Overview of May PPP Loan Forgiveness Regulations


By: Colleen Lyons

June 5, 2020

As contemplated when the Paycheck Protection Loan Forgiveness Application was released in the middle of May, the Small Business Administration (“SBA”) released two sets of interim regulations on May 22nd – one with respect to Loan Forgiveness Requirements and the other with respect to SBA loan review procedures.  Certain elements of these regulations will be further modified in light of the recent passage of the Paycheck Protection Program Flexibility Act of 2020.

Interim Regulations concerning Loan Forgiveness

In many respects the interim regulations concerning the loan forgiveness requirements (the “Forgiveness Regulations”) track the earlier Loan Forgiveness Application and related instructions as outlined in our earlier Client Alert. That said, these new regulations do provide some additional guidance of note in several areas as follows.

Overview of Loan Forgiveness Process: In order to receive forgiveness, the borrower will need to submit a completed loan forgiveness application to its lender.  The lender will then have 60 days to issue a decision to the SBA and request payment for the forgiveness amount.  Not later than 90 days after the lender delivers it decision and request, the SBA will remit the forgiveness amount, plus any interest accrued through the date of payment.

Hazard Pay and Bonuses: Hazard pay or bonuses paid to employees whose annualized compensation does not exceed $100,000 will be a forgiveable payroll cost.

Treatment of Costs Incurred at end of Covered Period: Payroll costs incurred during a borrower’s last pay period during the covered or alternative covered period but paid on or before the next regular payroll date are eligible for forgiveness.  Similarly non-payroll costs incurred during the covered period but paid on or before the next regular billing date are eligible for forgiveness. Advanced payments of interest on mortgage obligations are not eligible for loan forgiveness.

Caps on Payroll Costs of Owner-Employees and Self-Employed Individuals:The amount of loan forgiveness that can be requested for owner-employees and self-employed individuals payroll compensation cannot be more than the lesser of 8/52 of 2019 compensation or $15,385 per individual across all businesses[1].  While not defined, owner-employees are thought to be shareholders of Subchapter C or S corporations who receive W-2 wages from the corporation; amounts paid with respect to owner-employees for any retirement and health care insurance benefits are eligible for forgiveness.  Self-employed individuals, including Schedule C filers and general partners, may not request forgiveness for retirement and health care insurance contributions.

Permitted FTE Adjustments: When computing the FTE Reduction Amount, a borrower may exclude any reduction in full time equivalent employees (“FTEs”) attributable to an employee if (i) the borrower made a good faith, written offer to rehire the employee (or restore the reduced hours); (ii) the offer was for the same salary or wages and the same number of hours as earned by the employee immediately prior to separation or reduction; (iii) the offer was rejected by the employee; (iv) the borrower has maintained records documenting the offer and its rejection; and (v) the borrower has informed the applicable state unemployment insurance office within 30 days of employee’s rejection.  The Forgiveness Regulations indicate that additional guidance will be provided concerning the unemployment notice requirement.

The Forgiveness Regulations also confirm that if an employee of the borrower is fired for cause, voluntarily resigns or voluntarily requests a reduced schedule during the covered period or the alternative covered period (an “FTE reduction event”), the borrower may count such employee at the same full-time equivalency level before the FTE reduction event when calculating the FTE employee reduction penalty.  Borrowers who avail themselves of this exemption are required to maintain records to support the treatment.

Interplay of FTE and Salary/Wage Reductions: The Forgiveness Regulations clarify that to the extent a salary/wage reduction is the result of a reduction in the number of hours an employee works, then that reduction will only be reflected in the FTE Reduction Computation and not also in the salary/wage reduction calculation so the borrower is not doubly penalized for the reduction.

Reduction Safe Harbors: The Forgiveness Regulations confirm that if salaries or wages were reduced between February 15 and April 26th (the “safe harbor period”) and the borrower eliminates those reductions within the prescribed period (originally on or before June 30, 2020 but extended to December 31, 2020 by the PPP Flexibility Act), then the borrower will not be subject to any salary/wage reduction.  Similarly if the borrower’s FTEs were reduced during the safe harbor period and the borrower eliminates those FTE reductions within the prescribed period, the borrower will not be subject to any FTE reduction.

Interim Regulations concerning SBA Loan Review Procedures

The second set of interim regulations addresses loan review process issues for both borrowers and lenders (the “Review Regulations”).  Only the regulations addressing issues with respect to borrowers are discussed in this Client Alert.

Because the PPP loan program is based largely on self-certifications by each borrower, the Review Regulations make clear that any PPP loan may be reviewed at any time by the SBA.  The SBA is authorized to review any of the following: (i) the borrower’s eligibility under the CARES Act, the rules and guidance available at the time of the borrower’s PPP loan application, and the terms of the borrower’s loan application; (ii) the proper calculation of the loan amount, (iii) the proper use of the loan proceeds and (iv) the computation of the amount eligible for forgiveness.  If the SBA has questions about any aspect of a loan, the borrower will have the opportunity to respond and provide supporting information through its lender to the SBA.

If the SBA determines that a borrower was ineligible for a PPP loan, its forgiveness application will be denied.  If the SBA determines that the borrower is ineligible for all or a portion of the loan forgiveness amount claimed, the SBA will direct the lender to 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 remedies.  The Review Regulations indicate that the SBA intends to issue a separate interim final rule addressing the appeal process of the borrower.


[1] These caps may be adjusted in light of the Paycheck Protection Program Forgiveness Flexibility Act (“PPP Flexibility Act”).