes, “the 25 percent cap on nonpayroll costs will avoid excessive inclusion of nonpayroll costs.”
As we discussed in our prior article, the forgiveness application provides favorable interpretations of, and mechanical formulas to calculate, (1) the reduction in forgiveness for reductions in the number of full-time equivalent (FTE) employees, (2) the reduction in forgiveness for a reduction in salary or wages, and (3) avoiding these reductions in forgiveness by restoring the FTE or compensation reduction, as applicable, by June 30. We note the following:
The IFR does not answer all questions about forgiveness, and, it certainly raises some new ones. Nonetheless, leaving aside the questionable restrictions on owner-employees, the IFR demonstrates the resurgence of the SBA providing favorable guidance that expands relief. We applaud these efforts and continue in our attempt to not let the perfect be the enemy of the good.
1 In preparing the forgiveness application, a borrower must list any EIDL advance, but does not take the EIDL advance into account in determining the forgivable amount. It appears that this was not a glitch. Instead, it appears that the SBA is taking on the responsibility of undertaking this calculation. We have no objection to this process, but predict news stories about borrowers being surprised when the forgiven amount of the PPP loan is less than amount listed on the forgiveness application.
2 This reduces administrative burdens by having payroll costs match pay periods. However, it generally reduces the amount of forgivable payroll costs because the first paychecks in the eight-week period will not include amounts paid for work done before the eight-week period.
3 The “across all businesses” provision provides guidance for owners of multiple businesses that each pay a salary. It appears that the owner is capped at $100,000 total, rather than $100,000 per business.
4 The concept of owner-employees was mentioned in the forgiveness application.
5 The IFR discusses this in terms of the prior month’s utility bill timely paid during the eight-week period. However, we are not aware of anything that would prohibit similar treatment to a late payment of a nonpayroll cost paid during the eight-week period.
6 The SBA doesn’t seem to appreciate that Congressionally-enhanced unemployment benefits through the end of July explicitly eliminate any requirement that the unemployed individual seek or accept employment. Further, many unemployment offices are not set up to receive much less track such notifications at a time when seeking employment has been eliminated as a requirement for unemployment benefits. So we look forward to seeing how the SBA effectuates their goal as reflected in the IFR.
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