Small and medium-size businesses (SMBs) are the engine of the American economy. To address the economic fallout of the pandemic, the U.S. government’s Payment Protection Program (PPP) was implemented to help businesses cover payroll costs and other expenses from February 15, 2020 through June 30, 2020.
As shelter in place restrictions across the country start to lift, many SMB owners juggle pressing priorities including transitioning back their employees to the workplace safely and keeping up with new guidance issued by the government. It can be overwhelming to stay up to date and, through this blog post, we hope to provide you with the latest on PPP loan forgiveness. You can also access our recent webinar that will help you identify what you need to address to maximize forgiveness of your PPP loan.
In the last several weeks, the Small Business Administration (SBA) and the Department of the Treasury have issued much anticipated guidance on the PPP loan forgiveness rules for borrowers and lenders. More changes are likely on the way as the Senate considers the Paycheck Protection Program Flexibility Act of 2020, recently passed by the House, that would make significant changes to the PPP loan program.
On May 15th, the SBA issued an 11-page PPP Loan Forgiveness Application followed the next week on May 22nd ,by two Interim Final Rules (IFRs)-PPP Interim Final Rule-Requirements-Loan Forgiveness and PPP Interim Final Rule-SBA Loan Review and Procedures and Related Borrower and Lender Responsibilities. The first IFR, largely mirrors the application instructions but does provide important clarifications and the second IFR relates to borrower and lender responsibilities and the SBA review process.
A borrower’s loan forgiveness amount will be reduced based on reductions in full-time equivalent employees (FTEs) or in salary or wages during an eight-week/56 day Covered Period subject to several safe-harbor provisions. To calculate the loan forgiveness amount the borrower must compete the PPP loan forgiveness application. The loan forgiveness application has several parts. In order to calculate forgiveness, you must first compete the PPP Schedule A Worksheet, then the PPP Schedule A, and then the PPP Loan Forgiveness Calculation Form. The PPP Loan Forgiveness Calculation Form and the PPP Schedule A must be submitted to the lender. The borrower must retain the PPP Schedule A Worksheet for 6 years.
One of the most significant developments is the addition of the “Alternative Payroll Covered Period”. Prior to the application and the IFRs, the borrower’s Covered Period started on the day the loan proceeds were distributed. Under the application and the IFRs, the borrower may align the eight-week/56-day Covered Period with the borrower’s regular payroll schedule, rather than starting the clock on the day the loan was funded by choosing to use the Alternative Payroll Covered Period. The Alternative Payroll Covered Period is only available to employers with a bi-weekly (or more frequent) payroll schedule. Borrowers may elect to start the eight-week clock (only for purposes of paying payroll costs) on the first day of the employer’s regular pay period following the date on which the employer received the loan disbursement.
The SBA provided much needed clarification on what “costs incurred and payments made” means. To be forgivable, at least 75% of the funds spent during the Covered Period or Alternative Payroll Covered Period must be spent on payroll costs, and no more than 25% of the funds may be spent on non-payroll costs. Under the application and IFRs, payroll costs are considered paid on the day that paychecks are distributed, or the borrower initiates an ACH credit transaction. Payroll costs are considered incurred on the day the employee’s pay is earned. Payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period or Alternative Payroll Covered Period are eligible for forgiveness if paid on or before the next regular payroll date. Thus, if an employer received the PPP loan before the next payday, it could use the PPP funds for that payroll even though work was performed prior to the Covered Period or Alternative Payroll Covered Period. This means that some employers may be able to include additional payroll cycles in the Covered Period or Alternative Payroll Covered Period to maximize loan forgiveness.
Eligible non-payroll costs (mortgage Interest, rent, utilities) 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. This means that borrowers can include more rental, utility, and interest payments (including those payments that have accumulated and remained unpaid due to due the pandemic), so long as the expense was in place as of February 15, 2020, it is not a prepayment, and it does not exceed the 25% threshold.
The application and IFRs provide that bonus and hazard pay are covered payroll costs and can be counted towards loan forgiveness subject to the $100,000 salary cap. Further, to enable borrowers to continue to pay their employees who are not able to perform their day to day duties due to lack of economic demand or public health considerations, wages or commissions paid to these employees may also be counted towards eligible payroll costs.
If an employer cannot maintain its FTE count due to circumstances beyond its control, such as a voluntary separation, voluntary reduction in hours, refusal to return to work or a termination for cause, the employer will not be penalized for failing to maintain headcount during the Covered Period or Alternative Payroll Covered Period. With respect to employees who refuse to come back to work or refuse an offer to restore hours the employer will not be penalized for a reduction in FTEs where the:
This new guidance alleviates the need for an employer to backfill positions that were vacated due to no fault of the employer. It is recommended that all separations of employment should be well documented, and all offers to return to work be in writing to the employee.
The PPP Schedule A Worksheet requires borrowers to track, on a per-employee basis, the average wages each employee earned over the Covered Period or Alternative Payroll Covered Period. The CARES Act set limitations on the maximum amount that each employee may receive from PPP funds over the Covered Period or Alternative Payroll Covered Period to be forgivable, specifying that PPP funds may not be used to compensate an employee for any amount in excess of $100,000, as prorated over the eight weeks.
Employees who worked for the borrower during the Covered Period or Alternative Payroll Covered Period and who earned less than $100,000 in 2019 are listed in Table 1. on the PPP Schedule A Worksheet. Employees who worked for the borrower during the Covered Period or Alternative Payroll Covered Period and earned more than $100,000 in 2019, are listed in Table 2 on the PPP Schedule A Worksheet.
The PPP Schedule A Worksheet requires the borrower to determine the Average FTE for each employee listed each week of the Covered Period or Alternative Payroll Covered Period. The CARES Act did not define FTE. The application clarifies that FTEs are calculated based on a 40-hour work week. To calculate the average number of hours paid per week, the borrower must divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the borrower. For some borrowers, dividing the average number of hours paid per week by 40 may result in a higher FTE count which the borrower may want to maximize forgiveness. FTEs are calculated on a weekly basis.
A borrower’s forgiveness will be reduced if, during the eight-week Covered Period or Alternative Payroll Covered Period, any employee’s wages were reduced by more than 25% compared to the average wages that employee earned January 1, 2030 through March 31, 2020.
If wages are reduced, they are deducted on a dollar-for-dollar basis from a borrower’s forgiveness amount. Until now, there was an open question as to whether the wage reduction penalty applied to employees who earned more than $100,000 in 2019. The application, however, makes clear that the wage reduction requirement applies only to those who earned less than $100,000.
If a borrower’s loan forgiveness eligibility is reduced based on the reduction of employees’ wages, there is a safe harbor which would avoid the reduction altogether. To determine if the safe harbor applies, the employer must first look at what the employee was earning as of February 15, 2020, and then determine what the employee earned on average from February 15 through April 26, 2020. If the amount the employee earned on average between February 15 and April 26, 2020 is less than what the employee earned as of February 15, 2020, the employer then looks to the employee’s average wage as of June 30, 2020. If the employee earned on average, the same, or more on June 30, 2020, compared to what the employee earned as of February 15, 2020, the safe harbor applies. This means that for forgiveness purposes, a salary reduction during the 8-week period will not count against PPP loan forgiveness, so long as that salary is restored by June 30, 2020.
Consistent with the Act, the application states that borrowers must maintain their average FTE count over the eight weeks following the loan disbursement, compared to one of two time periods, at a borrower’s election:
The FTE reduction is performed after the salary reduction referenced above. The average FTEs during the eight-week period is divided by the average FTEs in one of the two (or three, for seasonal employers) time periods referenced above, resulting in a quotient. The quotient is then multiplied times the total PPP loan amount eligible for forgiveness. The product results in the total amount of forgiveness.
However, this reduced amount is also eligible for safe harbor application. Like the safe harbor for wage reductions, the safe harbor for FTEs looks at two points in time – FTEs for the pay period including February 15, 2020 and the average FTEs from February 15, 2020 through April 26, 2020. If an employer had more FTEs on February 15, 2020 than the average FTEs between February 15, 2020 and April 26, 2020, so long as the employer restores the FTE count by June 30, 2020, to what is was as of February 15, 2020, the safe harbor is met and the employer avoids a reduction in forgiveness based on FTEs within the eight-week period.
The SBA makes clear that it may audit any loan it chooses, regardless of size, for initial eligibility, correctness of all aspects of the application, the use of the PPP funds, and accuracy of all aspects of the forgiveness application. Within 60 days of the submission of the forgiveness application, the lender must issue a decision to the SBA regarding the amount of the borrower’s PPP loan that is eligible for forgiveness. Lenders are expected to perform a good faith review, in a reasonable time of borrower’s calculations and supporting documentation. If a borrower disagrees with the lender’s decision, it has 30 days to appeal and request that the SBA review the forgiveness eligibility. The SBA, subject to any SBA review of the loan or loan forgiveness application, must take action within 90 days. Consistent with the forgiveness application instructions, borrowers must maintain all records associated with their PPP loans for six years after the date the loan is forgiven or repaid.
Passed by the House on May 28, and under consideration by the Senate, the PPP Flexibility Act would extend the PPP loan forgiveness period to include costs incurred and paid over 24 weeks from 8 weeks. This is a significant change and will allow borrowers much more time to use loan proceeds. Additionally, the period in which a loan could be forgiven would be extended to December 31 from June 30. The time period to apply for a PPP loan would be extended to December 31 and the current 75/25% ratio of payroll costs to non-payroll costs (mortgage interest, rent, utilities) would change to 60/40%. Loan repayment terms would change. Borrowers would be allowed to defer principal and interest payments on PPP loans until the SBA compensates lenders for any forgiven amounts, instead of the current six-month deferral period; Borrowers that don’t apply for forgiveness would be given at least 10 months after the program expires to start making payments and a minimum loan maturity period of five years following an application for loan forgiveness would be established, instead of the current two-year deadline set by the SBA. That provision would apply to PPP loans issued after the measure is enacted, though borrowers and lenders could agree to extend current loans.
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