Finally … Guidance on PPP Forgiveness

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Davis Wright Tremaine LLP

In the last two weeks, the Small Business Administration (SBA) has provided clarification and guidance for Borrowers as they prepare to seek forgiveness for their Paycheck Protection Program (PPP) loans obtained under the CARES Act. (See our prior blog on the PPP rollout here.)

On May 15, 2020, the SBA published the PPP Loan Forgiveness Application. A week later on May 22, 2020, the SBA issued an Interim Final Rule (IFR) on Loan Forgiveness and an IFR on SBA Loan Review Procedures. Below are the important takeaways. This is not an exhaustive list; Borrowers with questions should consult the linked documents, and their legal counsel for further information.

  • The PPP Loan Forgiveness Application requires the Borrower to check a box if, together with its affiliates, it received PPP loans with an original principal amount in excess of $2 million, highlighting the SBA’s intent to review all loans above such threshold.
  • The IFR on SBA Loan Review Procedures makes clear that the SBA may review at any time in its discretion any PPP loan it deems appropriate, regardless of size. Borrowers must retain the PPP documentation they used to support PPP loan eligibility and forgiveness for six years after the date their PPP loan is forgiven or repaid in full.
  • The IFR on SBA Loan Review Procedures states that if it’s determined that a Borrower was ineligible for a PPP loan, the SBA’s recourse against individual shareholders, members, or partners of a Borrower for nonpayment of a PPP loan would not be limited.
  • The PPP Loan Forgiveness Application creates an alternative eight-week period (Alternative Payroll Covered Period or APCP) that Borrowers with a biweekly (or more frequent) payroll schedule may elect to use to calculate payroll costs eligible for forgiveness. The Alternative Payroll Covered Period begins on the first day of a Borrowers first pay period following their PPP loan disbursement date. Eligible non-payroll costs remain tied to the eight-week period following loan disbursement (Covered Period).
  • The IFR on Loan Forgiveness confirms that (i) salary, wages, commissions, or similar compensation paid to furloughed employees and (ii) any bonuses or “hazard pay” (also known as “hero pay”, etc.) are eligible payroll costs, as long as an employee’s compensation does not exceed $100,000 on an annualized basis.
  • The IFR on Loan Forgiveness broadly interprets “costs incurred and payments made” (the language in the CARES Act) to include:
    • Payroll costs paid or incurred during the Covered Period (or the APCP). Payroll costs incurred during the Borrower’s last pay period of the Covered Period (or the APCP) are eligible for forgiveness if paid on or before the next regular payroll date.
    • Non-payroll costs 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.
  • The SBA has provided the method for determining whether at least 75 percent of the potential forgiveness amount was used for payroll costs. As the last step in calculating the eligible loan forgiveness amount (after making reductions for salary/hourly wage reductions and full-time equivalency employee (FTE) reductions), Borrowers will take the lesser of their eligible payroll costs divided by 0.75 or the just calculated loan forgiveness amount. This method provides for greater potential loan forgiveness than if the SBA had reviewed payroll versus non-payroll costs for the 75 percent requirement prior to the reductions for salary/hourly wage reductions and FTE reductions.
  • The PPP Loan Forgiveness Application and IFR on Loan Forgiveness clarify that the reduction to loan forgiveness for FTE reductions is based on average weekly FTE during the Covered Period (or the APCP) compared to the average during the chosen referenced period
  • To determine FTE, 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. 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 fewer hours may be used at the election of the Borrower.
  • In calculating the loan forgiveness amount, a Borrower may exclude any reduction in FTE headcount that is attributable to:
  • There will be no loan forgiveness reduction based on FTE levels if:
    • The Borrower did not reduce the number of employees or average paid hours of their employees between January 1, 2020 and the end of their Covered Period.
    • (i) The Borrower reduced its FTE levels anytime from February 15, 2020 to April 26, 2020 and (ii) then restored its FTE levels by not later than June 30, 2020 to its FTE levels in its pay period that included February 15, 2020.
  • The PPP Loan Forgiveness Application provided guidance on how to calculate the loan forgiveness reduction based on salary/hourly wage reductions. The amount of loan forgiveness will be less to the extent the average annual salary or hourly wages of any employee during the Covered Period (or APCP) was reduced by more than 25 percent as compared to the period from January 1, 2020 to March 31, 2020.
    • Salaried Worker: For calculation purposes, Borrowers should compare an employee’s average annualized salary for the relevant time periods. The reductions in excess of 25 percent will then be multiplied by 8/52 to determine the reduction to loan forgiveness for such employee.
    • Hourly Worker: For calculation purposes, Borrowers will compare an employee’s average hourly wage for the relevant time periods. The reductions in excess of 25 percent will then be multiplied by the average number of hours worked per week between Jan 1 and Mar 31, 2020, and then be multiplied by 8 to determine the reduction to loan forgiveness for such employee.
    • There will be no loan forgiveness reduction based on salary/hourly wage reductions if (i) there was a reduction in an employee’s average annual salary or hourly wages between February 15, 2020 and April 26, 2020 and (ii) as of June 30, 2020, such employee’s average annual salary or hourly wage is greater than the employee’s annual salary or hourly wage as of February 15, 2020.

The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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