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New PPP Interim Final Rules Clarify Forgiveness Calculation and Loan Review Process

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Update – June 4, 2020: Pursuant to the terms of the PPP Flexibility Act, some of the items below are modified by the provisions of this Act, notably items referring to the eight-week covered period and the six-month deferral.  Please review our advisory to learn more about the changes to the PPP.

On May 22, 2020, the Treasury Department and SBA issued two new Interim Final Rules applicable to the Paycheck Protection Program (PPP), one primarily focused on details related to the forgiveness calculation and one primarily focused on the loan review process. While a fair amount of the content of these rules had previously been covered in prior Interim Final Rules or SBA’s continually updated FAQ, the new rules formalize the prior guidance and provide more detail than previously released. In this advisory, we outline how these developments impact your business, including payroll and non-payroll costs, FTE reductions, the forgiveness application process, and more.


Payroll Costs

Q. For a borrower to include certain payroll costs, when must they be incurred? A. Payroll costs are forgivable if they are paid or incurred during the covered period. Payroll costs are considered paid when a borrower cuts payroll checks or makes an ACH transaction. Payments of payroll made after the end of the covered period are included for payroll costs incurred during the covered period if the borrower makes the payment on or before the next regular payroll date. For example, if a borrower’s covered period ended on June 15 but the borrower’s standard payroll practice would result in payments made on June 20, as long as those payments were made on or before June 20, the payments would be included for PPP analysis.

Q. What if a borrower’s pay cycle doesn’t line up with the eight-week covered period? A. To analyze the use of proceeds for payroll purposes only, the borrower may, at its option, select an alternative eight-week covered period beginning on the first day of the first full pay period after receipt of the PPP proceeds.

Q. Can a borrower use PPP proceeds for bonuses, hazard pay, or other special payments? A. Yes. SBA has decided to broadly interpret includable payroll costs. That said, receipt of cash compensation in excess of $15,385 (the pro rata equivalent of $100,000 on an annualized basis) is excluded from the definition of payroll costs, so any excluded amount would not be forgiven.

Q. What limitations are there on self-employed individuals or owner-employees? A. The forgiveness of PPP proceeds paid to self-employed individuals and owner-employees is limited to the lesser of $15,385 or 8/52 of the individual’s 2019 compensation. If an owner-employee receives retirement and health care benefits through the borrower as a W-2 employee, then these costs can be forgiven. This does not apply for self-employed individuals (including those who file a Schedule C with their Form 1040) and general partners or active LLC members who receive a Schedule K-1.

Non-Payroll Costs

Q. Can a borrower pay costs incurred in a prior period and get forgiveness? A. Yes, all non-payroll costs that are paid during the covered period are eligible for forgiveness. For example, if a borrower’s covered period begins on June 1 and pays its May electricity bill on June 5, that cost is eligible for forgiveness.

Q. Can a borrower pay after the covered period for costs incurred during the covered period and still have the costs forgiven? A. Yes, provided that the payment is made on or before the next regular billing date. However, to be clear, if the invoice relates to a period that is both during and after the covered period, only the portion applicable to the covered period is eligible for forgiveness.

Q. Can a borrower prepay any secured debt and get forgiveness? A. No. Prepaying secured debt is expressly not permitted pursuant to the CARES Act. As a reminder, payments of principal are similarly not eligible for forgiveness.

Reduction in Forgiveness Amount

Q. What steps does a borrower need to take in order to take advantage of the FTE reduction exemption for an employee who had been laid off or furloughed and declines to accept an offer to be rehired? A. For this exemption to be claimed, the following must be true:

(1) the borrower made a good faith written offer to the employee to rehire during the covered period;

(2) the offer was for the same salary/wages and same hours as earned by the employee prior to separation or reduction in hours;

(3) the offer was rejected by the employee;

(4) the borrower maintains records documenting the offer and rejection; and

(5) the borrower informed the applicable state unemployment insurance office of the employee’s rejection within 30 days thereafter. 

Item #5 is a new obligation. If a borrower seeks to take advantage of this exemption, the borrower should make sure the employee understands that the borrower is obligated to report the rejection to the unemployment insurance office.

Q. Will employees who resign, are terminated for cause, or request a reduction in hours have a negative effect on a borrower’s headcount? A. No, provided the borrower maintains records related to these events. Note, however, that if any position for which an FTE reduction exemption would apply is refilled, then the borrower cannot claim the exemption.

Q. Won’t a reduction in hours necessarily result in a reduction in wages so that a borrower is double penalized for both a reduction in headcount and a reduction in wages? A. The analysis related to a reduction in wages should be done on an “apples to apples” basis, meaning that if the hourly rate is not reduced, then there would not be a reduction in wages issue. For example, someone working 40 hours a week previously who is reduced to 20 hours but does not have a reduction in the rate of compensation per hour, would result in a 0.5 FTE reduction, but not a reduction in wages.

Q. Can a borrower qualify for either of the forgiveness “safe harbors” before June 30, 2020? A. Yes. Forgiveness reductions resulting from a reduction in wages are forgiven on an employee-by-employee basis if (1) the average salary/hourly wage between February 15, 2020 – April 26, 2020 is less than the salary/hourly wage on February 15, 2020, and (2) the employee’s salary/hourly wage is restored to the level at February 15, 2020 on or before June 30, 2020.

Similarly, forgiveness reductions resulting from a reduction in headcount are forgiven if (1) the average FTE headcount between February 15, 2020 – April 26, 2020 is less than the FTE headcount on February 15, 2020, and (2) the FTE headcount is equal to or greater than the level at February 15, 2020 on or before June 30, 2020.

Q. Once a borrower hits the safe harbor threshold, can the borrower just lay off employees immediately thereafter? A. While there is nothing specific on this point, we do not recommend that a borrower seeking to take advantage of the safe harbor try to “game the system” in this manner. When a borrower applies for forgiveness, the borrower must report their FTE headcount as of the date of the forgiveness application. We believe that a drastic reduction will raise a red flag with the lender and SBA. We anticipate that it is likely (given the frequency of this question) that there will be additional guidance and restrictions related to this point.

Q. What is an “FTE” for purposes of the PPP? A. An FTE is an employee who works of 40 hours or more, on average, each week. An employee who works less than 40 hours is included as a percentage of an FTE. The Interim Final Rule provides an example of an employee who is paid for 30 hours per week on average during the coverage period – this employee is deemed to be a .75 FTE. Note, however, that this example does not follow the instructions provided in the Schedule A Worksheet of the Loan Forgiveness Application, which directs borrowers to round to the nearest tenth for FTE purposes (which is how our Forgiveness Calculator is currently designed). We will monitor any technical modifications and update our materials accordingly. Alternatively, a borrower can elect to treat all employees who are paid for less than 40 hours per week as .50 FTEs.

Forgiveness Application Process

Q. What does a borrower do to get forgiveness? A. Once the covered period has ended, to receive forgiveness a borrower must complete the Loan Forgiveness Application (discussed in our prior advisory) or an equivalent form provided by the lender. To complete the application, the borrower must collect and submit all necessary documents evidencing the payments made using PPP proceeds for which the borrower is seeking forgiveness.

Q. How long until a decision is made on forgiveness? A. First a lender must review and make an initial determination of eligibility for forgiveness. The lender must notify SBA within 60 days of receipt of a complete application from the borrower. Unless SBA elects to review the loan application, it must remit the amount of forgiveness to the lender within 90 days after the lender’s submission. The amount of forgiveness will be reduced by the amount of the Economic Injury Disaster Loan advance previously received by the borrower (which may be up to $10,000).

Q. What is a lender required to review for loan forgiveness? A. A lender must confirm receipt of the necessary certifications in the application materials, confirm the documentation evidencing the use of proceeds, and review the calculations. This review should be done on a good-faith basis based on the materials provided by the borrower. The lender should work with the borrower to correct any miscalculation or material lack of substantiation identified by the lender in the course of its review. The lender does not need to independently verify the borrower’s information if it is supported with documentation and the borrower attests to its veracity.

Q. Can a lender determine that a borrower is not eligible for loan forgiveness? A. Yes, a lender can deny a loan forgiveness application or deny without prejudice subject to SBA review. If the lender denies the application outright, the borrower may request SBA review within 30 days of the lender’s decision.

Q. What happens if the final forgiveness amount has not been determined before a borrower is due to start making payments on the PPP loan? A. The Interim Final Rule provides that if SBA pays to the lender an amount of forgiveness in excess of the amount outstanding on a borrower’s PPP loan, the lender must immediately pay the excess amount to the borrower. This rule suggests that the borrower should begin making payments on their loan pursuant to the terms of their loan documentation if the forgiveness analysis is ongoing, but a borrower should work directly with their lender if this issue arises, particularly if making such payments will create a financial hardship.


Q. What PPP loans can SBA view? A. As discussed in our prior advisory, any loan in excess of $2 million will be reviewed by SBA. The Interim Final Rule clarifies, however, that any loan, regardless of amount, may be subject to audit.

Q. What can SBA review? A. Areas of review include eligibility of the borrower to participate in the PPP (including assessment of the certifications made by the borrower), calculation of loan amount, proper use of proceeds, and calculation of loan forgiveness amount.

Q. What if SBA decides to review and determines that the loan was ineligible? A. If SBA reviews the loan and determines that the borrower was ineligible based on the provision of the CARES Act, SBA rules, or guidance available at the time of the borrower’s application or the terms of the borrower’s application (including lacking an adequate basis for the good faith certifications made in the application), then SBA will inform the lender that the loan is not eligible for forgiveness and the lender must notify the borrower.

Q. When will SBA undertake a loan review? A. The two new rules imply that loan and forgiveness applications will be reviewed prior to the time that SBA remits the forgiveness amount to the lender, but SBA expressly reserves the right to review a loan file at any time. As a result, borrowers must retain all PPP documentation for six years after the date the loan is forgiven or repaid in full.

Q. If SBA reviews, will a borrower have the right to respond to SBA’s questions? A. Yes. Once SBA decides to review, the lender must notify the borrower. The lender or SBA may contact the borrower directly to request additional information related to SBA’s review.

Q. If SBA determines that the borrower was ineligible to participate, can any amount of the loan be forgiven? A. No, not if the borrower was ineligible to participate at all. If the ineligibility is with respect to the calculation of the loan amount or the loan forgiveness amount, SBA may permit partial forgiveness for the portion that is eligible.

Q. Is it possible that SBA could require immediate repayment if it determines that the borrower is an ineligible recipient? A. Yes.

Q. Can a borrower that receives an adverse SBA decision appeal? A. Yes, there will be an appeal process that will be detailed later.

Q. What does a lender have to do if SBA elects to review a loan? A. Within five business days of receipt of notice from SBA, the lender must notify the borrower and must send to SBA electronic copies of (i) the borrower’s application form and all supporting materials, (ii) the borrower’s loan forgiveness application and all supporting materials (and ask the borrower to provide a copy of its Schedule A Worksheet to the loan forgiveness application), (iii) a signed and certified transcript of account, (iv) a copy of the note evidencing the PPP loan, and (v) any other documents requested by SBA.

Q. If the borrower is determined to be ineligible, is the lender entitled to a processing fee? A. No and any previously paid processing fee is subject to clawback within one year from disbursement.

Q. Is SBA guaranty at risk if the borrower is determined to be ineligible? A. No, as long as the lender has satisfied its obligations (including record collection and retention requirements) under applicable regulations.


Q. Are there going to be changes to the PPP rules? What about an extension of the covered period? A. Based on news reports, it appears that there is bipartisan support for some changes to the program, including extending the period by which PPP proceeds can be used and forgiven to 16-24 weeks. While this change may be coming, borrowers should not assume that any changes will happen until they are passed by Congress and signed by the President.


As has been the case since the CARES Act was adopted and the PPP established, guidance continues to come regularly. We will continue to update as necessary and can help businesses navigate the parameters of this program.

This advisory was prepared by Josh French and Steve Patterson in Nutter’s Corporate and Transactions DepartmentMelissa Sampson McMorrow in the Tax Department, and David Rubin in the Labor, Employment and Benefits practice group. For more information, please contact Josh, Steve, Melissa, David, or your Nutter attorney at 617.439.2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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