Now that more companies have received Paycheck Protection Program (PPP) funds, we’ve been getting a steady stream of questions on how to maximize loan forgiveness.
As of today, the interim final rule on PPP forgiveness has not been issued. So important details on exactly how loan forgiveness will work just aren’t out yet. We know that to maximize forgiveness, the funds must be used within an 8 week period that commences when the loan is disbursed; that 75% of the funds must be used for eligible payroll costs (the other 25% may be used for eligible non-payroll costs); and that the employer must maintain employee headcount.
For several weeks there has been growing pressure for Treasury to relax the standards and allow businesses to spend more than 25% of the funds on qualifying non-payroll expenses. Thus far, the Treasury hasn’t budged on this requirement and seems unlikely to do so. Treasury Secretary Steve Mnuchin recently advised businesses that needed to primarily cover non-payroll expenses, to consider the Economic Injury Disaster Loan (EIDL) program as it may be used for a broader range of expenses.
Businesses should keep in mind though that any amounts not forgiven under PPP simply remain as a 1% interest loan, which is likely a lower interest rate than the business would pay under any other loan (albeit with only a two-year term). It also seems clear, that forgiveness is intended to be proportional. So, if a business used more than 25% for qualifying non-payroll expenses, they wouldn’t necessarily lose all forgiveness, just a portion.
Many businesses have also posed questions on how the 75% payroll rule works with the headcount rule, particularly in regard to the rehiring grace period. The PPP gives employers until June 30th to rehire laid off workers and thus restore headcount. However, an employer waiting to rehire workers will likely not hit the 75% payroll requirement and forgiveness may be impaired on that basis even if they do restore headcount by June 30th. Although final guidance hasn’t been issued, it appears that the employer must simultaneously satisfy both the 75% and the headcount requirements.
We’ve also fielded many questions on whether an employer could potentially boost pay or provide bonuses to employees to help meet the 75% requirement. In theory this could be helpful if not all workers return; in short though, we just don’t know. Nothing we’ve seen yet seems to prohibit this practice, but the interim final rule may also place limits on increases to employee compensation. We just don’t know and advise against this strategy until formal guidance is issued.
One problem we’ve been encountering at least once per day is when an employer has asked an employee to return to work, but the employee refuses because they are afraid to return to work and/or prefer collecting enhanced unemployment benefits. As we’ve previously discussed, many low wage workers may temporarily receive more on unemployment than they would earn coming back to work. This puts the employer in a difficult position in regard to forgiveness of their PPP loan. Fortunately, we learned in the May 5th update to the Treasury Q&A that this refusal to be reinstated will not impact forgiveness.
Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
In short, there are still many questions on exactly how PPP loan forgiveness will work, we are hopeful that the Interim Final Rule will be issued soon at which time we can hold a webinar on the rule and answer many additional questions.