Top Ten Things to Know from the PPP Loan Forgiveness Application

After weeks of speculation and discussion, the SBA has released the Paycheck Protection Program (PPP) Loan Forgiveness Application on May 15, 2020. This eleven page document provides instructions for loan forgiveness calculations along with calculation forms and worksheets. The following ten questions were answered and clarified in the PPP Loan Forgiveness Application:

1. Do costs need to be both incurred in and paid in the Covered Period?  Only payroll costs need to be both incurred in and paid in the Covered Period.  Notably, for payroll costs only, SBA offers borrowers who use a bi-weekly or more frequent payroll schedule the option to use an alternative covered period that commences on the first day of the first pay period following the loan disbursement date. Non-payroll costs need to be paid 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.
2. How much cash compensation is eligible for forgiveness?  An amount not to exceed $15,385 (e.g. an annual salary of $100,000 prorated for Covered Period (or Alternative Covered Period)) for each employee.  This applies to amounts for owners as well.
3. What is an FTE?  A full time equivalent (FTE) employee is determined by either calculating the average number of hours paid per week divided by 40, rounded to the nearest tenth and capped at 1.0 or using 1.0 for employees who work 40 hours or more per week and .5 for employees who work fewer hours.
4. What are the Safe Harbor Rules for FTE Reductions? Borrower is exempt from the FTE Reduction if the Safe Harbor applies.  The Safe Harbor is triggered, as to FTE Reductions, if Borrower reduced its FTE levels in the period beginning February 15, 2020 and ending April 26, 2020 and Borrower then restored its FTE employee levels by not later than June 30, 2020 to its FTE levels in Borrower’s pay period that included February 15, 2020.
5. What are the Safe Harbor Rules for Salary/Hourly Wage Reductions?  Borrower is exempt from the Salary/Hourly Wage Reduction if the Safe Harbor applies.  The Safe Harbor is triggered, as to Salary/Hourly Wage Reductions, if Borrower reduced the average annual salary or hourly wages of an employee by more than 25% in the period beginning February 15, 2020, and ending April 26, 2020; and Borrower then restored the average annual salary or hourly wage of that employee by not later than June 30, 2020 to that employee’s average annual salary or hourly wage as of February 15, 2020.
6. When will the amount eligible for forgiveness be reduced based upon FTE reductions?  A reduction may occur if Borrower’s average weekly FTE during the Covered Period (or Alternative Covered Period) is less than Borrower’s average weekly FTE during the reference period selected by Borrower.  The reference period is either February 15, 2019 and June 30, 2019 or January 1, 2020 and February 29, 2020; or in the case of a seasonal employer, the aforementioned periods or any consecutive twelve week period between May 1, 2019 and September 15, 2019.
7. When will the amount eligible for forgiveness be reduced based upon salary/hourly wage reductions? A reduction may occur if the average annual salary or hourly wages of certain employees during Covered Period (or Alternative Covered Period) is less than the average annual salary or hourly wages of the same employees during the period from January 1, 2020 to March 31, 2020.
8. What happens if an employee refuses to return to work, is fired for cause or resigns?  The loan will not be reduced due to a FTE reduction during the Covered Period (or Alternative Covered Period) resulting from any position where Borrower made a good-faith, written offer to rehire an employee which was rejected by employee or any employee who was fired for cause, voluntarily resigned; or voluntarily requested and received a reduction of their hours.
9. What will the lender require to be submitted to consider a loan forgiveness request? A Borrower must submit the PPP Loan Forgiveness Calculation Form and PPP Schedule A along with documentation, verifying eligible cash compensation and non-cash benefit payments from the Covered Period (or Alternative Covered Period), showing the average number of FTE employees on payroll for the periods used in reduction calculations, and verifying existence of then non-payroll obligation/service prior to February 15, 2020 and eligible payments from Covered Period.
10. Do Borrowers need to maintain these records relating to the PPP Loan?  There is a documentation retention requirement of 6 years after the date the PPP Loan is forgiven or repaid in full and these documents will be subject to review by SBA.

Based upon a press release from the U.S. Department of the Treasury on May 15, 2020, the SBA will also be issuing regulations and guidance in the near future to further assist Borrowers and Lenders.

Please reach out to our Business Services Group with questions regarding the PPP Loan Forgiveness Application.

Attorney Loren Speziale collaborates with business owners and human resource professionals, providing legal guidance for a wide variety of operational and personnel matters.