SBA Revises Loan Forgiveness Interim Final Rule: Implements Changes from the Paycheck Protection Program Flexibility Act

In prior alerts, we discussed the SBA’s interim final rule on loan forgiveness, and changes to the Paycheck Protection Program (PPP) resulting from the PPP Flexibility Act, signed into law on June 5, 2020.

On Monday, the SBA issued revisions to its interim final rules on loan forgiveness and review, implementing changes from the PPP Flexibility Act. While many of the revisions simply follow the PPP Flexibility Act’s provisions (e.g., changing 8 weeks to 24 weeks, changing 75 percent payroll to 60 percent payroll), there are several new aspects that require review.

1) Rescission of prior exemption for FTE reductions

While the PPP Flexibility Act adds additional FTE reduction safe harbors, the SBA quietly rescinded a prior exemption that was helpful for borrowers. The prior rule was first captured in frequently asked questions number 40, published by the SBA on May 3. FAQ 40 provided that laid-off employees whom the borrower made a written good faith offer to rehire for the same salary/wages and same number of hours, but which the employee rejected, would not be penalized for any FTE drop associated with that employee. This de minimis exemption was captured in the SBA’s interim final rule on loan forgiveness, with the added requirement that the employer report the employee to the applicable state unemployment insurance office within 30 days of his or her rejection of the offer.

The PPP Flexibility Act added a new FTE reduction exemption if an employer could document: (i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020. While different than the SBA’s previous rule, it has nonetheless concluded that this new FTE exemption “should supersede the previous de minimis exemption relating to reductions in FTE employees.”

What does this mean?

Borrowers that were relying on the SBA’s prior rule should take note. The SBA’s revisions impose a new requirement that was not previously found—namely, that the borrower also must make efforts to hire similarly qualified individuals and must document those efforts. Those efforts must be made “in good faith,” however the extent or nature of the efforts required, or the level of documentation expected, is not described.

2) The business activity safe harbor can be either direct or indirect

The PPP Flexibility Act created a new FTE reduction safe harbor if a borrower could document: (i) an inability to return to the same level of business activity as such business was operating at before February 15, 2020; (ii) that this inability was due to compliance with requirements established or guidance issued by HHS, CDC, or OSHA between March 1, 2020 and December 31, 2020; and (iii) that such requirements or guidance related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

The SBA expounded that this statutory exemption includes “both direct and indirect compliance with COVID Requirements or Guidance, because a significant amount of the reduction in business activity stemming from COVID Requirements or Guidance is the result of state and local government shutdown orders that are based in part on guidance from the three federal agencies.” By including indirect compliance, such as state and local shutdowns, or other measures implemented to comply with guidance issued by the federal agencies, this will allow many borrowers to take advantage of the new safe harbor. To do so, however, borrowers must maintain records regarding their reduction in business activity, the local government shutdown orders, and other information that supports their use of this safe harbor. In addition, borrowers must certify that they have documented in good faith that their reduction in business activity during the covered period stems directly or indirectly from such compliance.

3) Timing of loan forgiveness

While the PPP Flexibility Act extended Section 1102’s covered period to December 31, 2020, the SBA clarified that a borrower may request loan forgiveness at any time and need not wait until December 31, 2020 or even until the end of its loan forgiveness covered period. Thus, if a borrower elects to utilize the 24-week covered period, but exhausts its loan funds prior to week 24, it need not wait until the end of its covered period to request loan forgiveness. While a borrower may request loan forgiveness until the maturity date of its loan, if it does not submit its request within 10 months after the end of its loan forgiveness covered period, the loan is no longer deferred and the borrower must begin making principal and interest payments.

4) Owner employees and self-employed individuals

Previously, the SBA had capped the amount of loan forgiveness for owner-employees and self-employed individuals’ payroll compensation at the lesser of 8/52 of 2019 compensation or $15,385 per individual. For borrowers electing to use the longer 24-week period, the SBA has adjusted this calculation to the lesser of 2.5/12 of 2019 compensation or $20,833 per individual. As a result, owner-employees and self-employed individuals each have the potential to receive an additional $5,448 in loan forgiveness.

Conclusion

Here at Potomac Law, we are tracking PPP developments daily and will be updating clients as new developments and guidance comes out. If you are interested in advice for your specific PPP loan, please reach out to dadams@potomaclaw.com or review package offerings here to learn more.

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To learn more about the issues raised by this client bulletin, please contact Derek Adams at dadams@potomaclaw.com.

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