While the potential forgiveness of Paycheck Protection Program (PPP) loans is one of its most important and attractive features, it won’t happen automatically. Borrowers must spend their loan proceeds for certain specified purposes, prove that they did so, and engage in somewhat complex payroll calculations for all or part of their loans to be forgiven. Business owners seeking forgiveness will now have a better understanding of the process to do so as the Small Business Administration (SBA) and Department of the Treasury have just released the PPP Loan Forgiveness Application along with guidance for completing and submitting the application.
Although many questions remain, as does uncertainty as to whether or not lawmakers will extend the current eight-week loan period, the Loan Forgiveness Application and instructions will provide much-needed clarity for borrowers seeking forgiveness of their PPP loans. For the time being, the 75% eligible payroll/25% eligible non-payroll ratio of forgivable costs remains in place, as does the eight-week loan period. However, there is now flexibility regarding that period, as further discussed below.
Key points included in the SBA’s loan forgiveness guidance include:
Alternate Payroll Covered Period
Many borrowers are probably not lucky enough to have their eight-week loan period neatly coincide with their payroll schedule, resulting in chopped payroll periods to facilitate the use of as much in PPP loan proceeds as possible. To address this problem, the SBA now allows borrowers with a biweekly (or more frequent) payroll period to calculate eligible payroll costs using an 8-week window that begins on the first day of the borrower’s pay period following the PPP loan’s disbursement date. This new period is known as the “Alternate Payroll Covered Period.”
While borrowers can still use the original “Covered Period” that begins on the loan’s disbursement date to make their calculations, they must pick one of the two options and stick with it through the various calculations where the option of using either alternative is referenced. Where only the “Covered Period” is referenced, then it alone must be used.
Eligible Payroll Costs and Eligible Nonpayroll Costs and “Paid and Incurred” versus “Paid or Incurred”
Under current guidance, businesses must incur AND pay eligible payroll costs during the eight-week loan period for loan proceeds used for such expenses to be forgiven. The SBA considers payroll costs “paid” on the day that the borrower distributes paychecks to its employees or the date the borrower originates an ACH credit transaction. Payroll costs are considered “incurred” on the day that the employee earns the employee’s pay.
Payroll costs incurred but not paid during the borrower’s last pay period during the applicable eight weeks are nevertheless eligible for forgiveness if the borrower pays them on or before the next regular payroll date. Eligible nonpayroll costs must be paid during the eight-week loan period OR incurred during that period and paid on or before the next regular billing date, even if the billing date is after the eight weeks.
What is “Full-Time Equivalency” (FTE)?
The SBA’s guidance also provides borrowers with an option regarding their calculation of the average full-time equivalency (FTE) during the Covered Period or the Alternative Payroll Covered Period. An employer can calculate FTE either by:
- entering the average number of hours paid per week, dividing by 40, and rounding the total to the nearest tenth (with a 1.0 cap), or
- assigning a 1.0 for employees who work 40 or more hours per week and 0.5 for employees who work fewer hours per week.
According to the SBA, eligibility for loan forgiveness will not be impacted by:
- any FTE reductions, or
- any wage reductions (by individual employee, and only those wage reductions under $100,000 are considered) in excess of 25% of the employee’s wage or salary as of February 15, 2020, if any such cuts are eliminated as of June 30, 2020.
Not all FTE Reductions are Equal
The Loan Forgiveness Application confirms and expands upon recently released guidance concerning FTE calculations, including those relating to employees who refuse to accept offers of re-employment. Specifically, FTE reductions in the following cases will not reduce a borrower’s loan forgiveness:
- An employee rejects a good-faith, written offer to rehire that employee during the eight-week loan period, or
- An employee’s position is filled during the eight-week loan period after the employee:
- is terminated for cause;
- voluntarily resigns, or
- voluntarily requested and received a reduction of the employee’s hours.
In addition to providing guidance for making forgiveness calculations, the Loan Forgiveness Application identifies all documentation that borrowers must maintain, even if the borrower does not submit the documentation with its forgiveness application. Thee SBA instructs borrowers to retain such documentation for six years after the date the loan is forgiven or repaid in full. That documentation must be available for inspection by authorized representatives of the SBA, including representatives of its Office of Inspector General.
PPP Questions? We Have Answers.
If you have questions regarding the Paycheck Protection Program or have any other concerns or issues related to the COVID-19 pandemic, please contact the Business Law Practice Group at Kreis Enderle today.