Business Loan Program Temporary Changes; Paycheck Protection Program-Requirements-Loan Forgiveness, 33004-33010 [2020-11536]

Agencies

• SMALL BUSINESS ADMINISTRATION
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 85, Number 105 (Monday, June 1, 2020)]
[Rules and Regulations]
[Pages 33004-33010]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11536]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

[Docket Number SBA-2020-0032]
RIN 3245-AH46

DEPARTMENT OF THE TREASURY

RIN 1505-AC69


Business Loan Program Temporary Changes; Paycheck Protection 
Program--Requirements--Loan Forgiveness

AGENCY: U.S. Small Business Administration; Department of the Treasury.

ACTION: Interim final rule.

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SUMMARY: On April 2, 2020, the U.S. Small Business Administration (SBA) 
posted an interim final rule announcing the implementation of the 
Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The 
CARES Act temporarily adds a new program, titled the ``Paycheck 
Protection Program,'' to the SBA's 7(a) Loan Program. The CARES Act 
also provides for forgiveness of up to the full principal amount of 
qualifying loans guaranteed under the Paycheck Protection Program 
(PPP). The PPP is intended to provide economic relief to small 
businesses nationwide adversely impacted by the Coronavirus Disease 
2019 (COVID-19). SBA posted additional interim final rules on April 3, 
2020, April 14, 2020, April 24, 2020, April 28, 2020, April 30, 2020, 
May 5, 2020, May 8, 2020, May 13, 2020, May 14, 2020, May 18, 2020, and 
May 20, 2020, and the Department of the Treasury (Treasury) posted an 
additional interim final rule on April 27, 2020. This interim final 
rule supplements the previously posted interim final rules in order to 
help PPP borrowers prepare and submit loan forgiveness applications as 
provided for in the CARES Act, help PPP lenders who will be making the 
loan forgiveness decisions, inform borrowers and lenders of SBA's 
process for reviewing PPP loan applications and loan forgiveness 
applications, and requests public comment.

DATES: Effective date: May 28, 2020.
    Applicability date: This interim final rule applies to loan 
forgiveness applications submitted under the Paycheck Protection 
Program.
    Comment date: Comments must be received on or before July 1, 2020.

ADDRESSES: You may submit comments, identified by number SBA-2020-0032 
through the Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments. SBA will post all 
comments on www.regulations.gov. If you wish to submit confidential 
business information (CBI) as defined in the User Notice at 
www.regulations.gov, please send an email to [email protected]. Highlight 
the information that you consider to be CBI and explain why you believe 
SBA should hold this information as confidential. SBA will review the 
information and make the final determination whether it will publish 
the information.

FOR FURTHER INFORMATION CONTACT: A Call Center Representative at 833-
572-0502, or the local SBA Field Office; the list of offices can be 
found at https://www.sba.gov/tools/local-assistance/districtoffices.

SUPPLEMENTARY INFORMATION:

I. Background Information

    On March 13, 2020, President Trump declared the ongoing Coronavirus 
Disease 2019 (COVID-19) pandemic of sufficient severity and magnitude 
to warrant an emergency declaration for all States, territories, and 
the District of Columbia. With the COVID-19 emergency, many small 
businesses nationwide are experiencing economic hardship as a direct 
result of the Federal, State, tribal, and local public health measures 
that are being taken to minimize the public's exposure to the virus. 
These measures, some of which are government-mandated, are being 
implemented nationwide and include the closures of restaurants, bars, 
and gyms. In addition, based on the advice of public health officials, 
other measures, such as keeping a safe distance from others or even 
stay-at-home orders, are being implemented, resulting in a dramatic 
decrease in economic activity as the public avoids malls, retail 
stores, and other businesses.
    On March 27, 2020, the President signed the Coronavirus Aid, 
Relief, and Economic Security Act (the CARES Act) (Pub. L. 116-136) to 
provide emergency assistance and health care response for individuals, 
families, and businesses affected by the coronavirus pandemic. The 
Small Business Administration (SBA) received funding and authority 
through the CARES Act to modify existing loan programs and establish a 
new loan program to assist small businesses nationwide adversely 
impacted by the COVID-19 emergency. Section 1102 of the CARES Act 
temporarily permits SBA to guarantee 100 percent of 7(a) loans under a 
new program titled the ``Paycheck Protection Program.'' Section 1106 of 
the CARES Act provides for forgiveness of up to the full principal 
amount of qualifying loans guaranteed under the Paycheck Protection 
Program, and requires SBA to issue guidance and regulations 
implementing section 1106 within 30 days after the date of enactment of 
the CARES Act. On April 2, 2020, SBA posted its first PPP interim final 
rule (85 FR 20811) (the First Interim Final Rule) covering in part loan 
forgiveness. On April 8, 2020 and April 26, 2020, SBA also posted 
Frequently Asked Questions relating to loan forgiveness.\1\ On April 
14, 2020, SBA posted an interim final rule covering in part loan 
forgiveness for individuals with self-employment income. On April 24, 
2020, the President signed the Paycheck Protection Program and Health 
Care Enhancement Act (Pub. L. 116-139), which provided additional 
funding and authority for the Paycheck Protection Program.
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    \1\ https://www.sba.gov/document/support-faq-lenders-borrowers.
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    As described below, this interim final rule provides borrowers and 
lenders guidance on requirements governing the forgiveness of PPP 
loans.
    Four provisions of this interim final rule are an exercise of 
rulemaking authority by Treasury either jointly with SBA or by Treasury 
alone: (1) The de minimis exemption provided with respect to certain 
offers of rehire, (2) the additional reference period option provided 
for seasonal employers, (3) the de minimis exemption from the full-time 
equivalent employee reduction penalty when an employee is, for example, 
fired for cause, and (4) the de minimis exemption from the full-time 
equivalent employee reduction penalty when the borrower eliminates 
reductions by June 30, 2020. Otherwise, all provisions in this rule are 
an exercise of rulemaking authority by SBA alone.

II. Comments and Immediate Effective Date

    The intent of the CARES Act is that SBA provide relief to America's 
small businesses expeditiously. This intent, along with the dramatic 
decrease in

[[Page 33005]]

economic activity nationwide, provides good cause for SBA to dispense 
with the 30-day delayed effective date provided in the Administrative 
Procedure Act. Specifically, it is critical to meet lenders' and 
borrowers' need for clarity concerning loan forgiveness requirements as 
rapidly as possible because borrowers can seek loan forgiveness as 
early as eight-weeks following the date of disbursement of their PPP 
loans. Because the first PPP loans were disbursed after April 3, 
providing borrowers with certainty on loan forgiveness requirements and 
other program requirements will enhance their ability to carry out the 
purposes of the CARES Act in keeping their workers employed and paid, 
while at the same time taking necessary steps to maximize eligible loan 
forgiveness amounts. An immediate effective date also is necessary for 
PPP lenders who generally will make the loan forgiveness determinations 
as provided in the CARES Act. Specifically, an immediate effective date 
is necessary for lenders so that they will have both a degree of 
certainty and sufficient time to develop their systems and policies and 
procedures in order to timely review and process loan forgiveness 
applications, which borrowers are permitted to begin submitting at the 
end of their covered period.
    This interim final rule supplements previous regulations and 
guidance on the discrete issues related to loan forgiveness. This 
interim final rule is effective without advance notice and public 
comment because section 1114 of the CARES Act authorizes SBA to issue 
regulations to implement Title I of the CARES Act without regard to 
notice requirements. In addition, SBA has determined that there is good 
cause for dispensing with advance public notice and comment on the 
ground that it would be contrary to the public interest. Specifically, 
SBA has determined that advance notice and public comment would delay 
the ability of PPP borrowers to understand with certainty which payroll 
costs and nonpayroll costs that are incurred or paid during the covered 
period are eligible for forgiveness. By providing a high degree of 
certainty to PPP borrowers through this interim final rule, PPP 
borrowers will be able to take immediate steps to maximize their loan 
forgiveness amounts, for example, by either rehiring employees or not 
laying off employees during the covered period. This rule is being 
issued to allow for immediate implementation of the forgiveness 
component of this program. Although this interim final rule is 
effective immediately, comments are solicited from interested members 
of the public on all aspects of this interim final rule, including 
section III below. These comments must be submitted on or before July 
1, 2020. SBA will consider these comments and the need for making any 
revisions as a result of these comments.

III. Paycheck Protection Program Requirements for Loan Forgiveness

Overview

    The CARES Act was enacted to provide immediate assistance to 
individuals, families, and organizations affected by the COVID-19 
emergency. Among the provisions contained in the CARES Act are 
provisions authorizing SBA to temporarily guarantee loans under the 
Paycheck Protection Program (PPP). Loans under the PPP will be 100 
percent guaranteed by SBA, and the full principal amount of the loans 
may qualify for loan forgiveness. Additional information about the PPP 
is available in interim final rules published by SBA and Treasury in 
the Federal Register (85 FR 20811, 85 FR 20817, 85 FR 21747, 85 FR 
23450, 85 FR 23917, 85 FR 26321, 85 FR 26324, 85 FR 27287, 85 FR 29842, 
85 FR 29845, 85 FR 29847, 85 FR 30835) as well as an SBA interim final 
rule posted on May 20, 2020.
1. General
    Section 1106(b) of the CARES Act provides that, subject to several 
important limitations, borrowers shall be eligible for forgiveness of 
their PPP loan in an amount equal to the sum of the following costs 
incurred and payments made during the covered period (as described in 
section III.3. below):
    (1) Payroll costs; \2\
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    \2\ Payroll costs consist of 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. See 15 U.S.C. 636(a)(36)(A)(viii); 85 FR 20811, 20813.
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    (2) Interest payments on any business mortgage obligation on real 
or personal property that was incurred before February 15, 2020 (but 
not any prepayment or payment of principal);
    (3) Payments on business rent obligations on real or personal 
property under a lease agreement in force before February 15, 2020; and
    (4) Business utility payments for the distribution of electricity, 
gas, water, transportation, telephone, or internet access for which 
service began before February 15, 2020.
    This interim final rule uses the term ``nonpayroll costs'' to refer 
to the payments described in (2), (3), and (4). As set forth in the 
First Interim Final Rule (85 FR 20811), eligible nonpayroll costs 
cannot exceed 25 percent of the loan forgiveness amount.
2. Loan Forgiveness Process
What is the general process to obtain loan forgiveness?
    To receive loan forgiveness, a borrower must complete and submit 
the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) 
to its lender (or the lender servicing its loan). As a general matter, 
the lender will review the application and make a decision regarding 
loan forgiveness. The lender has 60 days from receipt of a complete 
application to issue a decision to SBA. If the lender determines that 
the borrower is entitled to forgiveness of some or all of the amount 
applied for under the statute and applicable regulations, the lender 
must request payment from SBA at the time the lender issues its 
decision to SBA. SBA will, subject to any SBA review of the loan or 
loan application, remit the appropriate forgiveness amount to the 
lender, plus any interest accrued through the date of payment, not 
later than 90 days after the lender issues its decision to SBA. If 
applicable, SBA will deduct EIDL Advance Amounts from the forgiveness 
amount remitted to the Lender as required by section 1110(e)(6) of the 
CARES Act. If SBA determines in the course of its review that the 
borrower was ineligible for the PPP loan based on the provisions of the 
CARES Act, SBA rules or guidance available at the time of the 
borrower's loan application, or the terms of the borrower's PPP loan 
application (for example, because the borrower lacked an adequate basis 
for the certifications that it made in its PPP loan application), the 
loan will not be eligible for loan forgiveness. The lender is 
responsible for notifying the borrower of the forgiveness amount. If 
only a portion of the loan is forgiven, or if the forgiveness request 
is denied, any remaining balance due on the loan must be repaid by the 
borrower on or before the two-year maturity of the loan. If the amount 
remitted by SBA to the lender exceeds the remaining principal balance 
of the PPP loan (because the borrower made

[[Page 33006]]

scheduled payments on the loan after the initial deferment period), the 
lender must remit the excess amount, including accrued interest, to the 
borrower.
    The general loan forgiveness process described above applies only 
to loan forgiveness applications that are not reviewed by SBA prior to 
the lender's decision on the forgiveness application. In a separate 
interim final rule on SBA Loan Review Procedures and Related Borrower 
and Lender Responsibilities, SBA will describe its procedures for 
reviewing PPP loan applications and loan forgiveness applications.
3. Payroll Costs Eligible for Loan Forgiveness
a. When must payroll costs be incurred and/or paid to be eligible for 
forgiveness?
    In general, payroll costs paid or incurred during the eight 
consecutive week (56 days) covered period are eligible for forgiveness. 
Borrowers may seek forgiveness for payroll costs for the eight weeks 
beginning on either:
    i. The date of disbursement of the borrower's PPP loan proceeds 
from the Lender (i.e., the start of the covered period); or
    ii. 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 that paychecks are 
distributed or the borrower originates an ACH credit transaction. 
Payroll costs incurred during the borrower's last pay period of the 
covered period or the alternative payroll covered period are eligible 
for forgiveness if 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. 
Payroll costs are generally incurred on the day the employee's pay is 
earned (i.e., on the day the employee worked). For employees who are 
not performing work but are still on the borrower's payroll, payroll 
costs are incurred based on the schedule established by the borrower 
(typically, each day that the employee would have performed work).
    The Administrator of the Small Business Administration 
(Administrator), in consultation with the Secretary of the Treasury 
(Secretary), recognizes that the eight-week covered period will not 
always align with a borrower's payroll cycle. For administrative 
convenience of the borrower, a borrower with a bi-weekly (or more 
frequent) payroll cycle may elect to use an alternative payroll covered 
period that begins on the first day of the first payroll cycle in the 
covered period and continues for the following eight weeks. If payroll 
costs are incurred during this eight-week alternative payroll covered 
period, but paid after the end of the alternative payroll covered 
period, such payroll costs will be eligible for forgiveness if they are 
paid no later than the first regular payroll date thereafter.
    The Administrator, in consultation with the Secretary, determined 
that this alternative computational method for payroll costs is 
justified by considerations of administrative feasibility for 
borrowers, as it will reduce burdens on borrowers and their payroll 
agents while achieving the paycheck protection purposes manifest 
throughout the CARES Act, including section 1102. Because this 
alternative computational method is limited to payroll cycles that are 
bi-weekly or more frequent, this computational method will yield a 
calculation that the Administrator does not expect to materially differ 
from the actual covered period, while avoiding unnecessary 
administrative burdens and enhancing auditability.
    Example: A borrower has a bi-weekly payroll schedule (every other 
week). The borrower's eight-week covered period begins on June 1 and 
ends on July 26. The first day of the borrower's first payroll cycle 
that starts in the covered period is June 7. The borrower may elect an 
alternative payroll covered period for payroll cost purposes that 
starts on June 7 and ends 55 days later (for a total of 56 days) on 
August 1. Payroll costs paid during this alternative payroll covered 
period are eligible for forgiveness. In addition, payroll costs 
incurred during this alternative payroll covered period are eligible 
for forgiveness as long as they are paid on or before the first regular 
payroll date occurring after August 1. Payroll costs that were both 
paid and incurred during the covered period (or alternative payroll 
covered period) may only be counted once.
b. Are salary, wages, or commission payments to furloughed employees; 
bonuses; or hazard pay during the covered period eligible for loan 
forgiveness?
    Yes. The CARES Act defines the term ``payroll costs'' broadly to 
include compensation in the form of salary, wages, commissions, or 
similar compensation. If a borrower pays furloughed employees their 
salary, wages, or commissions during the covered period, those payments 
are eligible for forgiveness as long as they do not exceed an annual 
salary of $100,000, as prorated for the covered period. The 
Administrator, in consultation with the Secretary, has determined that 
this interpretation is consistent with the text of the statute and 
advances the paycheck protection purposes of the statute by enabling 
borrowers to continue paying their employees even if those employees 
are not able to perform their day-to-day duties, whether due to lack of 
economic demand or public health considerations. This intent is 
reflected throughout the statute, including in section 1106(d)(4) of 
the Act, which provides that additional wages paid to tipped employees 
are eligible for forgiveness. The Administrator, in consultation with 
the Secretary, has also determined that, if an employee's total 
compensation does not exceed $100,000 on an annualized basis, the 
employee's hazard pay and bonuses are eligible for loan forgiveness 
because they constitute a supplement to salary or wages, and are thus a 
similar form of compensation.
c. Are there caps on the amount of loan forgiveness available for 
owner-employees and self-employed individuals' own payroll 
compensation?
    Yes, the amount of loan forgiveness requested for owner-employees 
and self-employed individuals' payroll compensation can be no more than 
the lesser of 8/52 of 2019 compensation (i.e., approximately 15.38 
percent of 2019 compensation) or $15,385 per individual in total across 
all businesses. See 85 FR 21747, 21750.
    In particular, owner-employees are capped by the amount of their 
2019 employee cash compensation and employer retirement and health care 
contributions made on their behalf. Schedule C filers are capped by the 
amount of their owner compensation replacement, calculated based on 
2019 net profit.\3\ 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. No additional 
forgiveness is provided for retirement or health insurance 
contributions for self-employed individuals, including Schedule C 
filers and general partners, as such expenses are paid out of their net 
self-employment income.
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    \3\ See 85 CFR 21747, 21749 (April 20, 2020).

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4. Nonpayroll Costs Eligible for Loan Forgiveness
a. When must nonpayroll costs be incurred and/or paid to be eligible 
for forgiveness?
    A nonpayroll cost is eligible for forgiveness if it was:
    i. Paid during the covered period; or
    ii. 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.
    Example: A borrower's covered period begins on June 1 and ends on 
July 26. The borrower pays its May and June electricity bill during the 
covered period and pays its July electricity bill on August 10, which 
is the next regular billing date. The borrower may seek loan 
forgiveness for its May and June electricity bills, because they were 
paid during the covered period. In addition, the borrower may seek loan 
forgiveness for the portion of its July electricity bill through July 
26 (the end of the covered period), because it was incurred during the 
covered period and paid on the next regular billing date.
    The Administrator, in consultation with the Secretary, has 
determined that this interpretation provides an appropriate degree of 
borrower flexibility while remaining consistent with the text of 
section 1106(b). The Administrator believes that this simplified 
approach to calculation of forgivable nonpayroll costs is also 
supported by considerations of administrative convenience for 
borrowers, and the Administrator notes that the 25 percent cap on 
nonpayroll costs will avoid excessive inclusion of nonpayroll costs.
b. Are advance payments of interest on mortgage obligations eligible 
for loan forgiveness?
    No. Advance payments of interest on a covered mortgage obligation 
are not eligible for loan forgiveness because the CARES Act's loan 
forgiveness provisions regarding mortgage obligations specifically 
exclude ``prepayments.'' Principal on mortgage obligations is not 
eligible for forgiveness under any circumstances.
5. Reductions to Loan Forgiveness Amount
    Section 1106 of the CARES Act specifically requires certain 
reductions in a borrower's loan forgiveness amount based on reductions 
in full-time equivalent employees or in employee salary and wages 
during the covered period, subject to an important statutory exemption 
for borrowers who have rehired employees and restored salary and wage 
levels by June 30, 2020 (with limitations). In addition, SBA and 
Treasury are adopting a regulatory exemption to the reduction rules for 
borrowers who have offered to rehire employees or restore employee 
hours, even if the employees have not accepted. The instructions to the 
loan forgiveness application and the guidance below explains how the 
statutory forgiveness reduction formulas work.
a. Will a borrower's loan forgiveness amount be reduced if the borrower 
laid-off or reduced the hours of an employee, then offered to rehire 
the same employee for the same salary and same number of hours, or 
restore the reduction in hours, but the employee declined the offer?
    No. Employees whom the borrower offered to rehire are generally 
exempt from the CARES Act's loan forgiveness reduction calculation. 
This exemption is also available if a borrower previously reduced the 
hours of an employee and offered to restore the employee's hours at the 
same salary or wages. Specifically, in calculating the loan forgiveness 
amount, a borrower may exclude any reduction in full-time equivalent 
employee headcount that is attributable to an individual employee if:
    i. The borrower made a good faith, written offer to rehire such 
employee (or, if applicable, restore the reduced hours of such 
employee) during the covered period or the alternative payroll covered 
period;
    ii. 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;
    iii. the offer was rejected by such employee;
    iv. the borrower has maintained records documenting the offer and 
its rejection; and
    v. 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.\4\
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    \4\ Further information regarding how borrowers will report 
information concerning rejected rehire offers to state unemployment 
insurance offices will be provided on SBA's website.
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    The Administrator and the Secretary determined that this exemption 
is an appropriate exercise of their joint rulemaking authority to grant 
de minimis exemptions under section 1106(d)(6).\5\ Section 1106(d)(2) 
of the CARES Act reduces the amount of the PPP loan that may be 
forgiven if the borrower reduces full-time equivalent employees during 
the covered period as compared to a base period selected by the 
borrower. Section 1106(d)(5) of the CARES Act waives this reduction in 
the forgiveness amount if the borrower eliminates the reduction in 
full-time equivalent employees occurring during a different statutory 
reference period \6\ by not later than June 30, 2020. The Administrator 
and the Secretary believe that the additional exemption set forth above 
is consistent with the purposes of the CARES Act and provides borrowers 
appropriate flexibility in the current economic climate. The 
Administrator, in consultation with the Secretary, have determined that 
the exemption is de minimis for two reasons. First, it is reasonable to 
anticipate that most laid-off employees will accept the offer of 
reemployment in light of current labor market conditions. Second, to 
the extent this exemption allows employers to cure FTE reductions 
attributable to terminations that occurred before February 15, 2020 
(the start of the statutory FTE reduction safe harbor period), it is 
reasonable to anticipate those reductions will represent a relatively 
small portion of aggregate employees given the historically strong 
labor market conditions before the COVID-19 emergency.
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    \5\ Section 1106(d)(6) is the sole joint rulemaking authority 
exercised in this interim final rule. All other provisions of this 
interim final rule are an exercise of rulemaking authority by SBA, 
except as expressly noted otherwise.
    \6\ Section 1106(d)(5) specifies that this reference period is 
between February 15, 2020 and 30 days after the date of enactment of 
the CARES Act or April 26, 2020 (the safe harbor period).
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b. What effect does a reduction in a borrower's number of full-time 
equivalent (FTE) employees have on the loan forgiveness amount?
    In general, a reduction in FTE employees during the covered period 
or the alternative payroll covered period reduces the loan forgiveness 
amount by the same percentage as the percentage reduction in FTE 
employees. The borrower must first select a reference period: (i) 
February 15, 2019 through June 30, 2019; (ii) January 1, 2020 through 
February 29, 2020; or (iii) in the case of a seasonal employer, either 
of the two preceding methods or a consecutive 12-week period between 
May 1, 2019 and September 15, 2019.\7\

[[Page 33008]]

If the average number of FTE employees during the covered period or the 
alternative payroll covered period is less than during the reference 
period, the total eligible expenses available for forgiveness is 
reduced proportionally by the percentage reduction in FTE employees. 
For example, if a borrower had 10.0 FTE employees during the reference 
period and this declined to 8.0 FTE employees during the covered 
period, the percentage of FTE employees declined by 20 percent and thus 
only 80 percent of otherwise eligible expenses are available for 
forgiveness.
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    \7\ This decision to permit seasonal employers to use, as a 
reference period, any consecutive 12-week period between May 1, 2019 
and September 15, 2019 is an exercise of the Secretary's rulemaking 
authority under section 1109 of the CARES Act. This reference period 
is consistent with the interim final rule on seasonal employers 
issued by Treasury. See 85 FR 23917 (April 30, 2020).
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    This formula implements section 1106(d)(2) of the CARES Act, which 
expressly requires that the loan forgiveness amount be reduced by the 
amount resulting from multiplying the amount that the borrower would 
otherwise receive by the quotient of the average FTE employees in the 
covered period divided by the average FTE employees in the relevant 
reference period.
c. What does ``full-time equivalent employee'' mean?
    Full-time equivalent employee means an employee who works 40 hours 
or more, on average, each week. The hours of employees who work less 
than 40 hours are calculated as proportions of a single full-time 
equivalent employee and aggregated, as explained further below in 
subsection d.
    The CARES Act does not define the term ``full-time equivalent 
employee,'' and the Administrator, in consultation with the Secretary, 
has determined that full-time equivalent is best understood to mean 40 
hours or more of work each week. The Administrator considered using a 
30 hour standard, but determined that 40 hours or more of work each 
week better reflects what constitutes full-time employment for the vast 
majority of American workers.
d. How should a borrower calculate its number of full-time equivalent 
(FTE) employees?
    Borrowers seeking forgiveness must document their average number of 
FTE employees during the covered period (or the alternative payroll 
covered period) and their selected reference period. For purposes of 
this calculation, borrowers must divide the average number of hours 
paid for each employee per week by 40, capping this quotient at 1.0. 
For example, an employee who was paid 48 hours per week during the 
covered period would be considered to be an FTE employee of 1.0.
    For employees who were paid for less than 40 hours per week, 
borrowers may choose to calculate the full-time equivalency in one of 
two ways. First, the borrower may calculate the average number of hours 
a part-time employee was paid per week during the covered period. For 
example, if an employee was paid for 30 hours per week on average 
during the covered period, the employee could be considered to be an 
FTE employee of 0.75. Similarly, if an employee was paid for ten hours 
per week on average during the covered period, the employee could be 
considered to be an FTE employee of 0.25. Second, for administrative 
convenience, borrowers may elect to use a full-time equivalency of 0.5 
for each part-time employee. The Administrator recognizes that not all 
borrowers maintain hours-worked data, and has decided to afford such 
borrowers this flexibility in calculating the full-time equivalency of 
their part-time employees.
    Borrowers may select only one of these two methods, and must apply 
that method consistently to all of their part-time employees for the 
covered period or the alternative payroll covered period and the 
selected reference period. In either case, the borrower shall provide 
the aggregate total of FTE employees for both the selected reference 
period and the covered period or the alternative payroll covered 
period, by adding together all of the employee-level FTE employee 
calculations. The borrower must then divide the average FTE employees 
during the covered period or the alternative payroll covered period by 
the average FTE employees during the selected reference period, 
resulting in the reduction quotient.
    The Administrator, in consultation with the Secretary, determined 
that because the Act does not define the term FTE employee, this 
approach to measurement of FTE is a reasonable and appropriate exercise 
of the Administrator's rulemaking authority, as it balances the need 
for a reasonable measurement of FTE employee headcount with the need to 
limit borrower compliance burdens and ensure administrative 
feasibility.
e. What effect does a borrower's reduction in employees' salary or 
wages have on the loan forgiveness amount?
    Under section 1106(d)(3) of the CARES Act, a reduction in an 
employee's salary or wages in excess of 25 percent will generally 
result in a reduction in the loan forgiveness amount, unless an 
exception applies. Specifically, for each new employee in 2020 and each 
existing employee who was not paid more than the annualized equivalent 
of $100,000 in any pay period in 2019, the borrower must reduce the 
total forgiveness amount by the total dollar amount of the salary or 
wage reductions that are in excess of 25 percent of base salary or 
wages between January 1, 2020 and March 31, 2020 (the reference 
period), subject to exceptions for borrowers who restore reduced wages 
or salaries (see g. below). This reduction calculation is performed on 
a per employee basis, not in the aggregate.
    Example: A borrower reduced a full-time employee's weekly salary 
from $1,000 per week during the reference period to $700 per week 
during the covered period. The employee continued to work on a full-
time basis during the covered period with an FTE of 1.0. In this case, 
the first $250 (25 percent of $1,000) is exempted from the reduction. 
Borrowers seeking forgiveness would list $400 as the salary/hourly wage 
reduction for that employee (the extra $50 weekly reduction multiplied 
by eight weeks).
    The provision implements section 1106(d)(3) of the CARES Act, which 
provides that ``the amount of loan forgiveness shall be reduced by the 
amount of any reduction in total salary or wages of any employee [who 
did not receive, during any single pay period during 2019, wages or 
salary at an annualized rate of pay in an amount more than $100,000] 
during the covered period that is in excess of 25 percent of the total 
salary or wages of the employee during the most recent full quarter 
during which the employee was employed before the covered period.''
f. How should borrowers seeking loan forgiveness account for the 
reduction based on a reduction in the number of employees (Section 
1106(d)(2)) relative to the reduction relating to salary and wages 
(Section 1106(d)(3))?
    To ensure that borrowers are not doubly penalized, the salary/wage 
reduction applies only to the portion of the decline in employee salary 
and wages that is not attributable to the FTE reduction.
    The Act does not address the intersection between the FTE employee 
reduction provision in section 1106(d)(2) and the salary/wage reduction 
provision in section 1106(d)(3). To help ensure uniformity across all 
borrowers in applying the FTE reduction provision and the salary/wage 
reduction provision, the Administrator, in consultation with the 
Secretary, has determined that the salary/wage reduction applies only 
to the portion of the decline in employee salary and wages that is not 
attributable to the FTE reduction. This approach will help

[[Page 33009]]

ensure that borrowers are not doubly penalized for reductions.
    Example: An hourly wage employee had been working 40 hours per week 
during the borrower selected reference period (FTE employee of 1.0) and 
the borrower reduced the employee's hours to 20 hours per week during 
the covered period (FTE employee of 0.5). There was no change to the 
employee's hourly wage during the covered period. Because the hourly 
wage did not change, the reduction in the employee's total wages is 
entirely attributable to the FTE employee reduction and the borrower is 
not required to conduct a salary/wage reduction calculation for that 
employee.
    The Administrator considered applying the salary/wage reduction 
provision in addition to the FTE reduction in situations similar to the 
example above because section 1106(d)(3) refers to reductions in 
``total salary or wages'' in excess of 25 percent. However, the 
Administrator determined that, based on the structure of section 
1106(d)(2) and section 1106(d)(3), Congress intended to distinguish 
between an FTE reduction on the one hand and a reduction in hourly 
wages or salary on the other hand. This interpretation harmonizes the 
two loan forgiveness reduction provisions in a logical manner 
consistent with the statute.
g. If a borrower restores reductions made to employee salaries and 
wages or FTE employees by not later than June 30, 2020, can the 
borrower avoid a reduction in its loan forgiveness amount?
    Yes. Section 1106(d)(5) of the CARES Act provides that if certain 
employee salaries and wages were reduced between February 15, 2020 and 
April 26, 2020 (the safe harbor period) but the borrower eliminates 
those reductions by June 30, 2020 or earlier, the borrower is exempt 
from any reduction in loan forgiveness amount that would otherwise be 
required due to reductions in salaries and wages under section 
1106(d)(3) of the CARES Act. Similarly, if a borrower eliminates any 
reductions in FTE employees occurring during the safe harbor period by 
June 30, 2020 or earlier, the borrower is exempt from any reduction in 
loan forgiveness amount that would otherwise be required due to 
reductions in FTE employees.\8\
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    \8\ In light of the flexibility the Act provides to borrowers 
with respect to their selection of the reference time period for any 
potential reduction in loan forgiveness, and the statutory authority 
for SBA and the Department of the Treasury to grant de minimis 
exemptions from this requirement, if the borrower meets the 
requirements for the FTE reduction safe harbor, it will not be 
subject to any loan forgiveness reduction based on a reduction in 
FTE employees.
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    This provision implements section 1106(d)(5) of the CARES Act, 
which gives borrowers an opportunity to cure reductions in FTEs, 
salary/wage reductions in excess of 25 percent, or both, using the 
applicable methodology set forth in section 1106(d)(5). The Act 
provides that the reduction in FTEs or the reduction in salary/hourly 
wages must be eliminated ``not later than June 30, 2020.'' This does 
not change or affect the requirement that at least 75 percent of the 
loan forgiveness amount must be attributable to payroll costs.
h. Will a borrower's loan forgiveness amount be reduced if an employee 
is fired for cause, voluntarily resigns, or voluntarily requests a 
schedule reduction?
    No. When an employee of the borrower is fired for cause, 
voluntarily resigns, or voluntarily requests a reduced schedule during 
the covered period or the alternative payroll covered period (FTE 
reduction event), the borrower may count such employee at the same 
full-time equivalency level before the FTE reduction event when 
calculating the section 1106(d)(2) FTE employee reduction penalty. The 
Administrator and the Secretary have decided to exempt such employees 
from the calculation of the FTE reduction penalty.
    Section 1106 is silent concerning how to account for employees who 
are fired for cause, voluntarily resign, or voluntarily request a 
reduced schedule. The Administrator and the Secretary have determined 
that such an exemption is de minimis, because a limited number of 
borrowers will face an FTE reduction event during the covered period or 
the alternative payroll covered period. Further, borrowers should not 
be penalized for changes in employee headcount that are the result of 
employee actions and requests. Borrowers that avail themselves of this 
de minimis exemption shall maintain records demonstrating that each 
such employee was fired for cause, voluntarily resigned, or voluntarily 
requested a schedule reduction. The borrower shall provide such 
documentation upon request.
6. Documentation Requirements
What must borrowers submit for forgiveness of their PPP loans?
    The loan forgiveness application form details the documentation 
requirements; specifically, documentation each borrower must submit 
with its Loan Forgiveness Application (SBA Form 3508 or a lender 
equivalent), documentation each borrower is required to maintain and 
make available upon request, and documentation each borrower may 
voluntarily submit with its loan forgiveness application. Section 
1106(e) of the Act requires borrowers to submit to their lenders an 
application, which includes certain documentation, and section 1106(f) 
provides that the borrower shall not receive forgiveness without 
submitting the required documentation. For purposes of administrative 
convenience for both lenders and borrowers, the Administrator, in 
consultation with the Secretary, has determined that requiring 
borrowers to submit certain documentation, maintain certain 
documentation, and choose whether to submit additional documentation 
will reduce initial reporting burdens on borrowers and reduce initial 
recordkeeping burdens on lenders.
7. Additional Information
    SBA may provide further guidance, if needed, through SBA notices 
that will be posted on SBA's website at www.sba.gov. Questions on the 
Paycheck Protection Program may be directed to the Lender Relations 
Specialist in the local SBA Field Office. The local SBA Field Office 
may be found at https://www.sba.gov/tools/local-assistance/districtoffices.

Compliance With Executive Orders 12866, 12988, 13132, 13563, and 13771, 
the Paperwork Reduction Act (44 U.S.C. Ch. 35), and the Regulatory 
Flexibility Act (5 U.S.C. 601-612)

Executive Orders 12866, 13563, and 13771

    This interim final rule is economically significant for the 
purposes of Executive Orders 12866 and 13563, and is considered a major 
rule under the Congressional Review Act. SBA, however, is proceeding 
under the emergency provision at Executive Order 12866 Section 
6(a)(3)(D), based on the need to move expeditiously to mitigate the 
current economic conditions arising from the COVID-19 emergency. This 
rule's designation under Executive Order 13771 will be informed by 
public comment.

Executive Order 12988

    SBA has drafted this rule, to the extent practicable, in accordance 
with the standards set forth in section 3(a) and 3(b)(2) of Executive 
Order 12988, to minimize litigation, eliminate ambiguity, and reduce 
burden. The rule has no preemptive or retroactive effect.

[[Page 33010]]

Executive Order 13132

    SBA has determined that this rule will not have substantial direct 
effects on the States, on the relationship between the National 
Government and the States, or on the distribution of power and 
responsibilities among the various layers of government. Therefore, SBA 
has determined that this rule has no federalism implications warranting 
preparation of a federalism assessment.

Paperwork Reduction Act, 44 U.S.C. Chapter 35

    SBA has determined that this rule will impose a new reporting 
requirement on borrowers who request forgiveness of their PPP loan. SBA 
has developed Form 3508, Paycheck Protection Program--Loan Forgiveness 
Application, for use in collecting the information required to 
determine whether a borrower is eligible for loan forgiveness. SBA 
obtained approval of Form 3508 from the Office of Management and Budget 
(OMB) as a modification to the existing PPP collection of information 
(OMB Control Number (3245-0407). This collection of information was 
approved under emergency procedures to facilitate immediate 
implementation of the PPP and expires on October 31, 2020.

Regulatory Flexibility Act (RFA)

    The Regulatory Flexibility Act (RFA) generally requires that when 
an agency issues a proposed rule, or a final rule pursuant to section 
553(b) of the APA or another law, the agency must prepare a regulatory 
flexibility analysis that meets the requirements of the RFA and publish 
such analysis in the Federal Register. 5 U.S.C. 603, 604. Specifically, 
the RFA normally requires agencies to describe the impact of a 
rulemaking on small entities by providing a regulatory impact analysis. 
Such analysis must address the consideration of regulatory options that 
would lessen the economic effect of the rule on small entities. The RFA 
defines a ``small entity'' as (1) a proprietary firm meeting the size 
standards of the Small Business Administration (SBA); (2) a nonprofit 
organization that is not dominant in its field; or (3) a small 
government jurisdiction with a population of less than 50,000. 5 U.S.C. 
601(3)-(6). Except for such small government jurisdictions, neither 
State nor local governments are ``small entities.'' Similarly, for 
purposes of the RFA, individual persons are not small entities. The 
requirement to conduct a regulatory impact analysis does not apply if 
the head of the agency ``certifies that the rule will not, if 
promulgated, have a significant economic impact on a substantial number 
of small entities.'' 5 U.S.C. 605(b). The agency must, however, publish 
the certification in the Federal Register at the time of publication of 
the rule, ``along with a statement providing the factual basis for such 
certification.'' If the agency head has not waived the requirements for 
a regulatory flexibility analysis in accordance with the RFA's waiver 
provision, and no other RFA exception applies, the agency must prepare 
the regulatory flexibility analysis and publish it in the Federal 
Register at the time of promulgation or, if the rule is promulgated in 
response to an emergency that makes timely compliance impracticable, 
within 180 days of publication of the final rule. 5 U.S.C. 604(a), 
608(b). Rules that are exempt from notice and comment are also exempt 
from the RFA requirements, including conducting a regulatory 
flexibility analysis, when among other things the agency for good cause 
finds that notice and public procedure are impracticable, unnecessary, 
or contrary to the public interest. SBA Office of Advocacy guide: How 
to Comply with the Regulatory Flexibility Act, Ch.1. p.9. Accordingly, 
SBA is not required to conduct a regulatory flexibility analysis.

Jovita Carranza,
Administrator Small Business Administration.

Michael Faulkender,
Assistant Secretary for Economic Policy, Department of the Treasury.
[FR Doc. 2020-11536 Filed 5-28-20; 8:45 am]
BILLING CODE 8026-03-P