SBA Further Clarifies PPP Loan Forgiveness Requirements and EIDL Refinance Rules

5 min

On Tuesday, June 23, 2020, the SBA released new guidance (here and here), revising its Interim Final Rules on Paycheck Protection Program (PPP) loan forgiveness procedures (more on that here) in light of the recently enacted Paycheck Protection Program Flexibility Act (PPPFA), and explaining the parameters for refinancing an Economic Injury Disaster Loan (EIDL) into a PPP loan.

The new guidance provides:

Loan Forgiveness Guidance:

  • Updates the prior Interim Final Rule to reflect the new loan forgiveness EZ Application (described further here).
  • Confirms that lenders have 60 days to review a loan forgiveness application and issue a decision to the SBA. Where the lender determines that the forgiveness amount applied for is appropriate, the lender should request payment from the SBA, and the SBA will remit payment to the lender within 90 days (subject to any review by the SBA).
  • Clarifies that a borrower may apply for forgiveness at any time after it exhausts its PPP funds, but where a borrower has reduced salaries, that the borrowers must account for such reduction until the end of the 8-week or 24-week period. The guidance is silent about treatment of headcount reductions.
  • Provides additional information regarding owner-employees and self-employed individuals:
    • For borrowers that received a PPP loan before June 5, 2020 that elect to use an 8-week covered period, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at 8 weeks’ worth (8/52) of compensation (i.e., approximately 15.38% of 2019 compensation) or $15,385 per individual, whichever is less, in total across all businesses. For all other borrowers, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at 2.5 months’ worth (2.5/12) of 2019 compensation (i.e., approximately 20.83% of compensation) or $20,833 per individual, whichever is less, in total across all businesses.
    • In particular, C-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.
    • S-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be added separately because those payments are already included in their employee cash compensation.
    • Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit.
    • General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed Section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties), multiplied by 0.9235.
    • For self-employed individuals, including Schedule C or F filers and general partners, retirement and health insurance contributions are included in their net self-employment income and therefore cannot be added separately to their payroll calculation.
    • For borrowers that received a PPP loan before June 5, 2020 that elect to use an 8-week covered period, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at 8 weeks’ worth (8/52) of compensation (i.e., approximately 15.38% of 2019 compensation) or $15,385 per individual, whichever is less, in total across all businesses. For all other borrowers, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at 2.5 months’ worth (2.5/12) of 2019 compensation (i.e., approximately 20.83% of compensation) or $20,833 per individual, whichever is less, in total across all businesses.
  • States that the previous “de minimis” exemption pertaining to individuals who refuse an offer to be rehired under the first IFR is superseded by the similar “de minimis” exemption provided for in the PPPFA, such that the exemption now provides that reductions in headcount may be remedied if the borrower can sufficiently document an inability to rehire employees working as of February 15, 2020 and an inability to hire similar qualified employees before December 31, 2020, or the inability to return to the same levels of business activity as of February 15, 2020, due to safety or sanitation reasons.
  • States that the “de minimis” exemption relating to borrowers that have offered to restore a reduction in hours and whose offer was declined by the employee will be retained, as the issue was not addressed in the PPPFA.
  • Confirms that borrowers remain required to report rejected rehire offers to state unemployment insurance offices within 30 days of the employee’s rejection.
  • Provides more context for the safe harbor relating to an “inability to return to pre-COVID business levels” to include state or local COVID-19 shutdowns that were based on federal guidance.

EIDL Refinances:

The SBA also clarified some ambiguities regarding the interrelation between PPP loans and EIDLs that have existed since the passage of the CARES Act.

  • EIDLs may not be refinanced with a PPP loan if the borrower received the EIDL before January 31, 2020 or after April 3, 2020.
  • EIDLs may but are not required to be refinanced with a PPP loan if the borrower (1) received the EIDL funds between January 31, 2020 and April 3, 2020, and (2) the borrower used EIDL funds for a purpose other than payroll costs.
  • EIDLs must be refinanced in full into a PPP loan if the borrower (1) received the EIDL funds between January 31, 2020 and April 3, 2020, and (2) the borrower used EIDL funds to pay payroll costs.

The amount of the EIDL to be refinanced does not include the amount of any EIDL “advance” or “grant,” which does not need to be repaid.
Where lenders filled out SBA Form 2484 by including an amount for the refinance of EIDLs, lenders must disburse and remit loan proceeds used to refinance the EIDL directly to the SBA and not to the borrower. If the lender has already disbursed the proceeds allocated to refinance the EIDL directly to the borrower, the lender must notify the borrower of the amount to be remitted to the SBA. Borrowers and lenders must fill out SBA Form 1201, and electronically remit EIDL refinance payments to the SBA on the Treasury website. Additional details regarding submitting payments and filling out Form 1201 are contained here.