Update: FAQ Regarding Loan Forgiveness Under the Paycheck Protection Program

(as of May 18, 2020)

On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act“), which is an approximately $2 trillion stimulus and economic relief package. One principal feature is the loan program known as the Paycheck Protection Program (“PPP“), to be administered by the Small Business Administration (“SBA“). On April 24, 2020, the President signed into law the Paycheck Protection Program and Health Care Enhancement Act, providing additional funds for the PPP (the “Enhancement Act“). The most significant feature of a PPP loan is if the borrower complies with certain requirements, some or all of the PPP loan will be forgiven.

On Friday, May 15, 2020, the SBA released the Loan Forgiveness Application that borrowers will be required to submit to determine how much, if any, of their PPP loan will be forgiven, together with detailed instruction on how to complete such application. (collectively, the “Application“) While the Application addresses many previous concerns and uncertainties, it does not answer all questions and creates some new issues. Recognizing the continuing uncertainty surrounding the program, the SBA has stated that it will be issuing additional guidance soon.

PAYROLL COSTS AND THE NEW ALTERNATIVE PAYROLL COVERED PERIOD

There has been much discussion in the press and in Washington, D.C. to expand and/or move the eight-week period during which PPP loan proceeds must be used to be eligible for forgiveness. Unfortunately, as of this date, the Application for the most part maintains the general rule (subject to numerous restrictions) that to qualify for forgiveness, PPP loan proceeds must be used to pay permissible costs during the “Covered Period,” which is the eight-week (56-day) period commencing on the date the PPP loan is funded. However, for the first time, the Application provides some flexibility with respect to this eight-week (56-day) period, at least as it relates to payroll costs (as described below).

1. What is the purpose of the Covered Period and the Alternative Payroll Covered Period?

Generally, to be eligible for forgiveness, payroll costs must be “paid” and “incurred” during one of two eight-week periods, either the Covered Period or the Alternative Payroll Covered Period. Subject to certain restrictions described below, the Application permits a borrower to select which eight-week period (i.e., the Covered Period or the Alternative Payroll Covered Period) to use when determining which payroll costs are eligible for forgiveness.

2. What is the difference between the Covered Period and the Alternative Payroll Covered Period?

Both are eight-week periods commencing generally around the same time; however, the Alternative Payroll Covered Period is tied to the borrower’s payroll schedule. This distinction is clarified through three defined terms:

“PPP Loan Disbursement Date” means the first date on which the borrower received the PPP loan proceeds from its lender.

“Covered Period” means the eight-week (56-day) period that begins on the PPP Loan Disbursement Date.

For example, if the borrower’s PPP Loan Disbursement Date was Monday, April 20, then the first day of the Covered Period is April 20 and the last day is Sunday, June 14.

“Alternative Payroll Covered Period” means the eight-week (56-day) period that begins on the first day of the borrower’s first pay period following the PPP Loan Disbursement Date.

For example, if the borrower’s PPP Loan Disbursement Date was Monday, April 20, and the first day of its first pay period following such disbursement is Sunday, April 26, then the first and last days of the Alternative Payroll Covered Period are Sunday, April 26 and Saturday, June 20, respectively.

The borrower may not alternate between the two periods, but rather must select one or the other and use it consistently.

3. Can any borrower select the Alternative Payroll Covered Period?

No. Only those borrowers who have a biweekly or more frequent payroll schedule may select the Alternative Payroll Covered Period. Thus, a borrower who pays its employees twice a month or once a month may not select the Alternative Payroll Covered Period. Note: whenever the phrase “Covered Period (or Alternative Payroll Covered Period)” is used, it means “as applicable, depending on which period the borrower selected”.

4.  Do payroll costs have to be actually paid during the Covered Period (or Alternative Payroll Covered Period) or just incurred?

Both. Subject to certain exceptions described below, payroll costs must be paid and incurred during such applicable eight-week period.

Paid. Payroll costs are considered paid on the day that paychecks are distributed, or the borrower originates an ACH credit transaction.

Incurred. Payroll costs are considered incurred on the day that the employee’s pay is earned.

5. What if the employee earned pay prior to the commencement of the Covered Period, but it is paid during the Covered Period?

To the extent any payroll cost relates to a period prior to the commencement of the Covered Period, it will not be a forgivable expense.

For example, if an employee worked on Monday, April 27 through Friday, May 1, but the borrower received its PPP loan proceeds on Tuesday, April 28, then for that week the borrower may only submit payroll costs commencing on Tuesday, April 28 to be forgiven. However, if such borrower is eligible to select the Alternative Payroll Covered Period (as described above), it may be more convenient for such borrower to not submit any of such week’s payroll costs for forgiveness, but rather to select the Alternative Payroll Covered Period and commence the eight-week period on the first day of the borrower’s first pay period following such April 28 PPP Loan Disbursement Date.

6. What if the employee earned pay prior to the end of the Covered Period (or Alternative Payroll Covered Period), but the employee is not paid until after the end of Covered Period (or Alternative Payroll Covered Period)?

Despite the general rule that payroll costs must be paid and incurred during such applicable eight-week period, the Application allows borrowers to maintain their regular payroll dates to cover such payroll costs. Payroll costs incurred but not paid during the 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. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).

 7. Does the $100,000 cap still apply?

Yes. For each individual employee the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, which equates to $15,385 during the Covered Period (or Alternative Payroll Covered Period).

NON-PAYROLL COSTS

8. Can a borrower select the Alternative Payroll Covered Period for Non-Payroll Costs?

No. The Alternative Payroll Covered Period may only be used with respect to payroll costs. For non-payroll costs, the Covered Period must be used.

9. Do non-payroll costs have to be both paid and incurred during the Covered Period?

No. Unlike payroll costs which must be both paid and incurred during the Covered Period, non-payroll costs can be paid or incurred during the Covered Period and still be eligible for forgiveness; provided that it is paid on or before the next billing date with respect to such cost, even if the billing date is after the Covered Period.

10. What non-payroll costs are eligible for forgiveness?

(a) Business Mortgage Interest Payments: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020;

(b) Business Rent or Lease Payments: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020; and

(c) Business Utility Payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

11. Does the 25 percent rule still apply with respect to non-payroll costs?

Yes. The dollar amount for which forgiveness is requested may not include non-payroll costs in excess of 25 percent of the amount so requested to be forgiven.

FULL TIME EQUIVALENT EMPLOYEES: COUNTING AND ITS IMPACT

Given that the intent of the PPP is to encourage employment and to “protect paychecks,” the PPP reduces the amount of the PPP loan otherwise forgiven if the borrower does not maintain such employment levels.

12. Does the PPP measure the actual number of employees for purposes of forgiveness?

No. The PPP measures the Full Time Equivalency (“FTE”) of employees, not the actual number.

13. What is the purpose of calculating FTEs?

The actual amount of loan forgiveness the borrower will receive may be less than what the borrower would have been otherwise entitled, depending on whether the borrower’s average number of FTE employees during the Covered Period (or Alternative Payroll Covered Period) was less than during the borrower’s chosen “FTE Reference Period” (as described below).

14. How are FTEs calculated?

FTEs for the Covered Period, the Alternative Payroll Covered Period, or the chosen FTE Reference Period as the case may be, are calculated as follows:

40 Hours or More. An employee who is paid on average forty (40) hours or more per week is considered one (1) FTE, no matter how many hours above 40 per week such employee is paid. No single employee may ever be counted as more than one (1) FTE.

Less than 40 hours. An employee who is paid on average less than forty (40) hours per week, must have their FTE calculated. The formula for each such employee is to divide the average number of hours paid per week by forty (40), and round the total to the nearest tenth.

Example No. 1:  An employee who is paid on average 15 hours per week, will be counted as a 0.4 FTE [15/40 = 0.375; rounded to the nearest tenth = 0.4].

Example No. 2: An employee who is paid on average 25 hours per week, will be counted as a 0.6 FTE [25/40 = 0.625; rounded to the nearest tenth = 0.6].

Alternative Simplified Method. The Application permits the use of an alternative simplified method for calculating the FTE of employees who work less than forty (40) hours per week, by simply counting each such employee as a 0.5 FTE. Note, that the benefit of this simplified method may not be helpful to the borrower if the borrower currently has most of its employees working more than 20 hours per week (see Examples No. 1 and No. 2 above). Note, if a borrower chooses to use this simplified method of calculation for the Covered Period (or the Alternative Payroll Covered Period), the borrower must also use this simplified method of calculation for the chosen FTE Reference Period.

15. What are the FTE Reference Periods?

The borrower may choose either of the following periods as the borrower’s chosen “FTE Reference Period”:

(a) February 15, 2019 to June 30, 2019; or

(b) January 1, 2020 to February 29, 2020.

Note, in the case of seasonal employers only, either of the preceding periods or a consecutive twelve-week period between May 1, 2019 and September 15, 2019 may be chosen as the FTE Reference Period.

16. What is the impact of FTE Reductions?

Each borrower is required to make the following calculation:

(a) The average number of FTE employees during the Covered Period (or Alternative Payroll Covered Period); divided by

(b) The average number of FTE employees during the borrower’s chosen FTE Reference Period.

If the resulting number is greater than 1.0, then no reduction in forgiveness is required. However, if the resulting number is less than 1.0, then the amount of the PPP loan otherwise forgiven may be reduced.

Example No. 1: Borrower has an average of 105 FTE Employees during the Covered Period (or Alternative Payroll Covered Period), but had an average of 100 FTE employees during its chosen FTE Reference Period (e.g., January 1, 2020 to February 29, 2020), then since 105/100 equals 1.05, which is greater than 1.0, there is no reduction.

Example No. 2:  Borrower has an average of 105 FTE Employees during the Covered Period (or Alternative Payroll Covered Period), but had an average of 120 FTE employees during its chosen FTE Reference Period (e.g., January 1, 2020 to February 29, 2020), then since 105/120 equals 0.875, which is less than 1.0, there might be a reduction in the forgiven amount.

NOTE: The Application requires the borrower to have documentation showing the average number of FTE employees on payroll per month during the various reference periods. It is unclear whether the calculations described in this Question 16 must be calculated using the average number of FTE employees per month during such reference periods or the average over the entire reference period. We are awaiting additional SBA guidance.

17. How much of the otherwise forgiven amount will be reduced because of an FTE Reduction?

Subject to the exemptions and safe harbor described below, the amount of the PPP loan otherwise forgiven will be reduced by the percentage amount of the FTE Reduction.

Example: Using the same figures set forth in Example No. 2 in Question 16 above, Borrower calculated a quotient equal to 0.875. If the borrower was seeking $100,000 of loan forgiveness, then such amount shall be reduced to $87,500 (i.e., $100,000 multiplied by 0.875). To put another way, 0.875 means there was a 0.125 or 12.5 percent reduction in FTE employees. Therefore, the $100,000 shall be reduced by 12.5 percent ($12,500), to $87,500.

NOTE: the example of $12,500 reduction is an approximation, since the Application requires that the percentage reduction caused by an FTE Reduction is applied after first subtracting any applicable Salary/Wage Reductions (as described below), the actual impact of such 12.5 percent reduction may be less than 12.5 percent of the total.

18. Are some FTE Reductions Exempt?

Yes. If during the period from February 15, 2020 through April 26, 2020, a borrower laid off an employee, and subsequently offers to rehire the same employee, but the employee declines the offer, the same shall not be counted as a reduction; provided that:

(a) the offer for rehire is “for the same salary/wages and same number of hours”;

(b) the borrower must have made a good faith, written offer to rehire, and

(c) the employee’s rejection of that offer must be documented by the borrower.

This exemption only applies if the position was not filled by a new employee already included in the borrower’s FTE calculation.

Example: Using the same figures set forth in Example No. 2 in Question 16 above, and assuming the non-rehired employee originally counted as 1 FTE,  rather than the calculation be 105/120, if the conditions above are fulfilled, the calculation will be 106/120, even though the employee is no longer employed by the borrower.

The SBA guidance issues the following caveat: “Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.”

19. What is the FTE Safe Harbor?

The borrower shall be exempt from the loan forgiveness reduction based on FTE employee levels if both of the following conditions are met:

(a) the borrower reduced its FTE employees during the period from February 15, 2020 through April 26, 2020; and

(b) by June 30, 2020, the borrower restored its FTE employee levels to its FTE employee levels in the borrower’s pay period that included February 15, 2020.

Note, for the safe harbor to apply, there must be a complete restoration, not a partial restoration. Also, the SBA has not yet provided any guidance on what happens, if anything, if a borrower reduces its FTE levels again after June 30, 2020.

SALARY/HOURLY WAGE REDUCTION

Just like with respect to the FTE reductions discussed above, given that the intent of the PPP is to encourage employment and to “protect paychecks,” the PPP also reduces the amount of the PPP loan otherwise forgiven if the borrower reduces any employee’s salary or hourly wages by more than 25 percent as further described below.

20. Is the comparison based on the total amount the borrower pays to all employees?

No. The comparison and the accompanying reduction, if applicable, is determined on an employee by employee basis. If an employee’s average annual salary/hourly wage was reduced by greater than 25 percent, then there will still be a reduction in loan forgiveness because of that employee, even if other employees’ annual salary/hourly wages were increased.

21. What is the Comparison Period?

The Application creates a new comparison period of January 1, 2020 to March 31, 2020, to which the borrower must compare salary or hourly wages as follows:

(a) Salary. For those employees who are paid on the basis of an annual salary, the borrower must determine whether the average annual salary paid to each such employee during the Covered Period (or Alternative Covered Period) was less than that paid to each such employee during the period from January 1, 2020 to March 31, 2020.

(b) Hourly Wage. For those employees who are paid on the basis of an hourly wage, the borrower must determine whether the average hourly wage paid to each such employee during the Covered Period (or Alternative Covered Period) was less than that paid to each such employee during the period from January 1, 2020 to March 31, 2020.

22. How is the Reduction Calculated?

The reduction in loan forgiveness is calculated on an employee by employee basis, as follows:

(a) Salary. For each employee who is paid on the basis of an annual salary, if the average annual salary paid to such employee during the Covered Period (or Alternative Covered Period) was less than 75 percent of the average annual salary paid to such employee during the period from January 1, 2020 to March 31, 2020, the loan forgiveness amount shall be reduced on a dollar for dollar basis to the extent below such 75 percent threshold. This creates an annualized reduction amount. Such amount is then divided by 52 and multiplied by 8 to calculate the pro-rated reduction amount for the Covered Period (or Alternative Payroll Covered Period).

Example:

(a) During the Covered Period (or Alternative Covered Period), Employee was paid at an average annual salary of $50,000;

(b) During the period from January 1, 2020 to March 31, 2020, Employee was paid at an average annual salary of $78,000;

(c) $50,000 divided by $78,000 = 64 percent. Since 64 percent is less than 75 percent, there will be a reduction to the extent below such 75 percent level. 75 percent of 78,000 is $58,500. Thus, the $50,000 paid in (a) is $8,500 below the 75 percent threshold;

(d) $8,500 divided by 52 = $163.46 (this is the weekly amount of the shortfall);

(e) $163.46 multiplied by 8 = $1,307.68; with the result being that

(f) The amount of the loan forgiven will be reduced by $1,307.68 due to such reduction paid to such employee.

A similar calculation needs to be performed for each employee.

(b) Hourly Wages. For each employee who is paid on the basis of an hourly wage, if the average hourly wage paid to such employee during the Covered Period (or Alternative Covered Period) was less than 75 percent of the average hourly wage paid to such employee during the period from January 1, 2020 to March 31, 2020, the loan forgiveness amount shall be reduced on a dollar for dollar basis to the extent below such 75 percent threshold. Finally, the borrower must determine the average number of hours worked per week by such hourly employee during the period from January 1, 2020 to March 31, 2020 and use such figure in calculating the shortfall.

Example:

(a) During the Covered Period (or Alternative Covered Period), Employee was paid at an average hourly wage of $14 per hour;

(b) During the period from January 1, 2020 to March 31, 2020, Employee was paid at an average hourly wage of $20 per hour;

(c) $14 divided by $20 = 70 percent. Since 70 percent is less than 75 percent, there will be a reduction to the extent below such 75 percent level. 75 percent of $20 is $15. Thus, the $14 per hour paid in (a) is $1 per hour below the 75 percent threshold;

(d) Calculate the average number of hours worked per week by such employee during the period from January 1, 2020 to March 31. For purposes of this example, assume such number was 20 hours per week;

(e) Multiply the $1 per hour shortfall by 20 = $20;

(f) Multiply $20 x 8 = $160; with the result being that

(g) The amount of the loan forgiven will be reduced by $160 due to such reduced hourly wage paid to such employee.

A similar calculation needs to be performed for each hourly employee.

23. What about employees who are paid at the rate of $100,000 or more per year?

There is no reduction in loan forgiveness with respect to any reduced annual salary or hourly wage relating to any employee who earns at the rate of $100,000 or more per year.

24. What is the Salary/Hourly Wage Safe Harbor?

The borrower shall be exempt from the loan forgiveness reduction based on any salary or hourly wage reduction with respect to each applicable employee, if either of the two conditions are met:

(a) the average annual salary or hourly wage paid to such employee during the period between February 15, 2020 and April 26, 2020 is greater than it was on February 15, 2020; or

(b) the average annual salary or hourly wage paid to such employee as of June 30, 2020, is equal to or greater than it was on February 15, 2020.

In either such case, the safe harbor has been met for such employee and no reduction in forgiveness based on salary/hourly wage is required.

Keith T. Zimmet is the Chair of our Commercial Finance Practice Group, and President and Managing Shareholder of our firm.

This information provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact or situation.