SBA Publishes Loan Forgiveness Application for Paycheck Protection Program

By Eric L. Kintner, Brett W. Johnson, Victor J. Roehm III, and Jennifer R. Yee

On May 15, the Small Business Administration (SBA) published its long-awaited Loan Forgiveness Application and Instructions for Borrowers (Application). The Application clarified certain forgiveness rules and calculations for the Paycheck Protection Program (PPP), although there remain several open issues that we expect the SBA to continue to clarify through an additional Interim Final Rule and FAQs. Below is a summary of the updated forgiveness rules as set forth in the Application.

Forgiveness “Covered Period” or “Alternative Payroll Covered Period”

The Application confirms that the eight-week (or 56-day) forgiveness period begins on the date that the borrower receives the PPP loan proceeds from the lender (Covered Period).  If the borrower received a loan on multiple dates, the borrower is instructed to use the first date.

The Application also includes a new “Alternative Payroll Covered Period,” which allows borrowers with a biweekly (or more frequent) payroll schedule to elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP loan disbursement date. The Application notes, however, that if a borrower elects to use the Alternative Payroll Covered Period, it must consistently use the Alternative Payroll Covered Period wherever there is a reference in the Application to “the Covered Period or the Alternative Payroll Covered Period.”  However, borrowers must still use the Covered Period whenever there is a reference in the Application to “the Covered Period” only.  For example, only payments for business mortgage interest, rent or lease, and utilities during the Covered Period may be included in the forgiveness calculation.

Payroll Costs “Paid and Incurred”

Under Section 1106 of the CARES Act, a borrower is eligible for forgiveness of indebtedness incurred under a PPP loan in an amount equal to certain costs “incurred and payments made” during the eight-week forgiveness period. The Application clarifies that borrowers can seek forgiveness for “payroll costs paid and payroll costs incurred” during the Covered Period or the Alternative Payroll Covered Period. Payroll costs are considered “paid” on the day that paychecks are distributed or the borrower originates an ACH transaction. Payroll costs are considered “incurred” on the day that 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. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).

It is not clear whether the borrower could include payroll costs paid, but not incurred, at the start of the applicable Covered Period.  For example, if a borrower’s Covered Period starts on April 20 and on the same day (April 20) the borrower initiates an ACH transaction that would cover wages for the two-week period prior to the Covered Period, it is not clear that borrower could seek forgiveness for the payroll costs incurred during the two-week period prior to April 20.

Nonpayroll Costs “Paid or Incurred”

The Application states that an eligible nonpayroll cost (i.e., mortgage interest, rent, or utility payments in effect as of February 15, 2020) 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.

75 Percent Rule Still in Effect

The Application includes the requirement that at least 75 percent of the total forgiveness amount must be for payroll costs, and no more than 25 percent of the total forgiveness amount must consist of the nonpayroll costs.  However, recent news reports suggest that the SBA is considering adding more flexibility to this so called 75 percent rule.

Forgiveness Reduction and Safe Harbor –  Average Number of FTEs

The Application addresses what reductions in the forgiveness amount, if any, are warranted because the borrower: (1) either reduced the number of full-time equivalent employees or the average wages of employees between January 1, 2020 and the end of the Covered Period, and (2) did not reverse such reductions by June 30, 2020 to qualify for the FTE Reduction Safe Harbor Provision (as described further below).

The PPP loan forgiveness amount is subject to a pro rata reduction based on (1) the average monthly number of “full-time equivalent employees” (FTEs) employed by the borrower during the eight-week Covered Period (or the Alternative Payroll Covered Period) as compared to (2) the average monthly number of FTEs during the borrower’s chosen reference period, which can be either (a) February 15, 2019 to June 30, 2019, or (b) January 1, 2020 to February 29, 2020.  Stated differently, the actual loan forgiveness amount that the borrower will receive may be reduced if the borrower’s average number of FTEs during the Covered Period (or the Alternative Payroll Covered Period) was less than during the borrower’s chosen reference period.

The Application clarified that the SBA is using a 40-hour workweek to measure FTEs, but at the election of the borrower, any employee working less than 40 hours can simply be logged as half-time. Specifically, to calculate an employee’s FTE, the borrower uses the average number of hours paid per week during the Covered Period (or the Alternative Payroll Covered Period), divide that number by 40, and round the total to the nearest tenth (with the maximum FTE being 1.0). The instructions also added a “simplified method,” which allows borrowers to assign a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.

As additional good news for borrowers, the instructions memorialized certain FTE reduction exceptions that are meant to safeguard employers who either: (1) tried to bring back employees who were previously laid off, or (2) had employees whose employment ended for other qualifying reasons.

Specifically, borrowers may indicate the FTE of (1) any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period, which was rejected by the employee; and (2) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In all of these cases, the borrower is to include these FTEs in the reduction calculation only if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the borrower’s loan forgiveness.

Forgiveness Reduction and Safe Harbor – Salary/Hourly Wage Reduction

The forgiveness amount is also subject to a pro rata reduction if there is a reduction during the Covered Period (or the Alternative Payroll Covered Period) in certain employees’ total salary or wages of more than 25 percent as compared to the employee’s total salary or wages during January 1, 2020 to March 31, 2020. This rule only applies to employees who did not receive annualized wages or salary during any pay period in 2019 of more than $100,000.

The borrower is exempt from forgiveness reductions described above if the FTE Reduction Safe Harbor applies. The FTE Reduction Safe Harbor applies if: (1) the borrower reduced its FTE employee levels from February 15, 2020 to April 26, 2020, as described above; and (2) the borrower then restored its FTE employee levels to its FTE employee levels in the borrower’s pay period that included February 15, 2020, by June 30, 2020.

This safe harbor provision is designed to protect borrowers who were forced to reduce their payroll costs before receiving the PPP loan funds, and then, consistent with the purpose of the CARES Act, used the loan funds before June 30, 2020 to restore their regular pay levels.

Loan Forgiveness Documentation and Review

To seek forgiveness, the borrower submits the Application, including PPP Schedule A, which lists each of borrower’s employees and their respective compensation, average FTE and salary/hourly wage reduction, along with certain payroll documentation, including bank account statements and tax forms (typically Form 941 and state quarterly filings).  Borrowers are also required to sign a certification as to the accuracy of the forgiveness information and documentation submitted, including a statement that the borrower’s knowing use of PPP loan proceeds for unauthorized purposes may result in civil or criminal fraud charges.

The borrower is required to maintain, but is not required to submit to the SBA, documentation supporting the individual employee information included on Schedule A, and documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations and written requests by any employee for reductions in work schedule.  In addition, the borrower should maintain records relating to the PPP loan application, including documentation supporting the borrower’s eligibility and certifications as to the necessity of the loan request.  The borrower is required to maintain these records for at least six years after the date the loan is forgiven or repaid in full, and permit the SBA and government officials to access such records upon request.

Finally, borrowers may want to continue to monitor the SBA’s forgiveness guidance, which very well may change over the forgiveness period.  During the forgiveness period it may also be important to maintain open communication lines with the lender as we anticipate that borrowers may be required to submit additional information in response to follow-up requests from the lender.