SBA Revises Interim Final Rules for Loan Forgiveness and Loan Review Procedures

As has been the case with other recent rulings, most of the changes in the June 22^nd ruling simply update existing guidance to conform to changes made by the PPPFA, as well as to incorporate the recently released “EZ” loan forgiveness application. We will focus our attention on the few morsels of new guidance sprinkled throughout the 34-page ruling.

Changes to Interim Final Rule on Loan Forgiveness

• The SBA determined that borrowers will be able to apply for loan forgiveness before the end of their Covered Period, provided that they have used all of the loan proceeds for which they are requesting forgiveness. While there are pros and cons relative to applying for forgiveness “early”, the SBA indicated that if a borrower applies for forgiveness before the end of their Covered Period and had reduced any employee’s salaries or wages in excess of 25%, the borrower is required to account for the excess salary reduction for the full 8-week or 24-week covered period. Impacted borrowers will want to consider the appropriate timing for filing their application, so as to maximize loan forgiveness.
• The SBA clarified the application of Cash and Non-Cash Compensation limitations to owner-employees for purposes of calculating Payroll Costs paid/incurred during the applicable Covered Period.
  • Cash Compensation (salaries, wages, etc.) for all owner-employees (including owner-employees of C Corporations and S Corporations) is capped (in total across all businesses) to the lesser of:
    • 8 weeks’ worth of 2019 Cash Compensation or $15,385 (for an 8-week Covered Period)
    • 2 ½ months’ worth of 2019 Cash Compensation or $20,833 (for a 24-week Covered Period)
  • For C Corporation owner-employees, employer contributions to retirement plans and health insurance are capped at:
    • 8 or weeks’ worth of 2019 employer contributions (for an 8-week Covered Period)
    • 2 ½ months’ worth of 2019 employer contributions (for a 24-week Covered Period)
  • For S Corporation owner-employees, employer contributions to retirement plans are subject to the same limitations as C Corporation owner-employees. Employer contributions to health insurance cannot be included in Payroll Costs.
• The previous de minimis exemption from a loan forgiveness reduction with respect to a reduction in headcount due to employees who were laid-off and subsequently refused an offer to be rehired for the same salary and same number of hours was rescinded in light of a related exemption included in the PPPFA (see below).
• The SBA provided guidance regarding the documentation necessary to support the two new exemptions from a reduction in loan forgiveness due to specific reductions in headcount provided by the PPPFA.
  • With regard to the exemption whereby the borrower (in good faith) is able to document that they were unable to rehire individuals who were employees of the borrower on February 15, 2020 (or hire similarly qualified employees for unfilled positions), the borrower must maintain documents that include (but are not limited to) all written offers to rehire employees, a written record of an offer’s rejection, and a written record of efforts to hire similarly qualified individuals. Additionally, the borrower is required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the rejection (further information will be forthcoming from the SBA regarding the process for reporting the rejection).
  • With regard to the exemption whereby the borrower (in good faith) is able to document that they were unable to return to the same level of business activity as they were operating on February 15, 2020 due to compliance with COVID Requirements or Guidance, the borrower must maintain copies of applicable COVID Requirements or Guidance for each business location as well as relevant financial records.
    • Per the PPPFA, COVID Requirements or Guidance refers to requirements or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
    • As a significant portion of the overall reduction in business activity in the United States stems from state and local shutdown orders which were based in part on guidance issued from the three federal agencies, the SBA has interpreted the above exemption to include compliance with any direct (federal) and indirect (state and local) COVID Requirements or Guidance. Accordingly, borrowers should retain documentation regarding compliance with any state/local Stay at Home Orders, public health official directives, re-opening orders, etc. impacting any of their business locations.

Common Changes to both Interim Final Rules

Both interim final rules were revised with respect to certain lender notification requirements.

• For loan forgiveness applications filed within 10 months after the end of the Covered Period, the lender is required to notify the borrower:
  • The amount of loan forgiveness remitted to the lender by the SBA;
  • Upon notification that the SBA determined that the borrower is not eligible to receive loan forgiveness; and
  • Upon receiving the loan forgiveness or determination of ineligibility for forgiveness from the SBA, the date on which the borrower’s first payment is due (if applicable)
• In the case that a loan forgiveness application is not filed within 10 months after the end of the Covered Period, the lender is required to notify the borrower:
  • Upon notification that the SBA independently determined that the borrower is not eligible to receive loan forgiveness; and
  • Upon reaching a date that is 10 months after the end of the borrower’s Covered Period, the date on which the borrower’s first payment is due

In Closing

We expect that the SBA will continue to release revisions to previous guidance in the coming weeks and will continue to update you as new information becomes available. If you have questions or wish to discuss these matters, please contact us.

Abeles and Hoffman, P.C.