What to Know for Businesses Completing the PPP Loan Forgiveness Application - Update

Schwabe, Williamson & Wyatt PC

On May 18, 2020, and May 26, 2020, Schwabe published two articles about the Paycheck Protection Program (“PPP”) Loan Forgiveness Application dated May 2020. On June 16, 2020, in light of the changes from the Paycheck Protection Program Flexibility Act (“PPPFA”), the U.S. Treasury posted two replacement forms and instructions: a PPP Loan Forgiveness Application Form 3508EZ (“Form EZ”), Form EZ Instructions, a Loan Forgiveness Application Revised June 16, 2020 PPP Loan Forgiveness Calculation Form (“Updated Forgiveness Form”) and Updated Forgiveness Form Instructions.

Today we’re walking through some of the basic items to help businesses identify what to look out for as they complete the Form EZ and the Updated Forgiveness Form and follow the accompanying instructions (“Instructions”). We expect the Small Business Administration (“SBA”) to issue further guidance in the coming weeks and answer some of the other open questions related to the loan forgiveness process. Schwabe will continue to monitor any developments and will update this and other resources as appropriate.

Who is eligible to use Form EZ and the Updated Forgiveness Form: Borrowers may only use Form EZ if they are able to check one of three qualification boxes. All other borrowers must use the Updated Forgiveness Form. To use Form EZ, the borrower must be able to check at least one of the following three boxes:

  • 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 application.
  • The borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or Alternative Payroll Covered Period compared to the period between January 1, 2020, and March 31, 2020 (for purposes of this statement, “employees” means only those employees who 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);

AND

The borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020, and the end of the Covered Period, ignoring (a) 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 (b) reductions in an employee’s hours that the borrower offered to restore and the employee refused.

  • The borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or the Alternative Payroll Covered Period compared to the period between January 1, 2020, and March 31, 2020 (for purposes of this statement, “employees” means only those employees who 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);

AND

The borrower was unable 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 Prevention, 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.

What to know about the Covered Period and the Alternative Payroll Covered Period: The “Covered Period” is either (a) the 24-week (168-day) period beginning on the PPP Loan Disbursement Date (the date the borrower received the loan proceeds from the lender) or (b) if the borrower received its PPP loan before June 5, 2020, the borrower may elect to use an 8-week (56-day) period. Borrowers with a biweekly (or more frequent) payroll schedule may elect an “Alternative Payroll Covered Period” to calculate eligible payroll costs using the 24-week (168-day) period or for loans received 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 PPP Loan Disbursement Date. Borrowers that elect to use the Alternative Payroll Covered Period must apply the period wherever there is a reference in the application to “the Covered Period or the Alternative Payroll Covered Period[.]” However, borrowers must apply the Covered Period and not the Alternative Payroll Covered Period wherever there is a reference in the application to the “Covered Period” only. The Alternative Payroll Covered Period cannot extend beyond December 31, 2020.

What to know about eligible payroll costs: PPP borrowers are generally eligible for forgiveness for payroll costs paid and payroll costs incurred during the 24-week or 8-week Covered Period or Alternative Payroll Covered Period. To calculate, (a) payroll costs are considered paid on the day that paychecks are distributed or the day that the borrower initiates an ACH credit transaction, and (b) payroll costs are considered incurred on the day that an employee’s pay is earned. For forgiveness purposes, payroll costs must either be paid during the Covered Period or Alternative Payroll Covered Period, or, for payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period or Alternative Payroll Covered Period, paid on or before the next regular payroll date. 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 Covered Period. For an 8-week Covered Period, that total is $15,385, and for a 24-week Covered Period, that total is $46,154. Count payroll costs that were both paid and incurred only once. Only compensation of employees who were employed by the borrower at any point during the Covered Period or the Alternative Payroll Covered Period and whose principal place of residence is in the United States may be included.

What we know about employee benefits: The following items are included, during the Covered Period or the Alternative Payroll Covered Period, in the total amount paid by the borrower for:

  • Employer contributions for employee health insurance, including employer contributions to a self-insured employer sponsored group health plan, but excluding any pre-tax or after-tax contribution by employees. Do not include employer health insurance contributions made on behalf of a self-employed individual, general partners, or owner-employees of an S-corporation, because such payments are already included in their compensation.
  • Employer contributions to employee retirement plans, excluding any pre-tax or after-tax contributions by employees. Do not add employer retirement contributions made on behalf of a self-employed individual or general partners, because such payments are already included in their compensation. In addition, for Form EZ, contributions on behalf of owner-employees are capped at 2.5 months’ worth of the 2019 contribution amount.
  • Employer state and local taxes paid by the borrower and assessed on employee compensation (e.g., state unemployment insurance tax), excluding any taxes withheld from employee earnings.

How to calculate “owner compensation”: Any amounts paid to owners (owner-employees, a self-employed individual, or general partners) during the Covered Period or the Alternative Payroll Covered Period: (a) for borrowers using a 24-week Covered Period, this amount is capped at $20,833 (the 2.5 month equivalent of $100,000 per year) for each individual or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower; and (b) for borrowers using an 8-week Covered Period, this amount is capped at 8/52 of 2019 compensation (up to $15,385).

What to know about annual payments of retirement and pension benefits that are not due during the Covered Period: These are still open questions. 

How rent and lease obligations and interest on covered mortgage obligations factor into the applications: The Instructions clarify that business lease and business mortgage obligations may relate to real or personal property. The arrangements should be in writing and must be entered into and in force prior to February 15, 2020. The documents will need to be provided with the application, together with evidence of payments. The payments 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 expiration of the Covered Period). Do not include prepayments for business mortgage interest payments.

What are covered utility payments: Business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access, in each case, for which service commenced prior to February 15, 2020, are considered covered utility payments. There is no further guidance on what these terms mean.

What is the limit on eligible nonpayroll costs: For forgiveness purposes, eligible nonpayroll costs are not permitted to exceed 40% of the total PPP loan forgiveness amount.

What to know about forgiveness reductions for workforce reductions: Per the Instructions to the Updated Forgiveness Form, the borrower must calculate its total average weekly full-time equivalency (“FTE”) during the chosen reference period, which may be either (a) February 15, 2019, to June 30, 2019, (b) January 1, 2020, to February 29, 2020, or (c) in the case of seasonal employers, either of the preceding periods or a consecutive 12-week period between May 1, 2019, and September 15, 2019, in each case at the borrower’s option. The loan forgiveness amount must be reduced based on reductions in full-time equivalent employees, as required by the statute. Specifically, the actual loan forgiveness amount that the borrower will receive may be reduced if the borrower’s average number of weekly FTE employees during the Covered Period or the Alternative Payroll Covered Period is less than during the borrower’s chosen reference period. There are still open questions on how this workforce reduction calculation works. The borrower is exempt from such reductions if any of the three criteria described below as the “Full-Time Equivalency (FTE) Reduction Calculation” apply. Furthermore, there are certain FTE reduction exceptions that do not count.

  • Full-time equivalent employees:To calculate the average FTE, borrowers take the average number of hours paid per week per individual employee, divided by 40, and round the total to the nearest tenth, capped at 1.0. A borrower may also elect a simplified method that assigns 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours per week.
  • Full-time equivalency (FTE) reduction calculation: The three criteria are:
    • No reduction in employees or average paid hours between January 1, 2020, and the end of the Covered Period
    • FTE Reduction Safe Harbor 1
    • FTE Reduction Safe Harbor 2
  • FTE Reduction Safe Harbors:There are two separate safe harbors that exempt certain borrowers from any loan forgiveness reduction based on a reduction in FTE employee levels:
    • FTE Reduction Safe Harbor 1 - Inability to Restore Levels: The borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees if the Borrower, in good faith, is able 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 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 Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
    • FTE Reduction Safe Harbor 2 - Restoring FTE Employee Levels: The borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees if both of the following conditions are met: (a) the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (b) 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.
  • FTE reduction exceptions:Any FTE reductions in the following cases do not reduce the borrower’s loan forgiveness: (a) any positions for which the borrower has made a good-faith, written offer to rehire an individual who was an employee on February 15, 2020, and the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020; (b) any positions for which the borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the Covered Period or the Alternative Payroll Covered Period and the employee rejected the offer; and (c) any employees who, during the Covered Period or the Alternative Payroll Covered Period, (1) were fired for cause, (2) voluntarily resigned, or (3) voluntarily requested and received a reduction of their hours. In all of these cases, include these FTEs only if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the borrower’s loan forgiveness.

What to know about forgiveness reductions for compensation reductions: The borrower’s loan forgiveness amount must be reduced due to a statutory requirement concerning reductions in employee salary and wages. Borrowers are eligible for loan forgiveness for certain expenditures during the Covered Period or the Alternative Payroll Covered Period. However, the actual amount of loan forgiveness the borrower may receive may be less, depending on whether the salary or hourly wages of certain employees during the Covered Period or the Alternative Payroll Covered Period were less than during the period from January 1, 2020, to March 31, 2020. If the borrower restores salary/hourly wage levels, the borrower may be eligible for elimination of the salary/hourly wage reduction amount. Borrowers count employees whose salaries or hourly wages were reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period as compared to the period of January 1, 2020, through March 31, 2020. In the event that salary/hourly wage levels are ultimately restored, then the applicable reduction may be eliminated. There are still open questions on how this compensation reduction calculation works.

What are the consequences for making a false statement to obtain forgiveness of a PPP: The Instructions set out the potential civil penalties and/or criminal fraud charges for the unauthorized use of PPP funds.

Which additional certifications are required for either application: In submitting an application, an authorized representative of the borrower must certify that: (1) the requested forgiveness amount (a) was used to pay costs that are eligible for forgiveness (payroll costs to retain employees, business mortgage interest obligations, business rent or lease payments, or business utility payments); (b) includes payroll costs equal to at least 60% of the forgiveness amount; (c) if a 24-week Covered Period, does not exceed 2.5 months’ worth of 2019 compensation for any owner-employee or self-employed individual or general partner, in each case capped at $20,833; and (d) if the borrower has elected an 8-week Covered Period, does not exceed 8 weeks’ worth of 2019 compensation for any owner-employee or self-employed individual or general partner, in each case capped at $15,385 per individual; (2) if the funds were knowingly used for unauthorized purposes, the federal government may pursue recovery of the loan amounts and/or civil or criminal fraud charges; (3) the borrower has accurately verified the payments for the eligible payroll and nonpayroll costs for which the borrower is requesting forgiveness; (4) the borrower has submitted the required documentation to the lender; (5) the information in the application and in all supporting documents and forms is true and correct in all material respects; (6) the tax forms submitted to the lender are consistent with those that the borrower has submitted or will submit to the IRS and/or state tax or workforce agency; and (7) the borrower understands, acknowledges, and agrees that the SBA may request additional information, and failure to provide the information may result in ineligibility for the PPP loan or denial of the forgiveness application.

Which additional certifications are required for the Form EZ: Additional certifications for Form EZ are: (a) the borrower did not reduce salaries or hourly wages by more than 25% for any employee during the Covered Period or Alternative Payroll Covered Period compared to the period between January 1, 2020, and March 31, 2020. For purposes of this certification, the term “employee” includes only those employees who 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; and (b) one of the following two items: (i) the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020, and the end of the Covered Period (other than any 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 reductions in an employee’s hours that a borrower offered to restore and were refused; and/or (ii) the borrower 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 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 Prevention, 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.

Which additional certifications are required for the Updated Forgiveness Form: The borrower must also certify to the following: (a) the forgiveness amount includes all applicable reductions due to decreases in the number of full-time equivalent employees and salary/hourly wage reductions; and (b) if the borrower checked the box for FTE Reduction Safe Harbor 1 on PPP Schedule A, the borrower 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 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 Prevention, 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.

What to know about document retention: Borrowers are required to retain PPP loan supporting documents for a period of six years after the date that the loan is forgiven or repaid in full. Such information includes payroll documentation, documentation supporting the borrower’s certifications, documentation delivered in connection with, and in support of, the borrower’s loan forgiveness application, and any other records demonstrating material compliance with PPP requirements. We provide further information regarding documents, retention, and record keeping in a separate article - Key Considerations for PPP Documentation.

What to know about the PPP borrower demographic information: The disclosure of this information is optional and voluntary and will have no bearing on the loan forgiveness decision.

Conclusion: Schwabe is committed to providing our clients with up-to-date resources to understand the CARES Act and navigate the COVID-19 pandemic. 

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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