PPP Loan Forgiveness Application Key Guidance

On May 15, 2020, the Small Business Administration (SBA), issued Release Number 20-41,¹ announcing that the: (1) SBA and the Department of the Treasury had released the Paycheck Protection Program (PPP) Loan Forgiveness Application and corresponding instructions, and (2) SBA will “soon issue regulations and guidance to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities.”²

The newly released application, along with the instructions, provides some long-awaited clarification for how forgiveness will work. However, many major issues remain unresolved by this limited amount of guidance—and some new questions have arisen as a direct result of the application and instructions.

Borrowers are required to complete the newly released multi-part application, per the instructions, and then submit it to the lender. While we await the promised “soon” forthcoming regulations and guidance, we want to share with our readers key highlights found within the application and instructions:

1. Borrowers are now assured that “covered rent obligations” (an eligible nonpayroll cost) include business rent or lease payments required under lease agreements for either real or personal property which were effective before February 15, 2020.

2. The eight-week Covered Period of a PPP Loan is specifically defined as 56 days.  According to the instructions, the first day of the Covered Period must be the same as the PPP Loan Disbursement Date.

The instructions provide the following example:

If the Borrower received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, June 14.“

3. Borrowers using biweekly (or more frequent payroll schedules) may choose to calculate eligible payroll costs using the Alternative Payroll Covered Period, an eight-week (56-day) period that begins on the first day of the first pay period following the PPP Loan Disbursement Date.
   
   Note: In some cases, borrowers electing the Alternative Payroll Covered Period will find that the regular Covered Period must be used instead.  The instructions provide that the Alternative Payroll Covered Period is unavailable wherever there is a reference in the application to “the Covered Period” only.

The instructions provide the following example:

If the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.“

4. Payroll costs which are incurred but have not been paid during the Borrower’s last pay period are eligible for forgiveness if the payroll costs were paid on or before the next regular payroll date. Otherwise, these payroll costs must be paid during the Covered Period.

5. During the Covered Period, contributions by employers to employee health insurance, including employer contributions to a self-insured, employer-sponsored group health plan, as well as to employee retirement plans are forgivable. Any pre-tax or after-tax contributions are not forgivable. Note that based on the guidance thus far, only health insurance is forgivable. Other types, such as disability insurance, are not.

6. Business Utility Payments are defined as business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

7. In preparing your Schedule A Worksheet related to full-time equivalent (FTE) employees, independent contractors, owner-employees, self-employed individuals, and partners may not be counted as an employee.

8. For purposes of determining FTE, during either the Covered Period or Alternative Payroll Covered Period, for each employee, applicants enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0.

9. During the Covered Payroll Period or Alternative Covered Period, for each part-time employee, the Borrower may use a simplified method which assigns 0.5 for employees who work any amount less than full-time.

10. In cases where (1) a Borrower makes a good-faith, written offer to rehire an employee during the Covered Period and the offer was rejected by the employee (and the rejection was documented); or (2) employees who, during the Covered Period, were (a) fired for cause, (b) resigned, or (c) requested a reduction in work or hours; will not reduce Borrower’s loan forgiveness due to a reduced FTE count. Employees who fall into one of these 4 categories will not affect the Borrower’s FTE count.
    
    Note: guidance was unclear in determining whether a position that is subsequently filled, but not immediately, still qualifies for this exception.

11. To determine whether the Borrower’s loan forgiveness must be reduced due to reductions in employee salary and wages depends on whether the salary or hourly wages of certain employees during the Covered Period was less than during the period from January 1, 2020, to March 31, 2020. Where salary and hourly wage levels were restored, the Borrower may be eligible for to have the salary and hourly wage reduction eliminated.

12. An FTE employee safe harbor provides that the Borrower is exempt from the reduction in loan forgiveness based on FTE employee levels if both of the following conditions are met: (1) the Borrower reduced its FTE employee levels in the period between February 15, 2020, and April 26, 2020; and (2) the FTE employee levels were restored by the Borrower  by no later than June 30, 2020, to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.

13. Even if an employer is able to meet the FTE safe harbor, forgiveness can still be reduced where wages are reduced. The wage safe harbor provides that if, on June 30, 2020, wages are greater than or equal to 75% of the wages paid between February 15, 2020, and April 26, 2020, then the Safe Harbor is met.

If you have questions or concerns regarding how you can take advantage of Paycheck Protection Program Loan Forgiveness, call Frost Law today at (410) 862-2890.