SBA Interim Final Guidance Provides Clarity on Several Loan Forgiveness Questions

Business Owner Compensation

After receiving the PPP loan forgiveness application, CWA interpreted the SBA’s language as limiting a business owner to total forgiveness of $15,385 including wages, pension contributions and health insurance premiums.  In the interim final rule, they made it abundantly clear this was the case.  Further, if a business owner made less than $100,000 in 2019, they are limited to 8/52 or 15.38% of 2019 compensation.

Staff Pension

While the there was clarity added related to business owner benefits, there is uncertainty related to staff pension.  To date, there is no where in the guidance that states that the staff pension is limited to 8/52’s of the prior year funding.  Because of this, if you had a payable for 2019 staff costs as of December 31, 2019, then this payable has been incurred. You should then pay this liability during the covered period up to 100% of the prior year staff costs. 

Remember, there could be further guidance that reduces this benefit, but until that is released, this may be a way to get your 2019 plan funded with forgiven money and increase the 75% portion of the loan.

Payroll Costs Definition

The release states that the CARES Act defines “payroll costs” broadly to include compensation in the form of salary, wages, commissions or similar compensation.  So, if an employee is not an owner and has total compensation less than $100,000 on an annualized basis, then all compensation including bonuses and hazard pay are eligible for forgiveness.

Full Time Equivalent Safe Harbor

The interim final rule also went into detail and provided more examples related to the reduction of loan forgiveness for both a reduction in full time equivalents (FTEs) and a reduction in salary/wages. 

Much of this was just an expansion of what we learned in the forgiveness application. There was, however, new guidance related to employees that decline to return to work.

As we have shared in our previous blog, the SBA and Treasury adopted a regulatory exemption to the forgiveness reduction rules for borrowers who have offered to rehire an employee or restore the employee’s hours, but the employee declines.

If an employer wants to exclude a reduction in FTE headcount for an employee that declines rehire, they must do the following:

1. Make a good faith, written offer to rehire the employee during the covered period
2. The offer must be at the same salary or wage and the same number of hours as prior to the separation or reduction in hours
3. The offer was rejected by the employee
4. The borrower has records documenting the offer and rejection, and
5. The borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of rejecting the offer.

This additional step that the SBA is requiring of notifying the state unemployment is worth noting as there is a 30-day deadline.

In a footnote, the SBA states it will give guidance on how an employer should contact their state unemployment on the SBA website, but that doesn’t seem to be there now and with the 30-day deadline, it seems that some employers may need to act soon.  For documentation purposes, it seems that a letter or email may be the most appropriate form of notification until guidance is received.

Employers also must remember that the other option to not have their forgiveness reduced is to replace any employees that decline an offer of reemployment by June 30, 2020.  This would alleviate the employer from having to provide the documentation above, but this may or may not be what is best for the business.

Forgiveness Process 

Lastly, the SBA added guidance on the loan forgiveness process.  As mentioned when the Loan Forgiveness Application was received, it set the deadline for the application as October 31, 2020.  The IFR now states that the lender will review the application and make a decision in regards to loan forgiveness.  They will have 60 days from receipt of the application to issue a decision to the SBA.  After this, the SBA has 90 days to remit the forgiven amount plus accrued interest to the bank. 

What is interesting about this, is that it’s clear that most will be past the 6 month deferral period before the application is submitted, bank reviewed, turned over to the SBA and payment is received.  As such, the IFR does clarify that if the forgiveness exceeds the amount of the loan due to the borrower making scheduled payments, the lender will remit the excess with accrued interest back to the borrower. 

Because of this time frame, borrowers need to be ready to start making payments on the full PPP loan after the 6 month deferral. With amortization periods only 18 months, these payments could be larger than many expect.