SBA Finally Provides PPP Forgiveness Guidance

Late last week, the Small Business Administration posted interim rules and the application for employers to complete when seeking forgiveness of their Paycheck Protection Program (“PPP”) loan. This guidance, which for many businesses comes almost at the end of the 8-week covered period for spending PPP funds, provides employers with many of the answers we have been waiting for since the CARES Act was passed in March.

Of course, that means that this guidance may be too late for some of us to correct actions we already took when we first received the PPP funds. But there are some strategic decisions that you can still make if you act quickly.

The basics of the loan forgiveness have been explained in more detail and in layman’s language in the U.S. Chamber of Commerce’s Guide to PPP Loan Forgiveness, which I highly recommend that you download. But here are some basic forgiveness criteria that we have been waiting on:

  • Application: Your forgiveness application can be filed after June 30, 2020 with your lender. This is good news, because the same banker who helped you get your loan application and supporting documents together will be helping you correctly complete your forgiveness application and document your PPP loan expenditures.
  • Covered Period: Your payroll calculations can be made over the 8-week “covered period”, which runs for 56 days, starting with the date your loan funds were deposited in your account, or you can choose the “Alternative Payroll Covered Period”, which allows you to shift that covered period by a week to better line up with your weekly or biweekly payroll (but doesn’t apply if you pay semi-monthly or monthly).
  • Compensation: If your employees earn pay during the last pay period of your 8-week covered period, but the paycheck won’t go out until after your covered period expires, you can still seek forgiveness for that compensation amount that was incurred during the PPP covered period. So it appears that the employee’s pay can be incurred (earned on each day worked) or paid, either one, during the covered period or alternative payroll covered period and be forgiven, as long as you are not double-dipping.
  • Bonuses and hazard pay can be utilized to spend your PPP funds here at the last minute, but no employee can earn cash compensation (salary, wages, bonuses, tips, commission) of more than $15,385 during the 8-week period (the equivalent of 8/52 of $100,000 per year compensation).
  • What you can spend the money on: The rule that 75% of your PPP funds must be spent on employee compensation, retirement contributions, group health care premiums and state taxes remains unchanged. The other 25% of your loan proceeds can be used for rent, mortgage interest, and utilities.
  • FTE Reduction: Your loan forgiveness will be reduced if your “average weekly full-time equivalent employees” (“FTEs”) decreased during the PPP covered period as compared to your average weekly FTEs during one of three reference periods, but the good news is that you as the borrower of the PPP funds gets to choose which comparison period works best for you:
    • February 15, 2019 to June 30, 2019; or
    • January 1, 2020 to February 29, 2020; or
    • In the case of seasonal employers, either of the preceding periods or any 12-week consecutive period between May 1, 2019 and September 15, 2019.
  • FTEs are measured on a 40-hour workweek (1 FTE = 40 hours), but in some very good news for employers who use lots of part-time help, employers can use a “simplified method”, which says that any employee working less than 40 hours can be counted as one-half FTE, regardless of hours worked. So a fast food employee who average 18 hours per week will still be counted as a 20-hour per week employee. On the other hand, if you have a lot of people working 30 hours per week, the traditional method of counting FTEs by adding all of your part-time employees’ hours worked each week and dividing by 40 may be more advantageous for you.
  • Salary/Hourly Wage Reduction: The other part of the forgiveness formula, the wage reduction part, was not aggregated like we hoped. You will be responsible for calculating whether the salary or hourly wages of each employee, by name, during the Covered Period or the Alternative Payroll Covered Period was less during Q1 of 2020. This calculation will compare each employee’s average annual salary or hourly wage during those two periods. If the employee’s average annual salary or hourly wage was reduced by more than 25%, you will lose some of your loan forgiveness.
  • Safe Harbors: There are some safe harbors you should be aware of and you may need to quickly take advantage of to maximize your loan forgiveness:
    • If you reduced your FTE number between February 15, 2020 and April 26, 2020, you can restore it by June 30, 2020 to the level that you had during the pay period that included February 15, 2020. This will allow you to claim full forgiveness of the loan without worrying about the FTE Reduction number. But obviously, you only have another month to make this happen, so you’ll need to be making calculations now and then take action to improve your FTE numbers if necessary.
    • If any employee has voluntarily resigned, been fired for cause, or voluntarily requested a reduction in hours, that person will not be counted against the employer FTE headcount (as long as their position was not filled by a new employee). Make sure you have written documentation of the reason that the employee no longer works for you.
    • If an employee is provided with a good-faith written offer of reemployment before the end of the 8-week covered period or alternate payroll covered period and refuses to return to work after a layoff or furlough, then that employee will not count against the employer’s forgiveness (but it requires that you as the employer report the refusal to return to work to the state unemployment agency). This may require you as an employer to act fast in the next couple of weeks to make a written reemployment offer before your PPP period runs out. Keep documentation of the employee’s refusal to return to work.
    • For the Salary/Hourly Wage Reduction forgiveness component, you will be forgiven if you can restore an employee by June 30, 2020, to the 100% of the average annual salary or hourly wage that he/she was making on February 15, 2020. So it does not appear that you have to repay a furloughed employee everything that employee would have made during the crisis, but only rehire that employee by June 30 and restore their wage rate to what it was on February 15, 2020.
    • If you are losing PPP loan forgiveness for an employee under one reduction, you won’t lose PPP loan forgiveness for that same employee under the other reduction. In other words, when calculating the FTE Reduction, if a particular employee is counted as a 0 FTE during your 8-week covered period because you had no work for that employee, you won’t also lose out on more loan forgiveness for that person’s missing compensation under the Salary/Hourly Wage Reduction.

Once you submit your completed loan forgiveness application and all the necessary documentation, your bank is supposed to give you a decision on forgiveness within 60 days. However, the SBA reserves the right to audit your application regardless of amount borrowed (seemingly contradicting an FAQ it just released on May 13, 2020) and if it deems it ineligible, you’ll have to provide more documentation and/or file an appeal.

Meanwhile, don’t get completely comfortable with any of this. There are multiple bills pending in the U.S. Congress to amend the CARES Act that could change all of this even at this late date. For example, the “covered period” may be expanded to 16 or even 24 weeks. The end date for rehiring employees and ending the PPP program may be extended from June 30, 2020 to December 31, 2020. The House also wants to override the unilateral regulation inserted by the Treasury department (which was not in the CARES Act passed by Congress) that the money must be spent 75% on payroll, since many businesses that were closed down still had rent and utilities, but no payroll during the COVID-19 shutdown.

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