PPP Forgiveness Interim Final Rules Issued
The Department of the Treasury (Treasury) and Small Business Administration (SBA) celebrated the holiday weekend early by releasing new Interim Final Rules (Rules) concerning the Paycheck Protection Program’s (PPP) forgiveness calculation. In general, the Rules build upon the application for forgiveness which was released on May 15, but do not address the biggest concerns of businesses—an expansion of the 8-week Covered Period or an elimination of the 75% payroll cost mandate. While both the Senate and House are expected to vote on bills this week which will address those aforementioned concerns, meaningful resolution of those issues will likely not come quick enough for those PPP recipients who received loans in early to mid-April. As of May 23, the SBA had authorized 4,426,118 loans for a total of $511,231,948,095 leaving about $138 billion authorized and available PPP funds remaining.
- Alternative Method for Covered Period – Borrowers with pay cycles of biweekly or more frequent are permitted to elect an alternative payroll Covered Period which allows for a Borrower’s Covered Period to commence on the first day of the pay period following receipt of PPP funds.
- Inclusion of Bonus or Hazard Pay – The Rules expand the definition of eligible payroll costs to include bonuses or hazard pay so long as those payments do not cause an employee’s pro-rated payroll costs to exceed the $100,000 threshold.
- Self-Employed and Owner-Employee Cap – The Rules established a cap on the amount of loan forgiveness available which is limited to the lesser of 8/52 of 2019 compensation (i.e., no more than 15.38% of 2019 compensation) or $15,385 per individual in total.
- When is a non-payroll cost ‘incurred’? – Importantly, the Rules provide much needed clarification that non-payroll costs must be paid or incurred during the 8-week Covered Period and paid on or before the next regular billing date—even if that date is beyond the Covered Period. Additionally, the Rules reiterate that advance payments on mortgage interest are not eligible for forgiveness.
- Refusal to be Rehired – The Rules further expand upon the de minimis exception provided by Question 40 of the FAQs concerning employees who refuse to be rehired following an offer of employment. In particular, the Rules reaffirm that such a reduction of employees will not affect a Borrower’s request for forgiveness so long as the Borrower can demonstrate: (i) the Borrower made a good faith, written offer to rehire; (ii) the offer was for the same salary or wages and same number of hours; (iii) the offer was rejected by the employee; (iv) the Borrower maintained the record documenting the offer; and (v) the Borrower informed the applicable state unemployment insurance office of the rejected offer.
- Definition of Full-Time Equivalent – Due to the CARES Act failing to provide a definition of full-time equivalents, the Rules provide that a full-time equivalent employee is one working 40 hours per week. Additionally, the Rules elaborate on the method for calculating less than full-time employees using the following example:
“For example, if an employee were paid for 30 hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.75. Similarly, if an employee were paid for ten hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.25.”
- Proportional Reduction related to 75% Payroll Requirement – Perhaps the most important piece of information to come out of the Rules relates to the dreaded 75% payroll expense requirement. After much uncertainty, the Rules clarify that a Borrower who does not use the PPP loan proceeds to pay 75% towards eligible payroll costs will not suffer a ‘cliff effect’ from a forgiveness standpoint. Rather, the amount eligible to be forgiven is simply reduced according to a percentage calculation based on full-time equivalents during the reference period divided by full-time equivalents during the Covered Period.
- Reduction in Wages or Employees – Finally, the Rules provide further guidance by way of an example to prevent Borrowers from being doubly penalized for reductions:
“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.”