Locke Lord QuickStudy: Saving Our Small Businesses: 10 Takeaways from PPP Forgiveness Application and Instructions

On Friday night, May 15, 2020, the Small Business Administration and the Treasury Department released the form of the application and related instructions that borrowers in the Paycheck Protection Program must complete in order to obtain forgiveness for all or some of their loan amount.  The loan forgiveness application is detailed, provides guidance and answers several outstanding questions regarding methodology.  The SBA further indicated that it will promptly issue additional guidance for borrowers on completing the forgiveness form and for lenders explaining their responsibilities.

Below is a brief summary of the loan forgiveness application and related instructions.

1. Timing of forgivable payments:

• Instead of an exact eight week period, a borrower can use an Alternative Payroll Covered Period: a borrower with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of its first pay period following its PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”). A borrower must choose one or the other for payroll costs and apply it consistently.  This Alternative Payroll Covered Period applies only to payroll costs and not non-payroll costs.
• The forgiveness calculations for payroll state that a borrower can enter total eligible payroll costs incurred or paid during the Covered Period or the Alternative Payroll Covered Period.  Payroll costs incurred but not paid during a borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.

• An eligible non-payroll cost (rent, mortgage interest, utilities) 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.

2. Confirms that there has been no change to the requirement that in order to qualify for 100% forgiveness, no less than 75% of the forgivable amount requested must be attributable to payroll costs.

3. Confirms that borrowers are not required to report payments they do not want to include in the forgiveness amount.

4. States that employee average full-time equivalency (FTE) is 40 hours per week.  This appears to be a departure from other SBA programs that use 30 hours per week for FTE.  Borrowers can use 1 FTE for an employee working 40 hours or more and 0.5 FTE for an employee working less than 40 hours.

5. States that the following employees do not need to be counted toward the forgiveness reduction for FTE reductions:

• any positions for which a borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee; and  
• any employees who during the Covered Period 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. 
• 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.

6. Subject to further guidance to be issued, the instructions indicate an all-or-nothing approach regarding the opportunity to cure average FTE reductions.  In order to obtain relief from the forgiveness reduction, average FTE needs to be fully restored by June 30, 2020 to the average FTE of the earlier comparison period.  This may reduce the incentive of an employer from hiring any employees back unless it can hire the full number back, which may not be possible or practical in many cases.

7. Requires borrowers to check a box if the PPP loans received by the borrower and its affiliates exceeded $2.0 million.  The instructions are unclear as to whether a borrower should disregard an affiliate that received a loan but returned it within the safe harbor period.  If this box is checked, it will trigger a review of the loan by the SBA as described in SBA FAQ #46.

8. Confirms that when you are reducing the forgiveness by both salary reductions and layoffs, you apply the salary reduction first, and then reduce the overall amount by the layoff reduction percentage.

9. Confirms that employer contributions to a self-insured, employer-sponsored group health plan are included.  

10. Borrowers are required to retain all documentation relating to the PPP and its forgiveness application for six years after the date the loan is forgiven or repaid and permit the SBA to access the records upon request.   A borrower must also retain documentation supporting the borrower’s certifications as to necessity and eligibility. 

Your regular Locke Lord contact and the authors of this article would be happy to help you navigate the CARES Act and the related amendments to the Small Business Act as they relate to the Paycheck Protection Program or otherwise.

Please visit our COVID-19 Resource Center often for up-to-date information to help you stay informed of the legal issues related to COVID-19.