June 01, 2020

Government Contractors: SBA Issues Regulations Governing Loan Forgiveness under the Paycheck Protection Program

7 min

In the last few weeks, the Small Business Administration (SBA) issued important guidance specifying how borrowers can achieve loan forgiveness under the Paycheck Protection Program (PPP).

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) (Pub. L. 116-136), aimed at providing immediate assistance to individuals, families, and organizations, including government contractors, affected by the COVID-19 emergency, was signed into law on March 27, 2020. Among various provisions, Section 1106 of the CARES Act conveyed to the SBA the authority to temporarily guarantee loans under the PPP. Subject to several requirements and limitations, Section 1106 of the CARES Act provided for possible loan forgiveness under the PPP. The CARES Act also required the SBA to issue guidance and regulations governing this process. Since its enactment, this guidance has been highly anticipated by PPP borrowers.

On May 15, 2020, the SBA issued its PPP Loan Forgiveness Application and Instructions, providing long-awaited guidance for how PPP borrowers can go about applying for and receiving loan forgiveness. The 11-page document contains the following components: (1) the PPP Loan Forgiveness Calculation Form; (2) PPP Schedule A; (3) PPP Schedule A Worksheet; and (4) the (optional) PPP Borrower Demographic Form. The application requires that all applicants submit items (1) and (2) to their lender for consideration. The form provides detailed, line-by-line instructions regarding how to fill out the PPP Loan Forgiveness Application Form and describes in detail the required documentation borrowers must submit to supplement the application. Importantly, the instructions reiterate that the "covered period" of a PPP loan is eight weeks, or 56 days, from the date the loan was dispersed, with the disbursement date marking the first day of that period. The instructions also emphasize that at least 75%1 of the potential forgiveness amount had to be used for payroll costs.2 Both eligible payroll and nonpayroll costs3 are outlined in the application's instructions.

On May 22, 2020, the SBA issued its interim final rule on PPP loan forgiveness, which tracks with the May 15, 2020 PPP Loan Forgiveness Application and Instructions. The interim rule confirmed that borrowers must submit the PPP Loan Forgiveness Application (SBA Form 3508) to its lender, and that lender must review the application and issue its decision on each forgiveness application to the SBA within 60 days of receipt.4 Importantly, the rule clarifies that, if a lender determines a borrower to be eligible for partial or whole forgiveness, the lender must request payment from the SBA at the time it issues its decision to approve the borrower's application to the SBA. If the request is approved, the SBA is required to remit payment in the amount approved (plus interest) to the lender within 90 days after the lender issues its decision to the SBA. The SBA is entitled to reject all or part of the amount approved by a lender. Any amount remaining on the loan following the SBA's review must be repaid before the two-year maturity of the loan. The final rule provides important guidance on the following additional topics.

Payroll Costs

The interim final rule confirms that borrowers may seek forgiveness for payroll costs for the eight-consecutive-week "covered period" beginning on either:

  • the date of disbursement of the borrower's PPP loan proceeds from the Lender (i.e., the start of the covered period); or
  • the first day of the first payroll cycle in the covered period (the "alternative payroll covered period").

Payroll costs are considered paid on the day paychecks are distributed or the borrower originates an ACH credit transaction. The interim final rule also confirms that payroll costs incurred during the borrower's last pay period of the covered period are eligible for forgiveness if they are paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the covered period (or alternative payroll covered period) to be eligible for forgiveness.

The regulations also confirm that at least 75% of the loan proceeds must have been expended for allowable payroll costs; however, as noted above, this may be amended by the pending HEROES Act.

Reductions to Loan Forgiveness Amount

Generally, a borrower's loan forgiveness amount will be reduced to account for any layoffs or reduction to the amount of a worker's hours or salary; however, this reduction will not apply to those borrowers who have made a good faith offer to rehire or restore an hours or salary reduction, regardless of whether the employee accepts. Specifically, a borrower can exclude a reduction in FTE head count if

  • the borrower made a good faith, written offer to rehire such employee (or, if applicable, to restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
  • the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
  • the offer was rejected by such employee;
  • the borrower has maintained records documenting the offer and its rejection; and
  • the borrower informed the applicable state unemployment insurance office of such employee's rejected offer of reemployment within 30 days of the employee's rejection of the offer.

However, if the borrower is not eligible for this exception, the loan forgiveness amount will be reduced by the same percentage as the reduction in FTEs.

Additionally, if employees' salaries or wages have been reduced, the loan forgiveness amount will be reduced by the amount of the reductions that are in excess of 25% of base salary or wages between January 1, 2020 and March 31, 2020, determined on an employee-by-employee basis rather than by aggregate amounts. The rule does make clear, however, that borrowers will not be penalized twice for reductions to FTEs and salaries/wages.

The interim final rule also confirms that if a borrower restores any reduction in FTEs, salaries, or wages on or before June 30, 2020, the borrower is exempt from any reduction in loan forgiveness amount that would have otherwise been required.

Documentation Requirement

The interim final rule requires that borrowers submit the PPP Loan Forgiveness Application (whether the SBA Form 3508 or a lender equivalent) and all documentation required therein. Borrowers must maintain all records relating to its PPP loan for six years after the date the loan is forgiven or repaid in full, and permit the SBA and its OIG to access such files upon request.

The SBA is likely to issue further regulations and guidance regarding loan forgiveness that will impact government contractors. Venable will continue to keep its clients apprised of important developments surrounding this program. Until then, stay safe and healthy.

[1] It is important to note that this 75% requirement may be amended by the currently pending Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act).

[2] "Payroll costs" were defined in the Interim Final Rule on Paycheck Protection Program (85 FR 20811) as "compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation."

[3] Eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount. Count nonpayroll costs that were both paid and incurred only once. An eligible nonpayroll cost must be 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.

[4] Within 30 days of notice from the lender, the borrower may request that the SBA review the lender's decision. See Interim Final Rule Regarding Review Procedures and Related Borrower and Lender Responsibilities at https://home.treasury.gov/system/files/136/PPP-IFR-SBA-Loan-Review-Procedures-and-Related-Borrower-and-Lender-Responsibilities.pdf.