SBA Issues New Guidance Extending the Safe Harbor Period for Certain PPP Borrowers and Calculating Forgiveness Amount; Clarifies Application of Affiliation Rules

Updated on May 18, 2020*

On May 5^th and 6^th, the Small Business Administration (SBA), in consultation with the Treasury Department, released updated Paycheck Protection Program (PPP) FAQs extending the recently announced amnesty “safe harbor” permitting PPP participants to return loan disbursements by May 14 to the extent they have reconsidered their PPP need-based certifications.  In addition, the SBA clarified that employees of both U.S. affiliates as well as foreign affiliates are to be included for purposes of calculating PPP eligibility based on employee headcount under the SBA’s affiliation rules and addressed the availability of the Employee Retention Credit in connection with returned loan disbursements. On May 3^rd, the SBA released new guidance in respect of the treatment of employees who reject offers of re-employment for purposes of calculating a borrower’s PPP forgiveness amount.

In light of the recent SBA and Treasury Department guidance regarding PPP participant eligibility and need-based certifications in conjunction with the announcement of SBA loan audits at the time a PPP participant applies for loan forgiveness and the creation and subsequent extension of the amnesty safe harbor, we believe it has become critical that PPP participants reevaluate their eligibility to participate in the PPP no later than the current expiration of the safe harbor on May 14. In light of the potential consequences of a false certification, prudence dictates that such analysis and determination be evidenced in writing and reviewed and confirmed by both senior management and the board of directors or similar governing body of the PPP participant.    

Current PPP participants and prospective borrowers should continue to consult the SBA and Treasury websites regularly to track new content and revisions to previously released guidance. Our previous alerts issued in connection with the financial assistance programs available under the CARES Act, including alerts regarding the most recent SBA and Treasury Department guidance on need-based certifications, participant eligibility, loan audits and potential civil and criminal enforcement are collected and published in the Kramer Levin COVID-19 Legal Resource Guide and can be found here: COVID-19 Legal Resource Guide.

Overview

• Extension of Safe Harbor: FAQ #43 extended the limited safe harbor period from May 7 to May 14 for PPP loan recipients that applied for loans prior to April 24 but believe that they mistakenly received their loans based on a misunderstanding or misapplication of their good faith certification concerning their need for the loan in light of SBA guidance in its April 23 FAQ #31 and April 24 interim final rule (which guidance clarified the extent to which public and private companies must evaluate their current business activities and alternative sources of liquidity to the extent not significantly detrimental to their business in making the need-based certification in good faith) to repay their loans in full, at which time they will be considered by the SBA to have made the need-based certification in good faith and avoid further SBA scrutiny.
• Calculation of Number of Employees to Include Foreign Affiliates: FAQ #44 provided that for purposes of determining whether a potential PPP borrower satisfies the PPP’s employee size standard (including those borrowers seeking to qualify as “small business concerns”), such potential borrowers must count all of their employees and those employees of their U.S. and foreign affiliates.
• Employee Retention Credit: FAQ #45 provided that if an employer repays its PPP loan within the newly extended safe harbor period ending May 14, the employer will be treated as though it had not received a covered loan under the PPP for purposes of the “Employee Retention Credit” (a refundable tax credit of up to 50% of $10,000 in wages paid by an eligible employer whose business has been hurt financially by COVID-19), and therefore otherwise remain eligible for the credit so long as the employer continues to meet eligibility requirements of the Employee Retention Credit.
• Loan Forgiveness/Rejection of Offer to Re-hire: FAQ #40 provided that the SBA will be releasing an interim final rule providing that for purposes of determining a PPP borrower’s forgiveness amount, such amount will not be reduced if the borrower previously terminated an employee, offered to rehire the same employee (for the same salary/wages and same number of hours), but the employee declined the offer. In order 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. The SBA went on to state that employees who reject such offers of re-employment may forfeit eligibility for continued unemployment compensation.  We expect additional details concerning the referenced ineligibility for continued unemployment benefits to be addressed in the forthcoming SBA interim final rule.

Analysis

Extension of Safe Harbor Period

Our detailed discussion of the SBA guidance in relation to this limited safe harbor can be found here. FAQ #43 provides that the SBA will revise its April 24 interim final rule to reflect the extension of the safe harbor for PPP loan recipients that applied for loans prior to April 24 from May 7 to May 14 and will provide additional guidance on its review methodology of the PPP application’s need certification prior to May 14. In light of the extension of this unusual amnesty period, and notwithstanding the stated purpose of the safe harbor strictly applying only to borrowers who applied for a PPP loan prior to April 24, recipients of PPP loans who determine to retain their PPP loan may be viewed by the SBA as effectively affirming their PPP application need-based certification as of May 14, in light of SBA and Treasury Department guidance as of such date. For borrowers that choose not to seek safe harbor protection and elect to retain their loans, our guidance and best practices to help them avoid or defend against potential criminal prosecution and/or civil enforcement can be found here.

Application of SBA Affiliation Rules With Respect to Employee-Based Size Standard

Following the passage of the CARES Act, SBA guidance implementing the PPP contained in the SBA’s April 2 interim final rule provided that in determining whether an applicant meets the applicable 500 or fewer employee size standard necessary for PPP eligibility, a PPP applicant must apply the SBA’s existing affiliation rules set forth in the 13 C.F.R. 121.301(f) (in the form such rules took prior to February 10, 2020, as the CARES Act permanently rescinded the SBA’s February 2020 amendment to 13 C.F.R. 121.301). Those rules provide that for determining the number of employees of the applicant and its affiliates, the employees of the applicant and the applicant’s domestic and foreign affiliates must be aggregated.

However, SBA guidance in its FAQ #3 and its April 2 and April 3 interim final rules went on to state that, in addition to alternative eligibility criteria, a prospective PPP borrower will generally be eligible for the PPP if it, combined with its affiliates, has 500 or fewer employees whose principal place of residence is in the United States. This guidance was widely interpreted as modifying the application of the 13 C.F.R. 121.301(f) affiliation rules to the 500 or fewer employee size standard, such that an applicant should only take into account the U.S. based employees of the applicant and its affiliates in calculating total employees for eligibility.

On May 6^th, over a month after releasing its previous guidance, the SBA in FAQ #44 has revisited the issue of calculation of employee headcount for PPP eligibility to seemingly clarify (or reverse) its last statement on headcount calculation to provide that for purposes of counting employees for the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S. and foreign affiliates, absent a waiver of or an exception to the applicable affiliation rules.

In light of this most recent FAQ, those PPP borrowers that may have previously certified themselves as eligible to participate in the PPP on account of being below the 500 employee threshold by disregarding employees of foreign affiliates should reconsider their prior certification, notwithstanding that they may have been relying on the SBA’s April 2 and April 3 guidance in counting only employees of the borrower and its affiliates whose principal place of residence is in the U.S.

On balance, taking into account the SBA’s recent emphasis on reviewing all PPP loans in excess of $2 million (in addition to other PPP loans as it deems appropriate), and the initial grant and subsequent extension of a rare limited amnesty with respect to the PPP’s need-based certification, the conservative approach to this new guidance, subject to further SBA clarification, would be for PPP borrowers to reevaluate their eligibility for the PPP in light of the need to include employees of their foreign affiliates for purposes of the 500 or fewer employee size standard. If on such reconsideration, a borrower who has already received a PPP loan disbursement determines that it would not be eligible for the PPP on account of aggregate employee headcount, then such borrower should strongly consider returning the funds by May 14^th (notwithstanding that the amnesty safe harbor extends only to PPP loan recipients who applied for their loans prior to April 24 and believe they may have misunderstood the need-based certification rather than the general PPP eligibility certification) and return such PPP disbursements to its lender by May 14. Otherwise, despite the size certification having been made at the time the PPP application was submitted, as of May 14, the SBA may consider retaining PPP loan proceeds to be a reaffirmation by borrowers of their eligibility certifications (including both the need-based certification and the size-based certification) and subject such certifications to scrutiny, which may result in possible civil and/or criminal liability (with statutes of limitations for such liability extending for up to ten years), if any are found to be untrue.

* On May 18, the SBA released a new interim final rule implementing its previous FAQ #44, providing that in order to calculate the number of employees of a prospective borrower for purposes of determining eligibility for the PPP based on the size of the borrower (the 500-employee or other applicable PPP size standard), a borrower must include all employees of its domestic and foreign affiliates, except in those limited circumstances where the affiliation rules are expressly waived under the CARES Act. The interim final rule additionally establishes a new safe harbor: In light of the clarification to (or change in) SBA guidance in FAQ #44, any borrower that applied for a PPP loan prior to May 5 based on excluding employees of foreign affiliates in calculating its employee headcount for purposes of determining its PPP eligibility will not be found by the SBA to have made an inaccurate certification of eligibility on its application as a result of such exclusion, so long as such borrower otherwise satisfied the applicable size standard based solely on the U.S. employees of the borrower and its U.S. affiliates. The interim final rule finally clarifies that PPP funds are not to be used to support non-U.S. workers or operations.