On May 22, 2020 the SBA and Department of the Treasury released the long awaited Interim Final Rule on Forgiveness of Paycheck Protection Program (PPP) Loans and the Interim Final Rule on SBA Loan Review Procedures, following up on the prior posting of the Borrower Forgiveness Application and accompanying Procedural Notice. On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 was signed into law. On June 16, 2020, the SBA published revisions to its Form 3508 Loan Forgiveness Application and separate Instructions (“Form 3508”) reflecting changes as a result of the PPP Flexibility Act. The SBA also released a new Form 3508EZ Loan Forgiveness Application and separate Instructions (“Form 3508EZ,” together with Form 3508, the “Forgiveness Applications”) for certain eligible borrowers.

For more information on the Paycheck Protection Program, the Economic Injury Disaster Loans (EIDL) and the Emergency Economic Injury Grants (EIDL Grants), please see the FAQ: CARES Act SBA Loan Programs.

PPP Loan Forgiveness Information

Procedure – PPP Loan Forgiveness

Q: How do Borrowers apply for PPP loan forgiveness?

A: Borrowers must complete and submit either the Form 3508 Loan Forgiveness Application or, if eligible, the Form 3508EZ Loan Forgiveness Application, to the Lender that provided the PPP Loan. Both the Form 3508 Loan Forgiveness Application Instructions and the Form 3508EZ EZ Loan Forgiveness Application Instructions itemize the documents that each Borrower must submit with its application, including specific payroll records and non-payroll costs documentation. There are also documents that Borrowers are required to maintain, but are not required to submit unless requested. Borrowers completing either version of Form 3508 also need to submit full-time equivalent employee (FTE) documentation. Borrowers should begin collecting this required documentation.

Q: What Application do Borrowers complete?

A: A Borrower is eligible to use Form 3508EZ if the Borrower can satisfy at least one of the following:

• The Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483).
• The Borrower (i) did not reduce the annual salaries or hourly wages of any employee by more than 25% during the Covered Period or Alternative Covered Period (discussed below) compared to the period between January 1, 2020 and March 31, 2020 and (ii) did not reduce the number of employees or the average paid hours of employees between January 1, 2020 to the end of the Covered Period. For purposes of (i), “employee” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000. For purposes of (ii), borrowers should ignore (y) reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020; and (z) reductions in an employee’s hours that the Borrower offered to restore and the employee refused.
• The Borrower (i) did not reduce the annual salary or hourly wages of any employee by more than 25% during the Covered Period or Alternative Covered Period compared to the period between January 1, 2020 and March 31, 2020 and (ii) the Borrower was not able to operate during the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevent or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing or any other work or customer safety requirement related to COVID-19. For purposes of (i), “employee” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.

If a Borrower cannot satisfy at least one of the above, then it cannot use Form 3508EZ, and instead must apply for forgiveness using Form 3508.

Q: Is there a due date for the Applications?

A: As of the date of this publication, nothing in the Forgiveness Applications, the Interim Final Rules or the SBA FAQs requires the Borrower to apply for forgiveness.

If a Borrower submits a Forgiveness Application within 10 months after the end of its loan forgiveness covered period, it will not have to make any payments of principal or interest on its loan before the date on which the SBA remits the loan forgiveness amount to the lender (or notifies the lender that no loan forgiveness is allowed).

If a Borrower does not submit a Forgiveness Application within 10 months after the end of its loan forgiveness covered period, it must begin paying principal and interest after that period.

Borrowers should review the promissory notes and other loan documents they executed in connection with their PPP loan, because Lenders may have included terms that require the Borrower to apply for forgiveness and to do so within a certain period of time.

Q: When will I know if I was approved for forgiveness?

A: For loans not reviewed by the SBA, the forgiveness process could take up to 5 months. This time period could be even longer for loans reviewed by the SBA.

After a Borrower submits a complete Forgiveness Application to its Lender, the Lender has 60 days to review the application and submit its decision to the SBA. The Lender’s decision may take the form of an approval, in whole or in part; a denial; or if directed by the SBA, a “denial without prejudice” due to a pending SBA review of the loan. A Borrower may request that the SBA review a Lender’s decision denying forgiveness within 30 days of receiving the denial notice from the Lender. The SBA, subject to any SBA review of the loan or loan application, has up to 90 days to remit the appropriate forgiveness amount to the Lender.

As indicated on the Forgiveness Applications, the audit threshold is based on whether the Borrower, together with its affiliates, received PPP loans with an original principal amount in excess of $2 million. The SBA may also review a PPP loan of any size – regardless of whether a forgiveness application has been submitted – at any time in its discretion. If the SBA reviews a PPP Loan, the SBA will notify the Lender in writing and the Lender is required within five (5) business days to notify the Borrower in writing of receipt and to provide certain information to the SBA including the loan application, the forgiveness application, and all supporting documentation. If the SBA determines that a Borrower was ineligible for the PPP loan, was ineligible for the PPP loan amount obtained or for the loan forgiveness amount claimed, the SBA will direct the Lender to deny the loan forgiveness application in whole or in part, as appropriate. The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.

The Borrower may appeal the SBA’s determinations, and the SBA has indicated that it intends to issue a separate interim final rule addressing this appeal process. The interim final rule does not impose a time frame on the SBA for its review of any PPP loan.

Q: If my Lender denies my application for forgiveness, can I appeal the Lender’s decision?

A: Yes. If a Lender denies a Borrower’s Forgiveness Application, the Lender must notify the Borrower in writing that it has issued a decision to the SBA denying the loan forgiveness application. Within 30 days of such notice from the Lender, the Borrower may request that the SBA review the Lender’s decision. If the SBA undertakes such a review, the SBA will notify the Lender in writing and the Lender must notify the Borrower in writing within five (5) business days of receipt.

Q: If the SBA determines that I was ineligible for the PPP loan, or was ineligible for the PPP loan amount obtained or for the loan forgiveness amount claimed, can I appeal the SBA’s determination?

A: Yes. The SBA has indicated that it intends to issue a separate interim final rule addressing this appeal process.

Q: Will my forgiveness application be audited by the SBA?

A: As indicated on the Loan Forgiveness Applications, the audit threshold is based on whether the Borrower, together with its affiliates, received PPP loans with an original principal amount in excess of $2 million. The SBA may also review a PPP loan of any size – regardless of whether a forgiveness application has been submitted – at any time in its discretion. If the SBA reviews a PPP loan, the SBA will notify the Lender in writing and the Lender is required within five (5) business days to notify the Borrower in writing of receipt and to provide certain information to the SBA including the loan application, the forgiveness application, and all supporting documentation. The SBA may request additional information from the Borrower in connection with its audit. The Borrower will have the opportunity to respond to the SBA’s questions in a review. The Borrower’s failure to provide the information requested by the SBA may result in a determination that the Borrower was ineligible for the PPP loan or ineligible to receive the loan amount or loan forgiveness amount claimed by the Borrower. If the SBA determines that a Borrower was ineligible for the PPP loan, was ineligible for the PPP loan amount obtained or for the loan forgiveness amount claimed, the SBA will direct the Lender to deny the loan forgiveness application in whole or in part, as appropriate. The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.

The Borrower may appeal the SBA’s determinations, and the SBA has indicated that it intends to issue a separate interim final rule addressing this appeal process. The interim final rule does not impose a time frame on the SBA for its review of any PPP Loan.

An audit may even occur after the PPP loan is forgiven or is repaid in full. Borrowers are reminded that they are required to keep all documentation related to their PPP loan for six (6) years after the date of forgiveness or repayment.

Q: What happens if only a portion of my PPP loan is forgiven, or if my forgiveness application is denied?

A: If a Borrower is denied forgiveness in whole or in part, the amount of the loan not forgiven must be repaid by the Borrower on or before the Borrower’s applicable maturity date (two years for those PPP loans “made” prior to June 5, 2020 and five years for those loans “made” on or after June 5, 2020). The SBA has indicated that, for PPP loans “made” prior to June 5, 2020, the Borrower and its lender may mutually agree to extend the existing 2-year maturity out to 5 years. Additionally, the SBA has indicated that a PPP loan is considered to be “made” on the date that the SBA assigns a loan number to the PPP loan.

This applies only to loan forgiveness applications that are not reviewed by the SBA prior to the Lender’s decision on the forgiveness application, meaning that - under certain circumstances - the SBA may impose additional or different repayment terms.

A Borrower should also review its promissory note and the other loan documentation it executed in connection with its PPP loan for any additional implications of a denial of forgiveness and specific repayment requirements.

If a Borrower submits a Forgiveness Application within 10 months after the end of its loan forgiveness covered period, it will not have to make any payments of principal or interest on its loan before the date on which the SBA remits the loan forgiveness amount to the lender (or notifies the lender that no loan forgiveness is allowed). The lender will notify the Borrower of the date that its first payment is due.

If a Borrower does not submit its loan forgiveness application within 10 months after the end of its loan forgiveness covered period, it must begin paying principal and interest after that period. For example, if a Borrower’s PPP loan is disbursed on June 25, 2020, the 24-week period ends on December 10, 2020. If the Borrower does not submit a Forgiveness Application to its lender by October 10, 2021, the Borrower must begin making payments on or after October 10, 2021, as notified by their lender.

If the SBA determines that the Borrower is ineligible for the PPP loan or is ineligible for the loan amount or the loan forgiveness amount claimed by the Borrower, the SBA may pursue other available remedies.

Q: A Lender may deny a Borrower’s Forgiveness Application “without prejudice” – what does this mean?

A: If, at the time a Borrower submits its Forgiveness Application, the SBA is already reviewing the Borrower’s loan and loan application, then the SBA may direct the Lender to “deny without prejudice” the Borrower’s forgiveness application. In the case of a “denial without prejudice” the Borrower may subsequently request that the Lender reconsider its application for loan forgiveness, unless the SBA has determined that the Borrower is ineligible for a PPP loan.

Eligibility – PPP Loan Forgiveness

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Q: What amount of my PPP loan is eligible for forgiveness?

A: A Borrower is eligible for forgiveness of part or all of its PPP Loan, subject to adjustments and limitations, if proceeds are used for eligible purposes and the Borrower can provide the required supporting documentation to demonstrate that it qualifies for forgiveness.

Additionally, in order to be eligible for full forgiveness, a Borrower must use at least 60% of the PPP loan for payroll costs, and not more than 40% of the loan forgiveness amount may be attributable to nonpayroll costs. If a Borrower uses less than 60% of its PPP loan for payroll costs, it will not receive the full amount of loan forgiveness it might otherwise be eligible to receive. Instead, the Borrower will receive partial loan forgiveness, based on the requirement that 60% of the forgiveness amount must be attributable to payroll costs. For example, if a Borrower receives a $100,000 PPP loan, and during the Applicable Covered Period the Borrower spends $54,000 (or 54%) of its loan on payroll costs, then because the Borrower used less than 60% of its loan on payroll costs, the maximum amount of loan forgiveness the Borrower may receive is $90,000 ($54,000 divided by 60%). This $90,000 is further broken down to $54,000 in payroll costs (constituting 60% of the $90,000 maximum forgiveness amount) and to $36,000 in nonpayroll costs (constituting 40% of the $90,000 maximum forgiveness amount).

Q: Which expenses from my PPP loan proceeds are eligible for forgiveness?

A: The sum of the following costs incurred and payments made during the Applicable Covered Period, subject to certain other terms and limits discussed elsewhere in this FAQ and as set forth on the Forgiveness Applications and the terms of SBA Interim Final Rules and guidance, are eligible for forgiveness:

• Payroll costs;
  • For Borrowers using the 8-Week Covered Period, the maximum amount of cash compensation is $15,385 per individual.
  • For Borrowers using the 24-Week Covered Period, the maximum amount of cash compensation is $46,154 per individual.
• Interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020;
• Business rent payments on real or personal property under a lease agreement in force before February 15, 2020;
• Business utility payments for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020; and/or
• Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.

The “Applicable Covered Period” as used in this FAQ is, for new and existing loans, the period (i) beginning on the date the loan is disbursed and (ii) ending the earlier of (1) the date that is 24 weeks after the loan disbursement date or (2) December 31, 2020. However, for loans “made” before June 5, 2020, the Borrower may elect to continue to use the 8-week (56-day) period beginning on the loan disbursement date. The SBA has also established an “Alternative Payroll Covered Period” for Borrowers with bi-weekly (or more frequent) payroll periods. Such Borrowers may elect to caculate eligible payroll costs using the Alternative Payroll Covered Period that begins on the first day of their first pay period following their PPP loan disbursement date. It is important to note that the “Alternative Payroll Covered Period,” if applicable, is only to be used in relation to payroll costs and cannot be used to determine non-payroll expenses included in the forgiveness calculation.

Q: What is the “Covered Period” for loan forgiveness?

A: The “Covered Period,” as referenced in the CARES Act and SBA guidance, is the period (i) beginning on the date the loan is disbursed and (ii) ending the earlier of (1) the date that is 24 weeks after the loan disbursement date or (2) December 31, 2020. However, for loans “made” before June 5, 2020 Borrowers may elect to continue to use the 8-week (56-day) period beginning on the loan disbursement date. For example, if the Borrower received its PPP Loan proceeds on April 20, 2020 and elects to continue using the 8-week period, then the first day of the “Covered Period” is April 20, 2020 and the last day of the “Covered Period” is June 14, 2020.

Q: What is the “Alternative Payroll Covered Period” for loan forgiveness?

A: Borrowers with a bi-weekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 24-Week (168-day) period - or for loans "made" before June 5, 2020, at the election of the Borrower, the 8-Week (56-day) period that begins on the first day of the first pay period following the date that the loan proceeds were disbursed to the Borrower. For example, if the Borrower received its PPP loan proceeds on April 20, 2020, and the first day of its first pay period following its PPP loan disbursement is April 26, 2020, then the first day of the “Alternative Payroll Covered Period” – if elected by the Borrower – is April 26, 2020 and the last day of the “Alternative Payroll Covered Period” is June 20, 2020 (if the Borrower elects the 8-week (56-day) loan forgiveness period.

If the Borrower elects the “Alternative Payroll Covered Period,” it must apply the “Alternative Payroll Covered Period” wherever there is a reference in the Loan Forgiveness Application to “the Covered Period or the Alternative Payroll Covered Period.” However, the Borrower must apply the “Covered Period” (not the “Alternative Payroll Covered Period”) wherever there is a reference in the application to “the Covered Period” only.

It is important to note that the “Alternative Payroll Covered Period” is only applicable to payroll costs and cannot be used to determine non-payroll expenses included in the forgiveness calculation.

Q: What “payroll costs” are eligible for forgiveness?

A: “Payroll costs” include compensation up to $100,000 (applies only to cash compensation , and not to non-cash benefits) on an annualized basis to employees with a principal place of residence in the U.S. in the form of:

• gross salary, gross wages, gross commissions, or similar compensation;
• gross cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);
• payment for vacation, parental, family, medical, or sick leave;
• allowance for separation or dismissal;
• payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement - not including such employer contributions made on behalf of the self-employed individual, general partners, or owner-employees of an S-corporation;
• payment of state and local taxes assessed on compensation of employees;
• if a 24-week Applicable Covered Period applies, for owner-employees, self-employed individuals and general partners, compensation replacement, the lesser of 2.5 months’ worth of 2019 compensation or $20,833; and
• if an 8-week Applicable Covered Period has been elected for owner-employees, self-employed individuals and general partners, compensation replacement, the lesser of 8 weeks' worth of 2019 compensation or $15,385.

“Payroll costs” may not include:

• compensation of an individual employee in excess of an annual salary of $100,000 in one year, pro-rated during the covered period;
• any compensation of any employee whose principal place of residence is outside of the United States;
• qualified sick leave wages or family leave wages for which a credit is allowed under section 7001 or 7003 of the Families First Coronavirus Response Act; or
• amounts paid to independent contractors.

Borrowers are generally eligible for forgiveness for the payroll costs “paid” and the payroll costs “incurred” during the Applicable Covered Period. 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 Applicable Covered Period are eligible for forgiveness if paid on or before the next regular payroll date.

Q: Are bonuses or hazard pay eligible for forgiveness?

A: Yes. If an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness.

Q: What non-payroll costs are eligible for forgiveness?

A: Non-payroll costs eligible for forgiveness include:

• covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020;
• covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020; and
• covered utility payments: 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.

Eligible non-payroll costs must be paid during the Applicable Covered Period or incurred during the Applicable Covered Period and paid on or before the next regular billing date, even if the billing date is after the Applicable Covered Period. As a reminder, as a result of the PPP Flexibility Act, eligible non-payroll costs cannot exceed 40% of the total forgiveness amount.

Q: I incurred certain eligible payroll or non-payroll costs before I actually received my PPP Loan proceeds, but I paid those costs during the Applicable Covered Period. Are those amounts incurred prior to – but paid during – the Applicable Covered Period eligible for forgiveness?

A: Yes.

Borrowers are generally eligible for forgiveness for the payroll costs “paid” and the payroll costs “incurred” during the Applicable Covered Period. 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 Applicable Covered Period are eligible for forgiveness if paid on or before the next regular payroll date.

For example, a Borrower’s Applicable Covered Period runs from April 14 through June 8, 2020. The Borrower has a bi-monthly payroll schedule that pays on the 15th and the last day of each month. The Borrower may use PPP loan funds to pay the payroll costs that would be paid on April 15, 2020 (“paid” during the Applicable Covered Period even though for payroll prior to the Applicable Covered Period). The Borrower may also use PPP loan funds to pay the payroll costs that would be paid on April 30, 2020; May 15, 2020; and May 31, 2020 (“incurred” and “paid” during the Applicable Covered Period). Additionally, on June 15, 2020 (next regular payroll date), the Borrower may use PPP Loan funds to pay the payroll costs attributable to June 1 through June 8, 2020 (“incurred” during the Applicable Covered Period even though paid after the Applicable Covered Period). All such payments may be included in the requested forgiveness amount.

Eligible non-payroll costs must be paid during the Applicable Covered Period or incurred during the Applicable Covered Period and paid on or before the next regular billing date, even if the billing date is after the Applicable Covered Period. The Interim Final Rule on forgiveness provide the example of an electric bill. Electric bills are typically paid in arrears. The Borrower’s Applicable Covered Period is June 1 through July 26, 2020. The electric bills that the Borrower pays for May and June are paid during the Applicable Covered Period and eligible for forgiveness. The July electric bill is paid on August 10, 2020 (which is the next regular billing date). The payment on August 10, 2020 (only for the portion of the Borrower’s July electricity bill through July 26, 2020 – the end of the Applicable Covered Period) may be included in the requested forgiveness amount because the related expenses were “incurred” during the Applicable Covered Period and paid on the next regular billing date.

Q: Is interest that accrued on the PPP Loan eligible for forgiveness?

A: Yes, the June 17, 2020 Interim Final Rule on Revisions to the Third and Sixth Interim Final Rule states that “the amount of loan forgiveness can be up amount to the full principal amount of the loan plus accrued interest."

Q: What if I applied for my PPP Loan based on a good faith belief that I was eligible, but a later Interim Final Rule or SBA guidance made clear my interpretation was not in line with what the SBA intended?

A: In discussing the SBA’s determination of forgiveness, the Interim Final Rule on forgiveness states “The Administrator may review whether a borrower is eligible for the PPP loan based on the provisions of the CARES Act, the rules and guidance available at the time of the borrower’s PPP loan application, and the terms of the borrower’s loan application. See FAQ 17 (posted April 6, 2020).” FAQ 17 states that Borrowers and Lenders may rely on the laws, rules and guidance available at the time of the application, but if the loan proceeds had not been disbursed at the time of the clarifying guidance, then the Borrower should have modified its application. The eligibility review will be “based on the provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application…” The SBA’s review will also examine whether the Borrower provided adequate documentation for the certifications on the loan application.

Q: What if I have not been able to open my business at all, but I am still paying employees?

A: For employees who are not performing work but are still on the Borrower’s payroll, payroll costs are “incurred” based on the schedule established by the Borrower (typically, each day that the employee would have performed work). Therefore, such payroll costs are eligible for forgiveness.

Reductions to Forgiveness Amount

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This FAQ section is limited to the additional information provided in the Interim Final Rules on Forgiveness and the Interim Final Rule on Revisions to First Interim Final Rule (posted on June 11, 2020). Additional instructions and examples are contained in the Interim Final Rules themselves, as well as on the Forgiveness Applications.

Q: What actions will reduce my forgiveness amount?

A: Generally, the amount of loan forgiveness will be reduced if the number of full-time equivalent employees is reduced (FTE Reduction), if employees’ salaries or hourly wages are reduced by more than 25% (Salary/Hourly Wage Reduction), or if the Borrower’s eligible non-payroll expenses exceed 25% of the total eligible expenses.

Q: How should a Borrower calculate a full-time equivalent employee (FTE)?

A: There are two (2) methods for a Borrower to calculate FTEs:

• Option #1 – for each employee, take 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.
• Option #2 – Assign a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.

Borrowers may select only one of these two methods, and must apply that method consistently to all of their part-time employees for the Applicable Covered Period and the selected reference period.

Q: What is the FTE Reduction?

A: Generally, the Borrower’s loan forgiveness will be reduced if the Borrower’s average number of FTEs during the Applicable Covered Period is less than the average number of FTEs during the Borrower’s chosen reference period. Borrowers can choose between the following reference periods:

• February 15, 2019 to June 30, 2019;
• January 1, 2020 to February 29, 2020; or
• for seasonal employers, either of the preceding periods or a consecutive 12-week period between May 1, 2019 and September 15, 2019.

The same method must be used for each employee.

However, there are two separate safe harbors that may apply to exempt Borrowers from the FTE Reduction:

1. If the Borrower is able, in good 1. faith, to document that it was unable to operate between February 15, 2020 and the end of the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020 and ending December 31, 2020, related to the maintenance of standards for sanitation, social distance, or any other worker or customer safety requirements related to COVID-19.
2. The FTE Reduction Safe Harbor provides that if both (1) the Borrower reduced its FTE employee levels between February 15, 2020 and April 26, 2020; and (2) the Borrower restored its FTE employee levels not later than December 31, 2020 to the levels in the Borrower’s pay period that included February 15, 2020, then such reduction will not reduce the amount eligible for forgiveness.

Additionally, the following situations do not count toward the FTE Reduction calculations:

• the Borrower offered to rehire former employees or offered to restore the reduced hours of such employee so long as the following conditions are met:
  • the Borrower made a good-faith, written offer to rehire the employee (or, if applicable, restore the reduced hours of such employee) during the Covered Period or the Alternative Payroll Covered Period;
  • the offer was for the same salary or wages and the same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
  • the employee rejected the offer;
  • the Borrower maintained records documenting the offer and its rejection; and
  • the Borrower informed the applicable state unemployment insurance office of the offer and rejection within 30 days of the employee’s rejection. This last requirement is a new provision from the Interim Final Rule on Forgiveness.The SBA will provide additional information on this reporting requirement on its website.
• employees fired for cause during the Applicable Covered Period;
• employees who voluntarily resigned during the Applicable Covered Period;
• employees who requested and received a reduction in their hours during the Applicable Covered Period; or
• the Borrower, in good faith, can provide documentation of its inability to (i) rehire employees who were employed on February 15, 2020 and (ii) hire “similarly qualified employees” for unfilled positions on or before December 31, 2020.

Any FTE reductions in the above cases do not reduce the Borrower’s loan forgiveness.

Q: By what amount is my loan forgiveness reduced if I have fewer FTEs during the Applicable Covered Period?

A: If none of the FTE Reduction exceptions or safe harbors apply, the average number of FTEs during the Applicable Covered Period reduces the amount of forgiveness proportionally by the percentage of reduction in FTEs. For example, if the Borrower has 20% fewer FTEs during the Applicable Covered Period, then the amount of forgiveness is reduced by 20%. The Forgiveness Application and schedules account for these reductions.

Q: What is the Salary/Hourly Wage Reduction?

A: Generally, for employees who earned $100,000 or less in 2019 (or were not employed by the Borrower in 2019), the Borrower’s loan forgiveness will be reduced for each employee whose average pay (salary or hourly wage) during the Applicable Covered Period is less than 75% of their average pay compared to the period from January 1, 2020 to March 31, 2020.

The Salary/Hourly Wage Reduction Safe Harbor provides that (1) if the average annual salary or hourly wages between February 15, 2020 and April 26, 2020 is equal to or greater than the annual salary or hourly wages as of February 15, 2020 or (2) if the average annual salary or hourly wage as of December 31, 2020 is restored to an amount equal to or greater than the average annual salary or wage as of February 15, 2020, then the reduction during the Applicable Covered Period does not count to reduce the amount of forgiveness.

If the Borrower does not meet the Salary/Hourly Wage Reduction Safe Harbor, the total amount of forgiveness is reduced by the total dollar amount of salary or wage reduction in excess of 25% of the salary or wages between January 1, 2020 and March 31, 2020. This reduction calculation is done on a per employee basis, not in the aggregate.

Q: If I terminated an employee or reduced their hours from full-time to part-time, do I count those reductions in both the calculations for the FTE Reduction and the Salary/Hourly Wage Reduction?

A: The Salary/Hourly Wage Reduction applies only to the portion of the Salary/Hourly Wage Reduction that is not attributable to the FTE Reduction.The SBA and Treasury make clear that Borrowers should not be doubly penalized by having such reductions count in both the Salary/Hourly Wage Reduction and the FTE Reduction. For example, an hourly wage employee had been working 40 hours per week during the Borrower selected reference period (FTE employee of 1.0) and the Borrower reduced the employee’s hours to 20 hours per week during the Applicable Covered Period (FTE employee of 0.5). There was no change to the employee’s hourly wage during the Applicable Covered Period. Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE Reduction and the Borrower is not required to conduct a Salary/Hourly Wage Reduction calculation for that employee. However, in this same example, if that employee’s hourly wage was also reduced, the FTE Reduction calculation is impacted and the Salary/Hourly Wage Reduction calculation is impacted, but only by the reduction attributable to the wage rate reduction, not the number of reduced hours.

Q: Is there a cap on the amount of loan forgiveness for owner-employees and self-employed individuals’ payroll compensation?

A: Yes. For Borrowers using a 24-week Covered Period, the amount of loan forgiveness for owner-employees and self-employed individuals’ payroll compensation can be no more than the lesser of the 2.5-month equivalent of their applicable compensation in 2019 or $20,883 per individual in total across all businesses. For Borrowers using an 8-week Covered Period, the amount o loan forgiveness for owner-employees’ and self-employed individuals’ payroll compensation can be no
more than the lesser of the 8-week equivalent of their applicable compensation in 2019 or $15,385 per individual in total across all businesses. In particular, owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf; Schedule C filers are capped at the amount of their owner compensation replacement, calculated based on 2019 net profit; and general partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses and depletion from oil and gas properties) multiplied by 0.9235.

Q: The new requirement is that at least 60% of the PPP loan proceeds shall be used for payroll costs, and not more than 40% of the loan forgiveness amount may be attributable to nonpayroll costs. What if a borrower spends less than 60% on payroll costs? Will it receive any forgiveness?

A: In order to be eligible for full forgiveness, a Borrower must use at least 60% of the PPP loan for payroll costs, and not more than 40% of the loan forgiveness amount may be attributable to nonpayroll costs. If a Borrower uses less than 60% of its PPP loan for payroll costs, it will not receive the full amount of loan forgiveness it might otherwise be eligible to receive. Instead, the Borrower will receive partial loan forgiveness, based on the requirement that 60% of the forgiveness amount must be attributable to payroll costs. For example, if a Borrower receives a $100,000 PPP loan, and during the Applicable Covered Period the Borrower spends $54,000 (or 54%) of its loan on payroll costs, then because the Borrower used less than 60% of its loan on payroll costs, the maximum amount of loan forgiveness the Borrower may receive is $90,000 ($54,000 divided by 60%). This $90,000 is further broken down to $54,000 in payroll costs (constituting 60% of the $90,000 maximum forgiveness amount) and to $36,000 in nonpayroll costs (constituting 40% of the $90,000 maximum forgiveness amount).