SBA Releases PPP Loan Forgiveness Application and Related Guidance

Updated as of 5/28/2020

The Small Business Administration (SBA) has released its much anticipated Paycheck Protection Program (PPP) loan forgiveness application, which may be found here. The loan forgiveness application provides useful guidance for borrowers, and includes calculators for determining the various components of a borrower’s ultimate forgiveness amount. Following release of the loan forgiveness application, the SBA, in consultation with the Treasury Department, released two interim final rules, found here and here, that provide further guidance for borrowers and lenders for navigating the loan forgiveness process and SBA loan review procedures, respectively. This alert highlights key clarifications and discrepancies found in the loan forgiveness application and its instructions, and the related interim final rules, as they relate to previous SBA guidance and the text of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

In parallel with this alert, we have prepared an accompanying infographic tool summarizing the key elements of the PPP loan forgiveness process and components, which can be found here. Prospective PPP borrowers should continue to consult the SBA and Treasury websites regularly to track new content and revisions to previously released guidance.

Our previous alerts issued in connection with the financial assistance programs available under the CARES Act are collected and published in the Kramer Levin COVID-19 Legal Resource Guide.

Overview 

• Creation of Alternative Payroll Period: As an alternative to the standard eight-week (56-day) period commencing on the date of the first loan disbursement (during which time eligible payroll costs paid or incurred will be included in determining a borrower’s forgiveness amount), for purposes of calculating payroll costs subject to forgiveness, PPP borrowers are now permitted to measure such period commencing on the first day of such borrower’s first pay period following receipt of its first PPP loan disbursement. The intention is to permit borrowers with biweekly or more frequent payroll periods to align the relevant forgiveness period with their actual payroll period.
  
  
• Treatment of Paid and Incurred Payroll Costs: For purposes of calculating payroll costs that count toward a borrower’s forgiveness amount, in addition to those payroll costs paid during the “covered period” (or “alternative payroll covered period”), borrowers may include as eligible payroll costs those costs that are incurred but not paid during such period so long as such costs are paid on or before such borrower’s next regular payroll date following the end of the covered period (or alternative payroll covered period). The SBA also clarified that bonuses and hazard pay that a borrower pays to an employee during the covered period (or alternative payroll covered period) may be included as eligible payroll costs for both use of loan proceeds and forgiveness.
  
  
• Loan Forgiveness Application Representations and Certifications: The loan forgiveness application includes several new representations and certifications that a borrower, or an authorized representative on behalf of a borrower, must make when submitting its application, including with respect to potential legal enforcement actions. Borrowers should review these new certifications carefully.
  
  
• Full-Time Employee Reduction Exceptions: The loan forgiveness application and related interim final rule include a new exception for certain employee reductions made during the covered period (or alternative payroll covered period) that will not count against employers in determining reductions to their loan forgiveness amounts.
  
  
• SBA Review of PPP Loan Applications: Notwithstanding prior FAQs, the SBA reiterates that it may undertake a review of a PPP loan of any size at any time at its discretion, and is authorized to review whether a borrower (i) is eligible for its PPP loan, (ii) calculated its loan amount correctly and used its loan proceeds for allowable uses, and (iii) is entitled to loan forgiveness in the amount claimed on the borrower’s loan forgiveness application. If the SBA determines that a borrower is ineligible for participation in the PPP, the SBA will direct the lender to deny the borrower’s loan forgiveness application and the SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies. If the SBA determines that the borrower applied for an incorrect principal loan amount or loan forgiveness amount, the SBA will direct the lender to deny the borrower’s loan forgiveness application in whole or in part, as appropriate. A borrower may appeal an SBA decision that the borrower is ineligible or a denial of the loan forgiveness amount claimed by the borrower; the SBA intends to issue a separate interim final rule addressing such appeal process.

PPP Loan Forgiveness Process and Requirements

Alternative Payroll Covered Period: PPP borrowers with a biweekly (or more frequent) payroll schedule may now elect to align with their regular payroll schedule the eight-week, or 56-day, covered period for purposes of calculating their eligible paid or incurred payroll costs in order to determine their forgiveness amount, counting the covered period from the first day of a borrower’s first pay period following receipt of its first PPP loan disbursement (rather than from the date of its first loan disbursement). If a borrower elects to utilize the alternative payroll covered period to calculate payroll costs subject to forgiveness, then such alternative payroll covered period must also be used to calculate reductions to such borrower’s forgiveness amount due to full-time-equivalent (FTE) employee or salary/wage reductions, as discussed further below.

Calculation of Payroll and Non-Payroll Costs: The loan forgiveness application and related interim final rule now distinguish between payroll costs eligible for forgiveness (including as part of cash compensation and allowances for dismissal or separation) that are either paid or incurred during the covered period (or alternative payroll covered period). Borrowers may now include in their forgiveness amount calculation both those payroll costs actually paid and those incurred but not yet paid during the covered period (or alternative payroll covered period). Payroll costs are considered paid on the day that a borrower distributes paychecks to its employees or when a borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that an employee’s pay is earned (i.e., on the day the employee worked). For employees who are not performing work but are still on a borrower’s payroll (i.e., furloughed employees), payroll costs are deemed to be incurred based on the schedule previously established by the borrower (typically, each day that the employee would have performed work). Payroll costs incurred but not yet paid during a borrower’s last pay period of its covered period (or alternative payroll covered period) are eligible for forgiveness if such compensation is paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the applicable covered period (or alternative payroll covered period).

The interim final rule on loan forgiveness clarifies that in calculating compensation to employees that may be included as forgivable payroll costs, a borrower may include as eligible for forgiveness (i) payments of salary, wages or commissions to furloughed employees during the covered period (or alternative payroll covered period), as long as the total compensation to each such furloughed employee does not exceed $100,000 on an annualized basis, and (ii) bonuses and hazard pay that a borrower pays to an employee during the covered period (or alternative payroll covered period) as incentive to return to work or otherwise, as long as an employee’s total compensation does not exceed $100,000 on an annualized basis, since an employee’s hazard pay and bonuses constitute a supplement to salary or wages, and are thus a similar form of compensation. As a result of this broadened definition of eligible payroll costs, a borrower need not necessarily rehire furloughed employees in order to use its loan proceeds for a forgivable purpose, but rather can count salaries, wages and/or commissions paid to furloughed employees during the covered period (or alternative payroll covered period) as eligible payroll costs to be included in the application for forgiveness. However, if a borrower does not rehire its furloughed employees during the covered period (or alternative payroll covered period), then its forgiveness amount will still be subject to the FTE employee reduction (as discussed further below).

Similarly, non-payroll costs eligible for forgiveness (up to 25% of the total forgiveness amount) must either 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, in order to be counted toward the forgiveness amount. As such, non-payroll costs such as rent, utility and mortgage interest payments that have gone unpaid (as a result of the COVID-19 crisis or otherwise) may still be included in the calculation of a borrower’s forgiveness amount so long as (i) the applicable expenses were in respect of obligations or agreements existing as of Feb. 15, 2020, (ii) amounts spent on such expenses were not prepayments, and (iii) amounts spent on such expenses are paid during the covered period or on or before the next regular billing date. The interim final rule on loan forgiveness reiterates the ability to include as forgivable non-payroll costs those payments made during the covered period for non-payroll costs incurred prior to the covered period, and those non-payroll costs 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.

The loan forgiveness application also clarifies that (i) the term “covered rent obligations” that count as eligible non-payroll costs includes rent/lease payments for both real and personal property, and (ii) the term “covered utility payments” that count as eligible non-payroll costs means those business payments to services for the distribution of electricity, gas, water, transportation, telephone or internet access. For purposes of calculating non-payroll costs, the actual eight-week, or 56-day, covered period measured from the first day of a borrower’s first PPP loan disbursement must be used irrespective of whether a borrower chooses to utilize the alternative payroll covered period in calculating its payroll costs.

In either case, payroll and non-payroll costs that were both paid and incurred during the covered period (or alternative payroll covered period in the case of payroll costs) may be counted only once in the forgiveness calculation.

Loans in Excess of $2 million: As discussed in our previously issued alerts, found here and here, the SBA will audit all PPP loans in excess of $2 million at the time the borrower applies for forgiveness. As such, the loan forgiveness application includes a check-the-box line item where borrowers must indicate whether they, together with their affiliates, received PPP loan(s) for a collective original principal amount in excess of $2 million. We assume that all borrowers that check the box indicating that they received loans greater than $2 million will receive follow-up questions or requests from the SBA in connection with their loan audit, and so should be prepared to present, if requested, all necessary documentation indicating their eligibility and need for the loan.

Loan Forgiveness Application Representations and Certifications: The loan forgiveness application includes a number of new representations and certifications that a borrower, or authorized representative on behalf of a borrower, must make in submitting its application. These representations and certifications range from acknowledging the forgiveness amount being requested and the accuracy of the payroll and non-payroll costs included in the calculation of such amount to acknowledging that the potential penalties for the unauthorized use of PPP loan proceeds and/or making false statements on the loan forgiveness application include return of PPP loan proceeds and/or civil or criminal fraud charges that may result in imprisonment of up to 30 years and fines of up to $1 million. All borrowers should carefully review these representations and certifications when submitting their loan forgiveness applications.

FTE Employee Calculation and FTE Employee Reduction to Forgiveness Amount: The CARES Act did not define FTE employees, as such term is used for purposes of determining whether a borrower’s loan forgiveness amount is subject to reduction due to reductions in FTE employees during the covered period (or alternative payroll covered period if such period was used in calculating payroll costs). Many observers, including us, assumed that because the CARES Act made reference to the Affordable Care Act, “FTE employee” would have the same definition in both pieces of legislation and so would be based on a 30-hour workweek as provided in the Affordable Care Act. However, the loan forgiveness application and related interim final rule clarify that “FTE employee” is instead based on a 40-hour workweek during the covered period (or alternative payroll covered period), and is calculated by entering the average number of hours paid to each employee per week and dividing by 40 (with such value being rounded to the nearest tenth). The maximum value for each employee is capped at 1.0. The loan forgiveness application and related interim final rule provide a simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for part-time employees that may alternatively be used at the election of a borrower, if such method of calculation is more beneficial. However, borrowers may select only one of the traditional or simplified methods, and must apply that method consistently to all of their part-time employees for the covered period (or the alternative payroll covered period) and the selected reference period (either Feb. 15, 2019 – June 30, 2019, or Jan. 1, 2020 – Feb. 29, 2020, at the borrower’s election).

Consistent with the CARES Act, the loan forgiveness application states that borrowers generally must maintain their average FTE employee head count during the covered period (or alternative payroll covered period), as compared to either Feb. 15, 2019 – June 30, 2019, or Jan. 1, 2020 – Feb. 29, 2020, at the borrower’s election, as any reduction in FTE employees during the covered period (or the alternative payroll covered period) will reduce the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. However, the loan forgiveness application and related interim final rule now provide that the FTE employee safe harbor is not applied on an individual employee basis but rather as an absolute safe harbor, whereby a borrower will not be subject to any loan forgiveness reduction based on a reduction in FTE employees if both of the following conditions are met: (i) the borrower’s FTE employee levels were reduced during the period from Feb. 15, 2020, to April 26, 2020; and (ii) by not later than June 30, 2020, the borrower subsequently restores its FTE employee levels to those in the borrower’s pay period that included Feb. 15, 2020. This FTE employee safe harbor is not on an individual employee basis, but rather on an all-or-nothing basis — only if both conditions are met will the borrower be fully exempt from any reduction in its forgiveness amount due to reductions in FTE employees during the covered period (or alternative payroll covered period).

Additionally, the loan forgiveness application and related interim final rule provide that a reduction in FTE employees (for which positions were not otherwise filled by new employees) under any of the following circumstances will not reduce a borrower’s loan forgiveness amount: (i) if the borrower made a good faith, written offer to rehire an employee during the covered period (or alternative payroll covered period) at the same salary or wage and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours, that was rejected by the employee (but only if the borrower maintained records documenting the offer and its rejection and informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer); or (ii) if any employees during the covered period (or alternative payroll covered period) were fired for cause, voluntarily resigned or voluntarily requested and received a reduction of their hours. Borrowers that avail themselves of these exemptions must maintain records demonstrating that each such employee was either fired for cause, voluntarily resigned or voluntarily requested a schedule reduction, and will be required to provide such documentation to the SBA upon request. In preparation for the possibility that a business need rely on these exceptions, we recommend that all separations of employment be documented and all offers to return to work and rejections of such offers be in writing and retained.

With respect to the exemption for a borrower’s offer to rehire, interestingly, while mentioning the required notice to the relevant state unemployment office, the interim final rule on loan forgiveness does not address the potential loss of unemployment benefits by an employee that rejects a borrower’s offer to rehire, which the SBA noted in previous guidance would be addressed further in a forthcoming interim final rule.

Salary/Hourly Wage Reduction to Forgiveness Amount: Generally, for each of a borrower’s new employees in 2020 and each existing employee of a borrower who was not paid more than $100,000 on an annualized basis during any pay period in 2019, the borrower must reduce its total forgiveness amount by the total dollar amount of each such employee’s salary or wage reductions that are in excess of 25% of such employee’s base salary or wages between Jan. 1, 2020, and March 31, 2020, on a dollar-for-dollar basis. However, the forgiveness application and related interim final rule on loan forgiveness clarify the language of the CARES Act in that it provides that a borrower’s forgiveness amount will be reduced if, during the covered period (or alternative payroll covered period if such period was used in calculating payroll costs), any employee’s wages are reduced by more than 25% compared to the average wages that employee earned from Jan. 1, 2020, through March 31, 2020, rather than compared to “the most recent full quarter during which the employee was employed before the covered period,” as provided in the CARES Act. We assume that this clarification was made in light of all PPP loan disbursements occurring during the second quarter of 2020, based on the current program end date of June 30.

The loan forgiveness application modifies slightly the safe harbor for reductions to a borrower’s forgiveness amount due to salary/hourly wage reductions, providing that if an employee’s average salary earned between Feb. 15, 2020, and April 26, 2020, is less than the amount such employee earned as of Feb. 15, 2020, then the safe harbor will be available to a borrower; there will no reduction to such borrower’s forgiveness amount if the employee earns on average as of June 30, 2020, the same or more than he or she did as of Feb. 15, 2020. We note, however, that it is unclear what period is to be used for determining average salary as of June 30, 2020.

The interim final rule on loan forgiveness importantly provides that the CARES Act did not address how the FTE employee and salary/wage reductions to forgiveness are meant to work together, and so in order to ensure that borrowers are not doubly penalized, the salary/wage reduction will apply only to the portion of the decline in employee salary and wages that is not attributable to an FTE reduction. As such, if during the covered period (or alternative payroll covered period) an hourly wage employee’s hours are cut in half and as a result of such hour reduction such employee’s compensation is half of what it previously was, then only the FTE employee reduction will be applied with respect to such employee as long as the employee’s hourly wages remain the same, since there was no actual reduction in the employee’s salary or wage levels.

Cap of $15,385 in Compensation: Generally for all employees, a borrower may only use loan proceeds and apply for forgiveness in respect of salary and similar compensatory payments up to a maximum of $15,385 (the eight-week equivalent of $100,000 per year) per employee for the covered period (or alternative payroll covered period). With respect to owner-employees, self-employed individuals or general partners, the maximum amount eligible for forgiveness is capped for each individual at the lower of $15,385 or the eight-week equivalent of their compensation in 2019. The interim final rule on loan forgiveness also clarifies that (i) compensation for owner-employees eligible for forgiveness is capped at their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf, (ii) eligible Schedule C filer compensation is capped at the amount of their owner compensation replacement, calculated based on 2019 net profit, and (iii) eligible general partner compensation is capped by the amount of their 2019 net earnings from self-employment (reduced by claimed Section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as such expenses are paid out of their net self-employment income.

Required Documentation and Retention/SBA Inspection: The loan forgiveness application and related interim final rule identify the documentation a borrower must submit with its application, as well as the documentation that each borrower must maintain (but is not required to submit with the application). Documentation required to be submitted by a borrower includes (i) documentation verifying the eligible cash compensation and noncash benefit payments from the covered period (or alternative payroll covered period), including bank account statements, tax forms, payment receipts and similar documentation; (ii) documentation showing FTE employee head counts during the covered period (or alternative payroll covered period) and any other relevant time periods; and (iii) documentation verifying the existence of a borrower’s non-payroll obligations/services in effect prior to Feb. 15, 2020, and eligible payments from the covered period.

The loan forgiveness application and related interim final rule provide that a borrower must retain for six years after the date its PPP loan is forgiven or repaid in full all records relating to the loan, including documentation submitted with its PPP loan application, documentation supporting the borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the borrower’s loan forgiveness application, and documentation demonstrating the borrower’s material compliance with PPP requirements. The borrower must permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request.

SBA Loan Review Procedures and Related Borrower and Lender Responsibilities

SBA Review of PPP Loans: The SBA now reiterates that it may undertake a review of a borrower’s PPP loan at any time in its discretion, including a review of the following:

• Borrower Eligibility: The SBA may review whether a borrower is eligible for its PPP loan based on the provisions of the CARES Act, the rules and guidance issued by the SBA or Treasury Department available at the time of the borrower’s PPP loan application submission, and the terms of the borrower’s PPP loan application. Such review will include a review of a borrower’s general eligibility based on the SBA’s ineligibility criteria for its business loans in 13 CFR §120.110 (as modified and clarified by the SBA’s PPP interim final rules and FAQs), eligibility based on size, applying the SBA’s affiliation rules found at 13 CFR 121.301(f), and eligibility based on the information, certifications and representations included in a borrower’s loan application (whether the SBA form or a lender’s equivalent form) and the loan forgiveness application (whether the SBA form or a lender’s equivalent form). We note that in previous SBA guidance, the SBA has provided that it will review a borrower’s certification of need for its PPP loan at the time that it applies for loan forgiveness. With respect to a borrower’s certification of need included in its loan application, the SBA has previously announced, as we summarize here, that with respect to loans under $2 million, the SBA will assume that the borrower has made its certification of need in good faith.
  
  
• Loan Amounts and Use of Proceeds: The SBA may review whether a borrower calculated its loan amount correctly and used loan proceeds for the allowable uses specified in the CARES Act.
  
  
• Loan Forgiveness Amount: The SBA may review whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s loan forgiveness application (whether the SBA form or a lender’s equivalent form).

In light of such right of review, borrowers are directed to retain PPP documentation and related records for at least six years following forgiveness or repayment in full and will be required to permit SBA access to review such materials. If the SBA, through a lender, requests additional information from a borrower with respect to a PPP loan and the borrower fails to respond, such failure may result in a determination that the borrower was ineligible for its PPP loan or ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower. As a consequence for any of these findings, the SBA may seek repayment of the outstanding PPP loan balance or pursue other available remedies, including applying those penalties provided in the PPP loan application and loan forgiveness application (as detailed above) or other civil or criminal enforcement as detailed in our previous alert found here. The SBA further reiterates that the nonrecourse provision of the CARES Act, found at 15 U.S.C. § 636(a)(36)(F)(v), which limits the SBA’s recourse against individual shareholders, members or partners of a PPP borrower for nonpayment of a PPP loan, will only apply if the borrower was eligible to participate in the PPP. 

PPP Lender Responsibilities: Notwithstanding a borrower’s certifications contained in its loan forgiveness application with respect to its forgiveness amount, lenders are still expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness. However, as stated in earlier SBA guidance, lenders may rely on borrower representations and do not need to independently verify a borrower’s reported information if the borrower submits documentation supporting its request for loan forgiveness and attests that it accurately verified the payments for eligible costs. If a lender identifies errors in a borrower’s forgiveness calculation or a material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue.

With respect to a loan forgiveness application, a lender must issue a decision to the SBA on the application within 60 days after receipt from a borrower. If the lender determines that the borrower is entitled to forgiveness, the SBA will remit the forgiveness amount to the lender within 90 days after the lender issues its decision to the SBA. If the lender determines that a borrower is not entitled to forgiveness in any amount, the borrower may request that the SBA review the lender’s decision within 30 days of notice from the lender.

If the SBA undertakes a review of a PPP application, it will notify the relevant lender in writing, and the lender must notify the borrower of such SBA review in writing within five business days of receipt of such notice. The SBA will then have 90 days to review the application. The SBA has also advised that additional guidance or rules on an appeals process to permit borrowers to challenge SBA ineligibility determinations or denials of forgiveness amounts are forthcoming.