Alerts and Updates

SBA Releases Paycheck Protection Program Loan Forgiveness Application, Interim Final Rule

May 19, 2020

The application requires borrowers to provide routine information in connection with their PPP loans.

Note: This Alert has been updated to include additional changes to the loan forgiveness process set forth in an interim final rule released on June 23, 2020, which are being implemented in connection with the passage of the Paycheck Protection Program Flexibility Act (PPP Flexibility Act).

On June 17, 2020, the Treasury Department and SBA released a revised Loan Forgiveness Application for the PPP. Borrowers are required to complete the application and submit it to their lenders in order to apply for loan forgiveness. This Alert discusses the Loan Forgiveness Application, as well as some clarifications regarding the rules for loan forgiveness contained within the application and has been updated to include new guidance from the PPP Flexibility Act.

Loan Forgiveness Application Form EZ

As part of the PPP Flexibility Act, the Treasury Department and the SBA released the Loan Forgiveness Application EZ, which is a streamlined version of the Loan Forgiveness Application available to (i) self-employed borrowers with no employees who did not include employee salaries in their PPP loan applications; (ii) borrowers that did not reduce salaries of any employees by more than 25% and did not reduce the number of employees or average paid hours of employees between January 1, 2020, and the end of the applicable loan forgiveness period; or (ii) borrowers that did not reduce salaries of any employees by more than 25% and were unable to operate during the applicable loan forgiveness period at the same level of business activity as before February 15, 2020, due to compliance with federal public health guidance related to COVID-19.

General Overview of Loan Forgiveness Process

To receive loan forgiveness[1], a borrower must complete the Loan Forgiveness Application within 10 months after the last date of the applicable covered period and submit the completed application to its lender[2]. Certain borrowers are also permitted to submit a Loan Forgiveness Application EZ, as discussed above. The lender will then review the application and make a decision regarding loan forgiveness. The lender’s decision must be made and delivered to the SBA within 60 days from receipt of a complete Loan Forgiveness Application. If the lender decides that the borrower is entitled to full or partial forgiveness, the lender will notify the SBA of its decision and request repayment of the forgiven amount from the SBA[3]. Subject to review of the loan or Loan Forgiveness Application, the SBA will remit the appropriate forgiveness amount to the lender, plus any accrued interest through the date of payment within 90 days after the lender issues its decision to the SBA.

If, during the course of its review, the SBA determines that the borrower was or is ineligible for the PPP loan based on the CARES Act, SBA rules or guidance available at the time of the borrower’s application, the borrower’s loan will not be forgiven. If the loan is partially forgiven, or else is otherwise ineligible for forgiveness, the remaining loan balance must be repaid by the borrower on or before the two-year maturity date of the loan[4]. The SBA has also indicated that it will use the statutory 90-day period to review the PPP loan and forgiveness documentation to prevent fraud or misuse of PPP funds, ensure that recipients of PPP loans are within the scope of entities that the CARES Act is intended to assist, and confirm compliance with the PPP requirements set forth in the statute, rules and guidance. Accordingly, determinations by the SBA should be rendered no more than 90 days after a lender submits its decision on a loan forgiveness application (which can be up to 60 days).

For PPP loans that originated after the PPP Flexibility Act was passed (June 5, 2020), such loans have maturities of five years. Borrowers who received their PPP loans before the PPP Flexibility Act passed (before June 5, 2020) have the option to negotiate with their lenders to extend the maturity dates of their loans from two to five years.

Please see our Alert that discusses the SBA review process in more detail.

General Overview of the Loan Forgiveness Application

The Loan Forgiveness Application contains four components for PPP loan borrowers to complete and submit to their lender: (i) the PPP Loan Forgiveness Calculation Form, (ii) the PPP Schedule A, (iii) the PPP Schedule A worksheet and (iv) the optional PPP Borrower Demographic Information Form.

The application requires borrowers to provide routine information in connection with their PPP loans, including such items as the SBA and lender PPP loan numbers, the total PPP loan amount and the name and address of the borrower.

Alternative Payroll Covered Period

The Loan Forgiveness Application provides for an alternate start date for the eight-week or 24-week Covered Period that borrowers with biweekly (or more frequent) payroll schedules may elect to use. Borrowers may calculate payroll costs eligible for loan forgiveness on the first date of their first pay periods following the date of the first disbursement of the PPP loan―this is the “Alternative Payroll Covered Period.” Wherever the application offers a choice between “Covered Period” and “Alternative Payroll Covered Period,” the borrower may choose to use the Alternative Payroll Covered Period described above in lieu of the Covered Period, which is the eight-week or 24-week period beginning on the date of first disbursement of the loan.[5]

With the passage of the PPP Flexibility Act, “Covered Period” now refers to either (i) the eight-week period beginning on the date that a PPP loan is first disbursed or (ii) the 24-week period beginning on the date that a PPP loan is disbursed (or December 31, 2020, if earlier than the 24-week period).

Forgiveness Amount Calculation

The Loan Forgiveness Application lists the types of payments that are eligible for loan forgiveness, consistent with prior rules and guidance. These include:

  1. Payroll costs that are “incurred or paid” during the Covered Period or Alternative Payroll Covered Period are eligible for loan forgiveness. Note the following for purposes of this calculation:
    • Payroll costs are considered paid on the day that paychecks are distributed or a borrower originates an ACH credit transaction, and that payroll costs are considered incurred on the day that the employee’s pay is earned. This will enable many employers to avoid scheduling an interim paycheck on the last date of the Covered Period.
    • Payroll costs incurred during the borrower’s last pay period of the Alternative Payroll Covered Period are eligible for forgiveness if paid on or before the next payroll date immediately following the end of the Alternative Payroll Covered Period; otherwise, payroll costs must be paid during the Alternative Payroll Covered Period to be eligible for forgiveness.
  2. Any business mortgage interest payments during the Covered Period for any business mortgage obligation on real or personal property incurred before February 15, 2020 (but not any prepayment or payment of principal);
  3. Any business rent or lease payments for real or personal property during the Covered Period, pursuant to lease agreements in force before February 15, 2020; and
  4. Any business utility payments during the Covered Period, for business utilities (electricity, gas, water, transportation, telephone and internet access) for which service began before February 15, 2020.

For any nonpayroll costs (items 2 through 4 above), those costs must be paid during the eight-week or 24-week Covered Period beginning on the first disbursement date or incurred during that period and paid on or before the next regular billing date, even if the billing date is after the applicable Covered Period. This answers a question for many employers as to whether they can use an accrual or cash-based method for determining nonpayroll costs eligible for forgiveness. However, advance payments of interest on otherwise eligible mortgage obligations are not eligible for loan forgiveness because such prepayments are excluded under the CARES Act.

Eligible Payroll Costs

The Loan Forgiveness Application provides that for each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the eight-week or 24-week periods. In addition, the Loan Forgiveness Application instructs applicants to “[c]ount payroll costs that were both paid and incurred only once” in order to avoid any potential for double-counting.

The interim final rule also provides that payments to furloughed employees during the Covered Period are also eligible for forgiveness so long as they do not exceed $100,000 on an annualized basis. 

As a major update to the CARES Act and prior guidance, the interim final rule states that the SBA has determined that hazard pay and bonuses are now eligible for loan forgiveness because they constitute a supplement to salary or wages and are thus “similar compensation,” as long as the total annual compensation to the applicable employee does not exceed $100,000, prorated for the applicable eight-week or 24-week Covered Period. This is a major change to the prior rules and guidance, as the SBA had not until now stated that bonuses were permissible payroll costs. However, this new information regarding bonuses should be considered relative to the other loan eligibility prerequisites (in particular, the need certification) and other loan forgiveness requirements.

Owner-Employees and General Partners

In the interim final rule, the SBA confirmed that owner-employees and self-employed individuals’ payroll is capped at the lesser of (i) 2.5/12 of 2019 compensation (approximately 20.83% of 2019 compensation) or (ii) $20,833 per individual across all businesses. For borrowers using the eight-week Covered Period, this amount is capped at the lesser of (i) $15,385 for each individual or (ii) the eight-week equivalent of their applicable 2019 compensation. Specifically, owner-employees are capped by the amount of their 2019 cash compensation and retirement and healthcare contributions. Schedule C filers are capped by the amount of their owner compensation replacement, based on 2019 profit. General partners are capped by the amount of their 2019 self-employment net earnings (reduced by certain deductions) multiplied by 0.9235. There is no additional forgiveness for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as such expenses are paid out of their net self-employment income.

The 60/40 Rule

The Loan Forgiveness Application now incorporates the new 60/40 rule from the PPP Flexibility Act, which relaxes the previous 75/25 rule regarding loan forgiveness. Now 60% of the total forgiveness amount must be used for payroll costs; and 40% at most may be used for nonpayroll costs, such as the mortgage interest, lease and utility payments summarized above. Importantly, the application did include a calculation methodology that had not previously been shared. The formula limits forgiveness to the amount calculated by dividing the Covered Period payroll costs by .60. For example, if a borrower’s total payroll costs over the Covered Period were $60,000, the maximum amount of forgiveness a borrower can seek is $100,000 ($60,000/.60 = $100,000). Keep in mind that the remaining $40,000 in proceeds used in this example must still be used for eligible nonpayroll costs.

$2 Million PPP Loan Threshold

Borrowers of loans in excess of $2 million[6] must check the box on page 1 of the Loan Forgiveness Application to confirm this fact. Note that, pursuant to prior rules and guidance, specifically FAQ 39, all PPP loans in excess of $2 million will be subject to audits by the SBA. For loans under $2 million, there is a safe harbor that presumes borrowers taking less than $2 million in PPP loans have certified in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” However, borrowers should note that the SBA maintains the right to review any PPP loan.

Certifications

The Loan Forgiveness Application, similar to the PPP Borrower Loan Application, requests that borrowers make certain certifications, with some of the most important being the certifications that:

  1. The amount applied to be forgiven is in compliance with the rules regarding payroll costs and the 60/40 rule, among others;
  2. That the loan amount will not be used for unauthorized purposes, and in the event the loan is knowingly used for such purposes, there may be civil and criminal penalties levelled against the borrower;
  3. The borrower has accurately verified the payroll costs applied for loan forgiveness; and
  4. The borrower has submitted the necessary documentation to evidence the payroll and nonpayroll costs eligible for forgiveness.

In addition, the Loan Forgiveness Application states that a borrower’s eligibility for forgiveness will be evaluated in accordance with the PPP regulations and guidance issued through the date of the application. Borrowers will not be restricted by guidance and rules issued after their application is submitted. However, the SBA may direct a lender to disapprove a borrower’s loan forgiveness application if the SBA determines that a borrower was ineligible for the PPP loan under the prior rules and regulations, as well as the terms and conditions of the CARES Act. Please see our prior Alert issued on this subject.

PPP Schedule A Worksheet

The Schedule A worksheet allows borrowers to: compute the compensation eligible for forgiveness for each of the borrower’s employees; confirms the $100,000 annualized cap for employee salaries (which are not eligible for forgiveness); determine the number of full-time equivalent employees of the borrower; and determine whether any reduction in the total loan forgiveness amount is required based on the prior calculations in the worksheet.

Calculation of Average Full-Time Equivalent Employees (FTEs) and FTE Reductions

While the CARES Act does not define the term “FTE,” the interim final rule states that FTE means 40 hours or more of work each week. The Loan Forgiveness Application provides instructions regarding how to calculate a borrower’s FTEs. For each employee, the borrower must 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.

In addition, the borrower may elect to use 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 less than 40 hours per week.

FTE Reduction Exceptions

There are certain exceptions for a borrower that will not result in a reduction of the loan forgiveness amount with respect to FTEs. Borrowers must list (i) any positions for which the borrower made a good faith, written offer to rehire an employee during the Covered Period beginning on the first disbursement date or the Alternative Payroll Covered Period that was rejected by the employee, and (ii) any employees who during the Covered Period beginning on the first disbursement date 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. The Loan Forgiveness Application makes clear that any FTE reductions in these cases will not reduce the borrower’s loan forgiveness. The information in clause (i) is consistent with the guidance issued on May 3, 2020, in FAQ 40. However, the information in clause (ii) is new and is in response to concerns raised by applicants about a reduction in headcount due to these factors, outside of the applicants’ control, impacting forgiveness.

In the interim final rule, the SBA further clarified the requirements for excluding employees who reject an offer to be rehired. Specifically, a borrower may exclude any reduction in FTE employee headcount attributable to an individual employee only if:

  1. The borrower made a good faith, written offer to rehire such employee during the Covered Period or Alternative Covered Period;
  2. The offer was for the same salary or wages and same number of hours as earned by the employee in the last pay period prior to the separation or reduction in hours;
  3. The offer was rejected by the employee;
  4. The borrower documented the offer and its subsequent rejection; and
  5. The borrower informed the applicable state unemployment insurance office of the employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer. (The SBA will post further information on its website regarding how to report information concerning rejected rehire offers.)

Additionally, the June 23 interim final rule confirms the exemptions for borrowers unable to rehire employees, as outlined in our Alert summarizing key changes created by the PPP Flexibility Act.

FTE Safe Harbor

The Loan Forgiveness Application restates the safe harbor provision for a reduction in employees, by which any borrower that rehires their employees by December 31, 2020, will not have their loan forgiveness amount reduced. Borrowers are exempt from the reduction in loan forgiveness based on FTE employees 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 December 31, 2020, to its FTE employee levels in the borrower’s pay period that included February 15, 2020.

Note that borrowers may take advantage of the safe harbor before December 31, 2020, upon the submission of their loan forgiveness application. Borrowers do not need to wait until December 31, 2020 to rehire employees and receive the benefit of the safe harbor.

Salary Reductions and Loan Forgiveness

As provided for by the CARES Act, loan forgiveness will also be reduced for any reductions of more than 25% of the salaries of employees who earn less than $100,000 on an annualized basis. Citing Section 1106(d)(5) of the CARES Act, the interim final rule provides that if employee salaries and wages for those making less than $100,000 annually were reduced between February 15, 2020, and April 26, 2020, but the borrower eliminates such reductions by December 31, 2020, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required. The Loan Forgiveness Application includes a worksheet for borrowers to calculate any reductions in salaries and how that may impact the total amount eligible for loan forgiveness. Borrowers should carefully review and work through the calculations pursuant to the worksheet provided in the Loan Forgiveness Calculation in order to account for any salary reductions and confirm whether any reduction will be made to the total loan forgiveness amount.

Interplay Between FTE Reductions and Salary Reductions

For borrowers that reduce both salaries and FTE levels, the interim final rule provides that the decrease in forgiveness in connection with a salary reduction in excess of 25% applies only to the portion of the decline in employee salary and wages that is not attributable to FTE reductions. The SBA’s rationale for including this was to ensure that borrowers are not doubly penalized for reducing headcount and salaries.

PPP Schedule A

Schedule A of the Loan Forgiveness Application requests that borrowers use the calculated amounts from the Schedule A worksheet in order to determine the total loan forgiveness amount and any required reductions. Schedule A also lists documentation that borrowers must submit in order to evidence the payments that comprise its loan forgiveness amount. Borrowers should read the list of documents carefully and make sure that all documentation can be readily provided as part of the Loan Forgiveness Application. Note that Schedule A also includes a list of documentation that borrowers are required to maintain but are not required to submit.

Borrower Demographic Information Form

The Borrower Demographic Information Form is an optional document that borrowers may fill out, which requests information on the veteran status, gender, race and ethnicity of principals of the borrower’s business. Borrowers do not have to fill out the form to be eligible for loan forgiveness.

Submission of Loan Forgiveness Application

The interim final rule released on June 22, 2020, appears to create uncertainty as to when PPP loan borrowers may submit their loan forgiveness applications. The Loan Forgiveness Applications released by the SBA imply that borrowers must perform calculations over the entire course of the Covered Period because the application requests calculations and other information during the “Covered Period” and not as of the date that the application is submitted. However, the interim final rule includes new language on when loan forgiveness applications may be submitted. The interim final rule provides that “[a] borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.”

The SBA will need to resolve the discrepancy between the interim final rule and the loan forgiveness application for a definitive answer to the question of whether PPP loan borrowers may submit their loan applications before the end of the 24-week period.

Borrowers should check with their lender until the SBA releases further guidance on this point.

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Duane Morris has created a COVID-19 Strategy Team to help organizations plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage. 

For More Information

If you have any questions about this Alert, please contact Nanette C. Heide, Sandra G. Stoneman, Stephen Morrissey, Mark Zhuang, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact.

Notes

[1] The process described applies only to Loan Forgiveness Applications that did not undergo SBA review before the lender’s decision on the forgiveness application. 

[2] Pursuant to Section 3(c) of the PPP Flexibility Act, for borrowers that fail to apply for loan forgiveness within 10 months after the last day of the covered period, the PPP loan is no longer deferred and the borrower must begin paying principal and interest. Additionally, lenders for these borrowers are required to notify the borrowers of the date the first payment is due, in addition to reporting to the SBA that the loan is no longer deferred on the next monthly SBA Form 1502.

[3] Note that if the borrower has received an Economic Injury Disaster Loan (EIDL) advance, the SBA will deduct that amount from the forgiveness amount remitted to the lender.

[4] The SBA has indicate that it will issue further guidance regarding an appeals process regarding its determination of eligibility for a PPP loan and/or an application for loan forgiveness.

[5] Note, however, for purposes of completing the application, if “Covered Period” is the only term listed or option given, the eight-week or 24-week period beginning on the date of the first disbursement of the loan must be used in that portion of the application. Where there is a choice provided in the application, either the Alternative Payroll Covered Period or the Covered Period may be used.

[6] Note that as a minor technical matter, the guidance does not specifically address loans of exactly $2 million, only those above and below.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.