PPP Loan Forgiveness: Additional Guidance and Clarification - June 30, 2020
The path to PPP loan forgiveness continues to evolve. Below we provide a more detailed summary of the changes resulting from the Paycheck Protection Program Flexibility Act (PPPFA) as well as additional guidance and clarification provided since its enactment on June 5, 2020.
Covered Period
The covered period for loan forgiveness has been extended from eight weeks to 24 weeks or December 31, 2020, whichever is earlier. The covered period begins on the date loan is funded. Borrowers who received loans prior to June 5, 2020 can choose either the 8-week or 24-week covered period, while those who received loans on June 5, 2020 or thereafter have the 24-week covered period.
Payroll Costs
Previously set at 75%, the percentage of the loan amount required to be used for payroll costs is now 60%. Payroll costs are capped as follows:
• Employee Non-Owner. For borrowers who elect the eight-week covered period the amount is capped at $15,385 per employee. For borrowers electing or subject to the 24-week covered period the amount is capped at $46,154 per employee. Employer non-owner payroll costs may include group health and retirement plan expenses.
• Owner-Employees and Self-Employed. For borrowers who elect the eight-week covered period the amount is capped at $15,385 or 8/52 of 2019 compensation per individual, whichever is less, in total across all businesses. For borrowers electing or subject to the 24-week period the amount is capped at $20,833 or 2.5/12 of 2019 compensation per individual, whichever is less, in total across all businesses. Health insurance for both owner employees and self-employed individuals is considered to be included in compensation. Retirement plan contributions for self-employed individuals are excluded; however, owner-employee retirement expenses may be included, but are capped at 2.5 months of the 2019 contribution amount.
Qualifying Non-Payroll Expenses
Up to 40% of PPP Loan funds may be used for qualifying non-payroll expenses, specifically: mortgage interest, rent, and utility payment obligations in existence prior to February 15, 2020. Per the CARES Act, utility payments include electricity, gas, water, transportation, telephone or internet access.
FTE Reduction Safe Harbor
A safe harbor exists for borrowers that have experienced difficulty meeting the FTE requirements despite a good faith effort to do so. The FTE Reduction Safe Harbor rules are as follows:
• Borrowers may exclude any reduction in the FTE employee headcount attributable to an individual employee as long as written documentation can be provided that shows a good faith, written offer was made to the employee and the offer to return to work was rejected by the employee. The offer must be for the same wage or salary and number of hours as that of the pay period immediately prior to the employee’s layoff or reduction in hours. Note: Borrowers are now required to inform the state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the rejection.
• Borrowers will be exempt from a reduction in loan forgiveness due to a proportional reduction in FTE employees as long as documentation is provided which shows a good faith effort was made, but the borrower was unable to hire similarly qualified individuals for unfilled positions on or before December 31, 2020.
• Borrowers will also be exempt from a reduction in loan forgiveness due to a reduction in the number of FTE employees if they are able to document in good faith that, as a result of COVID-19 requirements and guidance, they were unable to return to the same level of business activity at which they were operating before February 15, 2020. Note: Documentation must include copies of state and local government shutdown orders based on guidance from the Department of Health and Human Services, CDC, and OSHA. Relevant business financial records will also be required.
Loan Deferral and Loan Maturity
The loan deferral period has been increased from six months to ten months. In the event the borrower fails to apply for loan forgiveness during the ten month period following the last day of the covered period, the loan will not be eligible for forgiveness and the borrower will be required to begin paying principal and interest.
The time frame to repay any portion of the loan not forgiven has been extended to five years for loans made on or after June 5, 2020. The term for loans made prior to June 5, 2020 remains at two years unless the lender agrees to an extension.
Submitting the Application For Loan Forgiveness
Borrowers are now permitted to submit the application for loan forgiveness prior to the end of the covered period as long as all of the funds for which they are requesting forgiveness have been used. The lender has 60 days from receipt of the application to issue its decision on the forgivable and non-forgivable portion of the loan amount and submit it to the SBA. Note: All loan forgiveness decisions submitted by the lender may be subject to further review by the SBA.
We will continue to update you as additional clarification and guidance relating to the Paycheck Protection Program becomes available.
Covered Period
The covered period for loan forgiveness has been extended from eight weeks to 24 weeks or December 31, 2020, whichever is earlier. The covered period begins on the date loan is funded. Borrowers who received loans prior to June 5, 2020 can choose either the 8-week or 24-week covered period, while those who received loans on June 5, 2020 or thereafter have the 24-week covered period.
Payroll Costs
Previously set at 75%, the percentage of the loan amount required to be used for payroll costs is now 60%. Payroll costs are capped as follows:
• Employee Non-Owner. For borrowers who elect the eight-week covered period the amount is capped at $15,385 per employee. For borrowers electing or subject to the 24-week covered period the amount is capped at $46,154 per employee. Employer non-owner payroll costs may include group health and retirement plan expenses.
• Owner-Employees and Self-Employed. For borrowers who elect the eight-week covered period the amount is capped at $15,385 or 8/52 of 2019 compensation per individual, whichever is less, in total across all businesses. For borrowers electing or subject to the 24-week period the amount is capped at $20,833 or 2.5/12 of 2019 compensation per individual, whichever is less, in total across all businesses. Health insurance for both owner employees and self-employed individuals is considered to be included in compensation. Retirement plan contributions for self-employed individuals are excluded; however, owner-employee retirement expenses may be included, but are capped at 2.5 months of the 2019 contribution amount.
Qualifying Non-Payroll Expenses
Up to 40% of PPP Loan funds may be used for qualifying non-payroll expenses, specifically: mortgage interest, rent, and utility payment obligations in existence prior to February 15, 2020. Per the CARES Act, utility payments include electricity, gas, water, transportation, telephone or internet access.
FTE Reduction Safe Harbor
A safe harbor exists for borrowers that have experienced difficulty meeting the FTE requirements despite a good faith effort to do so. The FTE Reduction Safe Harbor rules are as follows:
• Borrowers may exclude any reduction in the FTE employee headcount attributable to an individual employee as long as written documentation can be provided that shows a good faith, written offer was made to the employee and the offer to return to work was rejected by the employee. The offer must be for the same wage or salary and number of hours as that of the pay period immediately prior to the employee’s layoff or reduction in hours. Note: Borrowers are now required to inform the state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the rejection.
• Borrowers will be exempt from a reduction in loan forgiveness due to a proportional reduction in FTE employees as long as documentation is provided which shows a good faith effort was made, but the borrower was unable to hire similarly qualified individuals for unfilled positions on or before December 31, 2020.
• Borrowers will also be exempt from a reduction in loan forgiveness due to a reduction in the number of FTE employees if they are able to document in good faith that, as a result of COVID-19 requirements and guidance, they were unable to return to the same level of business activity at which they were operating before February 15, 2020. Note: Documentation must include copies of state and local government shutdown orders based on guidance from the Department of Health and Human Services, CDC, and OSHA. Relevant business financial records will also be required.
Loan Deferral and Loan Maturity
The loan deferral period has been increased from six months to ten months. In the event the borrower fails to apply for loan forgiveness during the ten month period following the last day of the covered period, the loan will not be eligible for forgiveness and the borrower will be required to begin paying principal and interest.
The time frame to repay any portion of the loan not forgiven has been extended to five years for loans made on or after June 5, 2020. The term for loans made prior to June 5, 2020 remains at two years unless the lender agrees to an extension.
Submitting the Application For Loan Forgiveness
Borrowers are now permitted to submit the application for loan forgiveness prior to the end of the covered period as long as all of the funds for which they are requesting forgiveness have been used. The lender has 60 days from receipt of the application to issue its decision on the forgivable and non-forgivable portion of the loan amount and submit it to the SBA. Note: All loan forgiveness decisions submitted by the lender may be subject to further review by the SBA.
We will continue to update you as additional clarification and guidance relating to the Paycheck Protection Program becomes available.