PPP Guidance on Loan Forgiveness and
SBA Review Process

On Friday, May 22, 2020, the Small Business Administration (SBA) issued a pair of new interim final rules on Paycheck Protection Program (PPP) loans, the first addressing the loan forgiveness process and the second discussing the SBA’s process for reviewing PPP loans. As of May 23, approximately $138 billion in PPP funds remained available for additional lending.

Community Action network organizations that received PPP loans in the first wave of funding are approaching the end of the eight-week period for which forgivable PPP loan proceeds may be used. Such organizations, as well as all other organizations that have received a PPP loan, must begin to prepare for the loan forgiveness application process and any potential SBA review of the loan.

Loan Forgiveness

In the Loan Forgiveness Interim Final Rule, the SBA focuses on the process that PPP borrowers must use to obtain loan forgiveness and builds upon the Loan Forgiveness Application issued on May 15. Notable elements of this rule include:

1. The organization must complete and submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) to its lender. The lender has 60 days from the date it receives the completed application to review the application and make a decision about loan forgiveness.
    
2. Lender then submits the loan forgiveness decision to the SBA. Once the lender determines the organization is eligible for partial or full loan forgiveness, the lender submits its decision to the SBA for payment of the forgivable amount. The SBA may, at this point, review the lender’s decision, including the PPP loan and forgiveness applications in addition to verifying that the organization was eligible for a PPP loan and had an adequate basis to make the economic necessity certification. Note that the SBA’s May 13th guidance clarified that PPP loans under $2 million automatically qualify for a safe harbor and are presumed to have been made in good faith. This process is discussed in the second interim final rule issued by the SBA, summarized below.
    

3. Timing of payroll costs eligible for loan forgiveness. To be forgivable, qualifying payroll costs must be paid within the eight consecutive weeks (the covered period) following the date of the disbursement of the PPP loan. The SBA also allows organizations with a bi-weekly, or more frequent, payroll cycle to use an “alternative payroll covered period”, which starts the eight-week clock on the first day of the first payroll cycle in the covered period. This is useful for organizations that may have received the PPP loan on a date in the middle of a payroll cycle. In this case, the organization can elect to use the alternative payroll covered period to align its existing payroll cycle with the PPP’s eight-week covered period.

4. Accrued payroll costs. Payroll costs are considered paid on the day that paychecks are distributed, or the organization originates an ACH credit transaction. An organization is also eligible for loan forgiveness for payroll costs covering the last pay period of the covered period, if they are paid on or before the next regular payroll date. For example, if an organization’s covered period ends Friday, June 12, but weekly paychecks are not distributed until the following Friday, June 19, the organization may claim payroll costs through June 12 for PPP loan forgiveness, so long as paychecks go out no later than June 19. For employees who are not working but are still on payroll, payroll costs are incurred based on the schedule established by the organization (typically, each day that the employee would have performed work).

5. Hazard pay, bonuses, and pay for furloughed workers are eligible payroll costs. The SBA also clarified that hazard pay and bonuses are eligible PPP payroll costs, so long as total compensation for any individual employee does not exceed $100,000 annually, prorated for the covered period. Organizations may also pay furloughed employees even if they do not perform any work during the covered period.

6. Defining employee benefits that are eligible payroll costs. The PPP Loan Forgiveness Application indicates that the following employee benefits are eligible PPP expenses: (1) employer contributions for employee health insurance; (2) employer contributions to employee retirement plans; and (3) state and local taxes assessed on employee compensation (e.g., state unemployment insurance tax) paid by the employer. Note that other employer expenses for benefits (such as dental and vision insurance, life insurance, disability insurance, gym memberships, and other employee perks) cannot be covered by PPP loan proceeds. Employee contributions (whether pre-tax or after-tax) to health insurance plans and retirement plans also are not eligible.

7. Defining utility payments that are eligible for loan forgiveness. The PPP Loan Forgiveness Application indicates that the following utility payments are eligible for loan forgiveness: electricity, gas, water, transportation, telephone, and internet access for which service began before February 15, 2020.

8. Timing of non-payroll costs eligible for loan forgiveness. For other eligible PPP expenses—utilities, rent, and mortgage interest—costs are forgivable if they are either paid during the covered period, or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.

9. Advance payments of mortgage interest are not eligible for loan forgiveness. An organization cannot receive loan forgiveness for any prepayments of mortgage interest. Mortgage principal payments are not an eligible use of PPP loans, regardless of when they are made.
    
10. Loan forgiveness amount not reduced if employee declines offer to return to work. While the CARES Act requires reducing an organization’s PPP loan forgiveness amount based on reductions in full-time equivalent employees or in employee salaries and wages during the covered period, there has always been a statutory exception for organizations that rehire employees and restore salary and wage levels by June 30, 2020. The SBA now clarifies that an organization will not be subject to loan forgiveness reduction due to an employee who declines the offer to return to work if:
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    1. The organization makes a good-faith, written offer to rehire an employee or restore the employee’s position during the covered period (or alternative payroll covered period);
    2. The offer is for the same salary or wages and same number of hours as in the employee’s last pay period prior to separation or reduction of hours;
    3. The employee rejected the offer;
    4. The organization has records documenting the offer and its rejection; and
    5. The organization informed its state unemployment insurance office of the employee’s rejected offer of reemployment within 30 days of the rejection.
11. ​Defining and calculating “full-time equivalent employee”. For purposes of determining any reduction in loan forgiveness amount, the term “full-time equivalent employee” means an employee who works 40 hours or more, on average, each week. The SBA allows organizations to choose to calculate the full-time equivalency in one of two ways for employees who work less than 40 hours per week. First, the organization may calculate the average number of hours a part-time employee was paid per week during the covered period. For example, if an employee was 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 was 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. Second, for administrative convenience, the organizations may elect to use a full-time equivalency of 0.5 for each part-time employee. Organizations must select one method and use it consistently for all part-time employees.
     

12. Employees terminated for cause or who voluntarily resign do not reduce the organization’s loan forgiveness amount. An employee who is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the covered period or the alternative payroll covered period, may still be counted as a full-time equivalent employee when the organization is calculating any loan forgiveness penalty that may apply. Organizations must maintain records demonstrating that each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction.

13. Organizations must maintain PPP records for six years. The Loan Forgiveness Application states that an organization must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full, and must permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.

SBA Loan Review Process

The Loan Review Procedures Interim Final Rule clarifies the following:

1. SBA has the authority to review PPP loans of any amount. The SBA indicates that it may review any PPP loan at any time. The scope of the review includes an organization’s eligibility for a PPP loan, whether an organization calculated the loan amount correctly and used loan proceeds for the allowable uses, and whether an organization is entitled to loan forgiveness in the amount claimed on its Loan Forgiveness Application.
    

2. Organizations may respond to SBA questions in a review. If the SBA questions an organization’s eligibility for, use of, or loan forgiveness amount claimed with respect to a PPP loan, the organization will have the opportunity to respond with more information. The SBA will consider all information provided by the organization in response to such an inquiry.

3. Loan is not forgivable if the SBA determines the organization is ineligible for a PPP loan. If the SBA determines that an organization is ineligible for a PPP loan, the lender must deny the loan forgiveness application. Further, if the SBA determines that the organization is ineligible for the loan amount or loan forgiveness amount claimed by the organization, the lender must deny the loan forgiveness application in whole or in part. The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.

4. Appealing the SBA’s determination. An organization may appeal the SBA’s determination that an organization is ineligible for a PPP loan or ineligible for the loan amount or the loan forgiveness amount claimed by the organization, and the SBA intends to issue separate guidance on the appeals process.

For additional information about eligible PPP expenses, loan forgiveness, and the loan forgiveness reduction penalties, please view CAPLAW’s archived webinar, CARES Act Loans and Tax Credits for Nonprofit Organizations.

This News Flash is part of the Community Services Block Grant (CSBG) Legal Training and Technical Assistance (T/TA) Center. It was created by Community Action Program Legal Services, Inc. (CAPLAW) in the performance of the U.S. Department of Health and Human Services, Administration for Children and Families, Office of Community Services Cooperative Agreement – Grant Award Number 90ET0467-03. Any opinion, findings, conclusions, or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the U.S. Department of Health and Human Services, Administration for Children and Families.

The contents of this news flash are intended to convey general information only and do not constitute legal advice. Any communication through this publication or through CAPLAW’s website does not constitute or create an attorney-client relationship. If you need legal advice, please contact CAPLAW or another attorney directly.