SBA Publishes Updated PPP Loan Forgiveness Application and Additional Guidance

Corporate & Capital Markets

The SBA has published a new Interim Final Rule (IFR), which implements recent amendments to the Paycheck Protection Program (PPP) enacted by the Flexibility Act, and new forgiveness applications (a standard, updated version of the original application and an EZ application, which is a shortened version that can be used by borrowers that meet certain criteria), and application instructions (standard application instructions and EZ application instructions). We previously published a summary of the Flexibility Act amendments to the PPP.

The changes enacted by the Flexibility Act extend the covered period to spend PPP loan proceeds, reduce the percentage of loan proceeds required to be used for payroll costs and expand the safe harbor rules for reduction of employee headcount and compensation. These changes, along with certain additional changes included in the new IFR, are incorporated in the updated standard application and EZ application. Forgiveness applications must be submitted to lenders (not the SBA), who may require additional information and documentation as part of that process.

Covered Period and Required Percentage of Loan Proceeds Used for Payroll Costs

The covered period for spending the loan proceeds is extended from eight weeks to 24 weeks. This change is retroactive, but borrowers with loans received prior to June 5, 2020 can elect to either use the original eight-week period or the new 24-week period. No time period between eight and 24 weeks is allowed. The percentage of loan proceeds required to be used for payroll costs is reduced from 75% to 60%. The applications include a line item that requires the borrower to calculate and confirm that at least 60% of loan proceeds were used for payroll costs, and the borrower also must certify that payroll costs equal at least 60% of the forgiveness amount. This confirms that at least 60% of loan proceeds must be used for payroll costs in order for the borrower to be eligible for forgiveness.

Expanded Safe Harbor Rules and Certification

The Flexibility Act expanded the safe harbor rules, which provide exemptions from reductions to the forgiveness amount based upon reductions in full-time employee ("FTE") headcount and compensation. Specifically, the forgiveness amount will not be affected by a reduction in employees if the borrower (1) was unable to return to the same level of business activity as it was operating at before February 15, 2020 due to compliance with regulatory requirements or guidance established by HHS, CDC or OSHA between March 15, 2020 and December 31, 2020 related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 (“Safe Harbor 1”); or (2) reduced FTE headcount between February 15, 2020 and April 26, 2020 and restored FTE headcount by no later than December 31, 2020 (“Safe Harbor 2”). Note that, based on the updated standard application form, the determination about whether employee headcount has been restored apparently should be calculated as of the date of the forgiveness application. Thus, pending further guidance and clarification, it appears that the earlier of the forgiveness application date and December 31, 2020 will be used to determine the applicability of Safe Harbor 2. As a result, a borrower that restored its FTE headcount at the time it applied for forgiveness (say July 6, 2020, for example) to the same level of FTEs that it employed as of its February 15 pay period, would suffer no reduction to its forgiveness amount based on the employee headcount tests.

The standard application requires that borrowers check a box to certify whether Safe Harbor 1 is applicable and includes a worksheet to calculate whether or not Safe Harbor 2 is applicable. In addition, Safe Harbor 1 has been added to the list of representations that the borrower must initial and certify, and documentation to support the certification of Safe Harbor 1 and calculation of Safe Harbor 2, if applicable, has been added to the list of documents the borrower is required to maintain for six years after the forgiveness date.

Certain employee headcount and compensation reductions are exceptions to reductions in the forgiveness amount, and the worksheet in the standard application has been revised to document such exceptions. When completing the standard application worksheet, borrowers must include employees who are no longer employed but were employed as of the February 15, 2020 pay period, that could not be replaced with a similarly qualified employee, rejected a rehire offer, were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours. Such employees are not included for purposes of calculating changes in full-time employee headcount and/or compensation, but nevertheless, the application requires that they are listed. Borrowers should maintain complete records regarding these circumstances in order to substantiate each exception if necessary.

Forgivable Payroll Costs for Owners

The new IFR further restricts the amount of owner compensation that can be included for purposes of calculating the forgiveness amount. If a borrower elects to use an eight-week covered period, forgivable owner compensation is limited to eight weeks’ worth of 2019 compensation (or 2019 net profit) up to $15,385 per owner-employee or general partner. If a borrower elects, or is required, to use the 24-week covered period, forgivable owner compensation is limited to two and a half months’ worth of 2019 compensation (or 2019 net profit) up to $20,833 per owner-employee or general partner. Covered benefits (healthcare, retirement contributions and the employer portion of payroll taxes) for general partners or owner-employees of an S-corporation cannot be included in the calculation of payroll costs. The SBA indicated in the new IFR that it determined with the Secretary of Treasury that limiting owner compensation was in line with the goal of the CARES Act, which is to keep workers employed and appropriate to avoid unintended windfalls to owners.

For additional information on this topic, please contact your regular Calfee attorney or one of the attorneys listed below.


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