On May 15, 2020, the Treasury and Small Business Association released the “Loan Forgiveness Application” for borrowers of a Paycheck Protection Program (“PPP”) loan. The application includes instructions for borrowers seeking to determine the amount of its PPP loan forgiveness and provides additional clarity on certain aspects of the CARES Act. Below is a brief summary of the updates and clarifications. We have put this together in the interest of time, but we will continue to review this to confirm our initial reading is correct and to confirm no other material terms are noteworthy.
- Forgiveness Application. The released pages include the application for forgiveness and relevant instructions for borrowers. The application includes two supporting schedules: Schedule A and the Schedule A Worksheet. As part of the application, the borrower must make certain certifications to the SBA/Treasury, including the accuracy of the forgiveness amount and the proper use of forgivable funds. Along with their application, borrowers must include the following:
- Payroll documentation verifying the eligible cash compensation and non-cash payments made consisting of bank statement or third-party payroll service provider reports, tax forms, and payment receipts documenting the amount of any employer contributions to employee health insurance or retirement plans.
- Documentation supporting the borrower’s calculation of FTEs (discussed further below).
- Documentation verifying the existence of the obligations/services borrower is requesting forgiveness as non-payroll costs.
- Updates to Forgiveness Provisions
- Covered Period. The instructions clarify that the “Covered Period” is the 8-week period generally beginning on the date you received the loan disbursement. However, the Treasury now allows a borrower, with a biweekly (or more frequent) payroll schedule, to choose an “Alternative Payroll Covered Period” specific to only payroll costs, which is the 8-week period beginning on the first day of the first pay period following the disbursement date of the PPP loan. This provides much needed flexibility for borrowers looking to align the covered period with its existing pay dates.
- Eligible Payroll Costs. Borrowers are generally eligible for forgiveness for the payroll costs paid and the payroll costs incurred during the 8-week Covered Period or Alternative Payroll Covered Period (as applicable). Payroll costs are considered paid on the day that paychecks are distributed, or the borrower originates an ACH credit 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).
- Eligible Non-Payroll Costs. All non-payroll costs must be either 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. Eligible non-payroll costs cannot exceed 25% of the total forgiveness amount.
- Calculation of Borrower’s Average Full-Time Equivalency (“FTE”). The instructions for the PPP Schedule A Worksheet provide the calculation used to determine whether the borrower’s loan forgiveness amount must be reduced due to statutory requirements concerning reductions in full-time equivalent employees. The actual loan forgiveness amount that a borrower will receive may be less, depending on whether the borrower’s average weekly FTEs during the Covered Period or Alternative Covered Period is less than the borrower’s FTEs for any of the following reference periods, at borrower’s election either (i) February 15, 2019 to June 30, 2019, (ii) January 1, 2020 to February 29, 2020, or (iii) for a seasonal employee, any 12-week period between May 1, 2019 and September 15, 2019. To calculate FTE for each employee, determine the average number of hours worked per week and divide by 40. The maximum amount for each employee is 1.0. Alternative, borrowers may use 1.0 for every employee who worked 40 hours per week and 0.5 for every employee who didn’t meet the standard.
- FTE Reduction Exceptions and Safe Harbor. A FTE reduction in each of the following cases does not reduce the borrower’s loan forgiveness total: (i) the borrower made a good-faith, written offer to rehire an employee which was rejected by the employee, (ii) the employee was fired for cause, voluntarily resigned, or received a reduction of their hours. A borrower is exempt from the reduction in loan forgiveness based on FTE employees described above if both of the following conditions are met: (i) the borrower reduced its FTE employee levels in the period beginning February 15, 2020 and ending April 26, 2020; and (ii) the borrower then restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the borrower’s pay period that included February 15, 2020.
- Salary/Hourly Wage Reduction and Safe Harbor. The total amount of loan forgiveness a borrower will receive may be less, depending on whether the salary or hourly wages of certain employees during the Covered Period or Alternative Payroll Covered Period was less than during the period from January 1, 2020 to March 31, 2020. This reduction only applies for salary reductions of employees making less than $100,000 a year. Borrowers who restore the average annual salary or hourly wage as of June 30, 2020, have met the Salary/Hourly Wage Reduction Safe Harbor and will not have their forgiveness amount reduced.
If you have additional questions or want to discuss this new guidance, please reach out to a member of our Corporate practice group for assistance.