COVID-19 UPDATE: SBA Releases Interim Final Rule on PPP Loan ForgivenessMay 28, 2020
On May 22, SBA released the first Interim Final Rule (the “Rule”) providing guidance on PPP Loan Forgiveness. This guidance came only days after SBA released the Loan Forgiveness Application (the “Application”) early last week. While much of the Rule is consistent with what we already knew from earlier guidance about how SBA would review loan forgiveness, the Rule does provide some additional guidance in a few key areas.
Hazard Pay: Businesses are eligible for payroll costs attributable to “hazard pay” or “COVID bonuses.” SBA initially (albeit informally) was suggesting that such payments would not be eligible for forgiveness. Yet the Rule explicitly clarifies that such payments are forgivable (subject to the $100,000 cap):
The Administrator, in consultation with the Secretary, has also determined that, if an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness because they constitute a supplement to salary or wages, and are thus a similar form of compensation.
Timing of Nonpayroll Costs: The Rule also clarifies how borrowers will be able to seek forgiveness for nonpayroll costs. There was initial confusion about how SBA would consider nonpayroll costs—principally, utility payments and either rent or mortgage interest—given that many are monthly payments and would not conveniently align with the covered period for forgiveness. The Rule explains that SBA will take an expansive view of these costs, and include those payments that were either incurred or paid during the covered period. As a result, businesses might be able to include almost three months of utility payments. The example in the Rule clarifies that a borrower, with a covered period of June 1 through July 26 and electricity bills paid on the 10th of the month, would be able to include nearly three full electricity bills in the forgiveness covered period: the May electricity bill (paid on June 10), the June bill (paid on July 10) and the portion of the July bill up to July 26 (paid on August 10).
Offers to Rehire Employees: While SBA had already clarified that employers could exclude employees who refused a good faith offer to return to work from the headcount test, the Rule also included a new requirement that the employer must notify the state unemployment office within 30 days of the date the employee rejects the offer. SBA noted that further guidance will be forthcoming on this issue.
Loan Forgiveness Timeline: Last, the Rule does not include or mention a deadline for a borrower to apply for Loan Forgiveness. It does, however, require a lender to issue a decision to (and request payment from) SBA based on a borrower’s forgiveness application within 60 days of when the borrower submits the application. Then, SBA has 90 days to remit payment to the lender. The Rule also explains that the lender will be communicating with the borrower, not SBA.
Overall, SBA provided significant guidance on loan forgiveness over the past week. Yet, substantial questions still remain (Can a borrower claim forgiveness of greater than 8 weeks of payroll costs?). Expect additional guidance to be forthcoming on these and other topics. Moreover, as Congress continues to discuss changing the rules surrounding the program, some of the existing guidance is liable to be nullified. For these reasons, and because it is generally good practice, we recommend that borrowers maintain open communication with their lenders, who will ultimately be evaluating the Application.