Paycheck Protection Program – Guidance on Loan Forgiveness
The Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as amended by the Paycheck Protection Program and Health Care Enhancement Act, has made available up to $659 billion in potentially forgivable loans to small businesses for the payment of payroll costs and certain other expenses.
The Small Business Administration (SBA) and the Department of the Treasury (Treasury) recently made available the PPP loan forgiveness application (Loan Forgiveness Application) and new guidance relating to PPP loan forgiveness. The recent guidance includes an interim final rule posted by the SBA and Treasury on May 22, 2020 addressing PPP loan forgiveness (Loan Forgiveness IFR), an interim final rule posted by the SBA on May 22, 2020 on the SBA’s PPP loan review procedures and related borrower and lender responsibilities (Loan Review IFR), and additional published answers to frequently asked questions regarding the PPP (FAQ Guidance). We have summarized some of the recent guidance below.
It is also worth noting that on May 28, 2020, the House of Representatives approved a bill that would make it easier for borrowers to receive full forgiveness of their PPP loans, including by (1) extending the time period during which funds spent on qualified expenses would be eligible for forgiveness and (2) reducing the percentage of the forgiveness amount required to be spent on payroll costs from 75% to 60%. The bill will next be considered by the Senate, and if it becomes law, it will implicate a number of the provisions summarized below.
Forgiveness of Payroll Costs:
The following payroll costs (as defined in the CARES Act and a subsequent interim final rule issued by the SBA) of a PPP borrower are potentially eligible for forgiveness:
- Payroll costs paid or incurred during either (1) the eight-week period beginning on the date the loan is funded (the Covered Period) or (2) if so elected by a borrower with a bi-weekly or more frequent pay period, the eight-week period beginning on the first day of the first pay period starting in the Covered Period (the Alternative Payroll Covered Period); and
- Payroll costs incurred during the borrower’s last pay period in the Covered Period or Alternative Payroll Covered Period, as applicable, and paid no later than the next regular payroll date.
Payments to Furloughed Employees, Bonuses, and Hazard Pay. Compensation paid to furloughed employees, bonuses, and hazard pay are all potentially eligible for loan forgiveness, subject to the cap of $15,385 (the eight-week equivalent of $100,000 per year) of total compensation for each employee.
Compensation of Owner-Employees and Self-Employed Individuals. The amount of compensation of an owner-employee or self-employed individual that may be forgiven is capped at the lesser of (1) 8/52 of 2019 compensation or (2) $15,385 (the eight-week equivalent of $100,000 per year).
Forgiveness of Costs Other than Payroll Costs:
In addition to qualifying payroll costs, the following costs (Nonpayroll Costs) may be eligible for forgiveness:
- Interest payments (but not any prepayment or payment of principal) on a business mortgage obligation on real or personal property incurred prior to February 15, 2020;
- Payments on business rent obligations on real or personal property under a lease agreement that was in force prior to February 15, 2020; and
- Business utility payments (for electricity, gas, water, transportation, telephone, or internet access) for which service began prior to February 15, 2020.
To qualify for forgiveness, a Nonpayroll Cost must be either (1) paid during the Covered Period or (2) incurred during the Covered Period and paid no later than the next regular billing date (which may fall after the end of the Covered Period). In any event, Nonpayroll Costs may not constitute more than 25% of the loan forgiveness amount.
Reduction of Forgiveness Amount:
In general, a borrower’s loan forgiveness amount will be reduced if:
- Full-time equivalent (FTE) employee headcount is decreased; or
- Salaries and wages are decreased by more than 25% for any employees who made less than $100,000 annualized in 2019.
However, a reduction in headcount or salary levels will not be counted against a borrower to the extent that:
- The reduction is due to a termination for cause or an employee’s voluntary resignation or voluntary request for reduced hours during the Covered Period or Alternative Payroll Covered Period, as applicable;
- The borrower cures any such reduction made between February 15, 2020 and April 26, 2020 by no later than June 30, 2020; or
- During the Covered Period or Alternative Payroll Covered Period, as applicable, the borrower makes a good faith offer in writing to rehire a terminated employee (or restore any reduction in an employee’s hours, if applicable) for the same salary and number of hours as prior to the termination (or reduction in hours), but the employee rejects such offer. To qualify for this exception, the borrower must also keep a record of such offer and rejection and inform the applicable state unemployment insurance office of the rejected offer of reemployment within 30 days of the rejection. The Loan Forgiveness IFR states that the SBA’s website will provide further information on how a borrower should report a rejected offer to rehire a former employee to the applicable state unemployment insurance office.
Calculation of Number of FTE Employees. In order to calculate its average number of FTE employees for an applicable period, a borrower must first calculate the full-time equivalency of each employee by dividing the average number of hours paid for such employee per week by 40 (capped at a full-time equivalency of 1.0 for each employee). Alternatively, for each employee who was paid for fewer than 40 hours per week on average, the borrower may elect to use a full-time equivalency of 0.5; however, the borrower must apply the same calculation method to all of its part-time employees.
No Double Penalization. A borrower’s loan forgiveness amount will be reduced for applicable salary or wage reductions only to the extent that the same are not attributable to a reduction in the borrower’s FTE employee headcount.
Loan Forgiveness Process:
The PPP loan forgiveness process requires a borrower to submit the Loan Forgiveness Application to the lender servicing its PPP loan. The lender must review the request for forgiveness and issue a decision regarding such request to the SBA within 60 days of receipt of the borrower’s Loan Forgiveness Application. If the lender has found that the borrower is entitled to forgiveness, the SBA will pay the forgiveness amount to the lender within 90 days of notice of the lender’s decision (although payment may be delayed or denied if the SBA also reviews the applicable PPP loan).
SBA’s Review of PPP Loans:
All PPP loans are subject to the SBA’s review at any time in the SBA’s discretion, and the SBA has suggested that it will review all PPP loans in excess of $2 million. The SBA may review whether a borrower was eligible for its PPP loan, whether the loan amount was calculated correctly, whether the loan proceeds were used for permitted purposes and/or whether the borrower is or was entitled to loan forgiveness.
Review of Certification Regarding Need for PPP Loan. Recent FAQ Guidance again addresses the certification in the PPP borrower application form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” providing that:
“SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees.”
The FAQ Guidance further provides that:
“Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance …. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.”
Borrower Right to Provide More Information. If it appears that a borrower may have been ineligible for a PPP loan or for the amount of the loan or forgiveness received, the lender or the SBA will contact the borrower for more information, and the SBA has indicated that it will take into account all information provided by the borrower in response.
Borrower Right to Appeal Determination. If the SBA determines that a borrower was ineligible for its PPP loan or for the loan or forgiveness amount applied for, the borrower may appeal this determination. The appeals process is expected to be addressed in a separate interim final rule to come.
Borrower Right to Request Review. If a borrower receives written notice from the lender servicing its PPP loan that the loan forgiveness applied for will be denied, the borrower will have 30 days to request that the SBA review the lender’s decision.
Retention of PPP Records. The Loan Review IFR requires that each borrower retain the applicable documentation in its records for six years after the forgiveness or repayment of its PPP loan in full and permit representatives of the SBA to access such records upon request.
For Further Information:
We previously circulated a legal alert (available here) outlining the general terms and conditions of the PPP and various legal alerts (available here, here, and here) highlighting PPP guidance from the SBA and Treasury as such guidance was published. If you have any questions regarding the PPP, please reach out to Jeff Brandel or Lauren Roberts.
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