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PPP Loan Forgiveness and Review: Key Observations

May 27, 2020

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PPP Loan Forgiveness and Review: Key Observations, Part II

The SBA issued an Interim Final Rule (“IFR”) regarding PPP loan forgiveness on May 22, 2020, to supplement the PPP Loan Forgiveness Application and instructions issued one week earlier. While the new IFR did not provide a great deal of new guidance, below is a list of our key observations, which supplements our prior observations on the application itself, which are repeated at the end of this Alert.

We understand that the SBA plans to issue additional FAQs regarding loan forgiveness that hopefully will address some of our open questions. 

On May 22, 2020, the SBA also issued an IFR on the review process for PPP loans by the SBA, which we also address below. 

1. Alternative Payroll Covered Period.

  • The IFR reiterates that the borrower must use a bi-weekly or more frequent payroll schedule to use the Alternative Payroll Covered Period (the first day of borrower’s first pay period following loan disbursement). Borrowers using a monthly or bi-monthly payroll schedule must use the Covered Period (eight-week period beginning on loan disbursement date).

2. Paid or Incurred

  • The IFR makes it clear that, for non-Payroll Costs, the forgivable amount includes all eligible non-Payroll Costs (i) paid OR (ii) incurred OR (iii) paid and incurred during the Covered Period, so that borrowers can have more than eight weeks of such costs forgiven. For instance, if the borrower’s Covered Period runs June 1 - July 26, and it pays its May and June electricity bills during the Covered Period and pays its July electricity bill by the next regular billing date after the end of the Covered Period, the borrower can include its electricity costs for May, June and July through July 26, the end of the Covered Period, in the forgiven amount.
  • However, advance payments of interest on mortgage obligations are not eligible for forgiveness.
  • While the IFR is not quite as clear on the treatment of Payroll Costs, it appears to us that it may work in the same fashion, permitting borrowers to have more than eight weeks of Payroll Costs forgiven, but not more than $15,385 for any one employee. Forgiven Payroll Costs will be Payroll Costs (i) paid OR (ii) incurred OR (iii) paid and incurred during the Covered Period or Alternative Payroll Covered Period, as applicable. For instance, if we are correct, if the borrower’s Alternative Payroll Covered Period runs June 1 - July 26, and it pays Payroll Costs for (i) the pay period ending May 31 in June, (ii) all pay periods through July 19 prior to July 26 and (iii) the pay period that ends July 26 on the regular payroll payment date later in July, the borrower’s forgiveness amount will cover all those payments, which is 10 weeks of Payroll Costs. Hopefully, the FAQs will provide more clarity on this.
  • But borrowers can only count eligible costs once, either when paid or when incurred.
  • For employees who are not performing work, but are being paid, Payroll Costs are incurred based on the schedule established by the borrower, typically each day the employee would have performed work.

3. Accrued Interest on Forgiven Amounts is Forgiven.

  • The IFR makes clear that the accrued interest on the forgiven amount also is forgiven.

4. Payroll Costs Includes Bonuses/Hazard Pay.

  • Forgiven Payroll Costs includes supplements to salary or wages paid to employees during the Covered Period or Alternative Payroll Covered Period, including so-called “hazard” pay, incentive pay or bonuses, to the extent they do not cause the employee’s pay for the payroll period to exceed $100,000 on an annualized basis. Before paying out bonuses during this period in a lump sum, borrowers need to be sure the lump sum does not cause the employee’s compensation to annualize above $100,000 for the pay period.
  • As expected, forgiven Payroll Costs include amounts paid to furloughed workers, subject to the $100,000 annualized salary cap.

5. Owner-Employee Payroll Cost Forgiveness Limited to 2019 Levels.

  • For owner-employees, the Payroll Cost forgiveness amount is limited to 8/52 of their 2019 cash compensation, up to $15,385, and employer retirement and health care contributions made on their behalf, even if they are paid more during the Covered Period or Alternative Payroll Covered Period. Unlike other employees, it appears the forgiveness amount for owner-employees cannot cover so-called “hazard” pay, bonuses, or other increases in cash compensation if it increases their cash compensation above 2019 levels.

6. Health Care/Retirement Benefits for Self-Employed Individuals Not Forgiven.

  • For self-employed individuals who file IRS Schedule C, the Payroll Cost forgiveness amount is limited to 8/52 of their owner compensation replacement, calculated based on 2019 net profit, as provided in a prior IFR, up to $15,385, and does not include retirement or health care contributions for such individuals.
  • For general partners, the Payroll Cost forgiveness amount is limited to 8/52 of their 2019 net earnings from self-employment, less unreimbursed partnership expenses and certain other items, multiplied by .9235, up to $15,385, and does not include retirement or healthcare contribution for such individuals.

7. FTE Reduction Exception

  • Generally, employees whom the borrower offered to rehire, but refused to return to work, are exempt from the FTE forgiveness calculation. However, the IFR requires the offer to be at the same salary or wages and the same number of hours earned by the employee in the last pay period prior to separation or reduction in hours. It appears that the borrower cannot reduce the salary or wages for such employee by up to 25%, as it could have done for other employees, without losing the exception. We will look for more guidance on this point as it does not makes sense to force a borrower to restore full salary or wages for rehired workers, when the borrower has instituted a permitted across the board 25% (or less) reduction in salary or wages for its employees.
  • Borrowers must inform state unemployment insurance offices that an employee rejected an offer of reemployment within 30 days of the rejection. The SBA will issue more information regarding this process on its website.

8. PPP Loan Forgiveness Process.

  • To apply for forgiveness, the borrower must complete and submit Loan Forgiveness Application (SBA Form 3508 or the lender’s form) to the lender.
  • Lender has 60 days to issue decision on forgiveness to the SBA once it has a complete package from the borrower.
  • If the lender approves the requested forgiveness, the SBA will pay the forgiveness amount, plus accrued interest on that amount, to the lender within 90 days, unless the loan is otherwise under review by the SBA.
  • The lender will notify the borrower if the SBA or the lender denies any portion of the requested forgiveness.

9. PPP Loan Review Process.

  • The SBA may review a PPP loan of any size at any time at its discretion. If it does, it will notify the lender in writing, who has to notify the borrower in writing within 5 business days. At that time, the lender will provide the SBA with all documentation received by the lender from the borrower.
  • Borrowers must maintain PPP loan records for six years after the PPP loan is forgiven or repaid and permit representatives of the SBA to access such records on request.
  • Borrowers will be permitted to respond to the SBA’s questions in a review either directly or through the lender. Failure to respond to an SBA inquiry may result in denial of forgiveness.
  • The SBA intends to issue a separate IFR addressing the process to appeal a decision that the borrower was ineligible for a PPP loan or denying forgiveness.
  • The lender will review the Loan Forgiveness Application form, confirm receipt of required back-up documentation, confirm the borrower’s calculations on the form by reviewing the documentation submitted and confirming that the Payroll Costs are at least 75% of the forgiven amount. A lender is required to perform a good-faith review. If payroll information is provided by a recognized third-party payroll processor, the lender’s review will be minimal, as compared to the level of review if the information is prepared by the borrower. The lender generally does not have to verify the accuracy of the information submitted.
  • The lender will either (i) approve (in whole or part); (ii) deny; or (iii) deny without prejudice due to pending SBA review of the loan. The lender submits to the SBA only the Loan Forgiveness Application and related Schedule A and demographic information, not the back-up documentation provided to the lender by the borrower, unless the PPP loan is under review by the SBA.
  • The lender must provide the SBA with the reason for any denial of forgiveness and notify the borrower that it has denied the loan. The borrower may request the SBA review the lender’s denial within 30 days of its receipt of the lender’s notice.
  • Once the lender is notified of a review of a PPP loan by the SBA, the lender cannot approve the forgiveness of the loan until the SBA notifies the lender in writing that it has completed its review.

PPP Loan Forgiveness Application: Key Observations, Part I

The SBA, in consultation with the U.S. Department of Treasury, issued the Paycheck Protection Program Loan Forgiveness Application and related instructions on May 15, 2020. While the application and instructions answer many of our questions about PPP loan forgiveness, it leaves many others open. The following is a list of our key observations based upon the application and instructions released on May 15, 2020. 

1. Alternative Payroll Covered Period

  • Borrowers who use a biweekly (or more frequent) payroll schedule may elect to use an Alternative Payroll Covered Period that starts on the first day of their first pay period following PPP Loan Disbursement Date.
  • If a borrower uses a bi-monthly or monthly payroll schedule, unless subsequent guidance is released changing the application, borrowers cannot use an Alternative Payroll Covered Period and must use the Covered Period (eight-week period beginning on loan disbursement date).
  • Alternative Payroll Covered Period only is used for calculating Payroll Costs. Borrowers must use the standard Covered Period for calculating non-Payroll Costs.

2. Paid or Incurred.

  • Eligible Payroll Costs to be forgiven are those paid OR incurred during the applicable Covered Period or Alternative Payroll Covered Period, provided incurred costs are paid on or before the next regular payroll or billing date.
  • Eligible non-Payroll Costs must be (1) paid during the Covered Period OR (2) incurred during the Covered Period and paid on or before the next regular billing date.
  • Borrowers can mix and match paid and incurred costs, so long as they do not double count costs. 
  • Payroll Costs are considered incurred on the day that the employee’s pay is earned.

 3. Additional Guidance

  • U.S. Department of Treasury indicated that the SBA also would soon issue regulations and guidance to further assist borrowers and lenders regarding PPP loan forgiveness matters.

 4. Use of Loan Proceeds.

  • There is no requirement in the application that the borrower certify that it used 75% of original loan proceeds for Payroll Costs as a condition to forgiveness. The only requirement is that at least 75% of the forgiven amount must be for Payroll Costs.
  • However, that does not mean borrowers can use more than 25% of PPP loan proceeds for purposes other than Payroll Costs. The Interim Final Rule (“IFR”) containing such requirement still remains in effect. Promised additional guidance from the SBA may address this question, as well as how borrowers may use excess loan proceeds that do not satisfy this requirement.

 5. Mortgage Obligations and Rent Obligations.

  • Covered mortgage obligations include interest paid or incurred during the Covered Period on business mortgage loans on real and/or personal property in effect prior to February 15, 2020.
  • Covered rent obligations include business rent or lease payments paid or incurred during the Covered Period on real and/or personal property leases in force before February 15, 2020.

6. No Further Guidance Yet on Covered Utility Payments

  • The application merely repeats the CARES Act’s utility categories of electricity, gas, water, transportation, telephone or internet service that began before February 15, 2020.
  • Open question as to whether the IFR on Requirements for Promissory Notes, Authorizations, Affiliation, and Eligibility (originally posted April 24, 2020), which lists gas for a business vehicle as an example of a utility payment, applies for all businesses, not just independent contractors or self-employed individuals.

7. No Further Guidance Yet on Payroll Costs Definition.

  • The application merely repeats the CARES Act’s list of expenses included in the definition of Payroll Costs, in addition to salaries and wages, and arguably is slightly narrower than the statute.

8. FTE Definition and Calculation

  • Full-time equivalency (“FTE”) employee calculation is based upon a 40-hour work week. However, because calculated on a consistent basis in each relevant period, we do not expect this to adversely impact borrowers.
  • FTE can be calculated, at the election of the borrower, by either: (1) for each employee, dividing the average number of hours the employee was paid per week by 40 hours, rounding to the nearest tenth, with the maximum being 1.0 FTE, or (2) using an alternative method assuming employees who work 40 hours or more per week are 1.0 FTE and employees who work fewer hours are 0.5 FTE. Borrowers should calculate FTE’s both ways to determine which is more favorable. The same calculation method must be used for all FTE calculations.
  • The FTE reduction is determined based upon total FTE’s in each period so that new employees included in the Covered Period or Alternative Payroll Covered Period offset employees included in the earlier comparative period who have since left employment. 

9. FTE Reduction Exceptions

  • The following reductions in FTE’s do not reduce the borrower’s loan forgiveness: (1) any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee; and (2) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.
  • However, if the position was filled by a new employee, then the borrower does not need to (and cannot) use this exception because the new employee is counted in the FTE count already. 

10. FTE Reduction Safe Harbor.

  • The borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employee levels if both of the following conditions are met: (1) the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the borrower then restored its FTE employee levels by not later than June 30, 2020, to its FTE employee levels in effect for the borrower’s pay period that included February 15, 2020.
  • The calculation is done as of June 30, 2020, so employees rehired prior to June 30, 2020 must continue to be employed through June 30, 2020.

 11. Salary/Hourly Wage Reduction

  • When calculating the salary/hourly wage reduction, the reduction is calculated for each employee who did not have annualized compensation for any pay period in 2019 in excess of $100,00 and then aggregated. There will be a reduction in forgiveness if any such employee has a reduction in their average annual salary or hourly wage during the Covered Period or Alternative Payroll Covered Period by more than 25%, even if other employees do not experience such a reduction.
  • The calculation compares the annual salary or hourly rate during the Covered Period or Alternative Payroll Covered Period to the annual salary or hourly rate from January 1, 2020, to March 31, 2020.
  • Only the reduction in annual salary or hourly rate in excess of 25% results in a reduction of forgiveness.
  • For hourly workers, the reduction in forgiveness is calculated based upon the average number of hours the employee worked each week during the period from January 1, 2020, to March 31, 2020, not the period the employee worked during the Covered Period or Alternative Payroll Covered Period. If hourly employees are not brought back until late in the Covered Period, or Alternative Payroll Covered Period, it is possible that a significant portion of the wages paid to them will not be forgiven if their hourly rate is not at least 75% of their hourly rate as of February 15, 2020, by June 30, 2020.
  • PPP Schedule A Worksheet requires borrowers to separate employees into different tables based on whether their annualized compensation for any pay period in 2019 was more than $100,000. Borrowers can reduce the salary or wages of employees with annualized compensation for any pay period in 2019 of more than $100,000 by more than 25% without causing a reduction in forgiveness. The application measures an employee’s compensation status for this purpose based upon 2019, not 2020, as provided in the CARES Act. Employees whose compensation in 2020 would annualize to a different threshold than in 2019 will still be categorized based upon 2019 compensation.

12. Loans in Excess of $2 million

  • Borrowers who, together with their affiliates (as defined by SBA rules), received PPP loans “with an original principal amount in excess of $2 million” must check a box on the application. Presumably, this will make it easier for the SBA to identify these borrowers for further review. We would advise borrowers who “received” PPP loans in excess of $2 million, and then returned a portion of the loan proceeds to get below $2 million, to check the box in the absence of further guidance from the SBA.

13. Documents that Must Be Submitted with Application.

  • Payroll: Documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period or the Alternative Payroll Covered Period consisting of each of the following:
    • Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
    • Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
    • IRS Payroll tax filings reported (typically, Form 941). Note that Form 941 covers a quarterly period, while the Covered Period or Alternative Payroll Covered Period only covers an eight-week period; and
    • State quarterly business and individual employee wage reporting and unemployment insurance tax filings.
    • Payment receipts, canceled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.
  • FTE: Documentation showing the average number of FTE employees during the comparative period selected by the borrower.
    • Documents may include IRS payroll tax filings (typically, Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings.
    • Documents submitted may cover periods longer than the specified time period.
  • Nonpayroll: Documentation verifying the existence of the obligations/services prior to February 15, 2020, and eligible payments from the Covered Period.
    • Business mortgage interest payments: Copy of lender amortization schedule and receipts or canceled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
    • Business rent or lease payments: Copy of current lease agreement and receipts or canceled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
    • Business utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, canceled checks, or account statements verifying those eligible payments.

14. Documents that Must be Maintained But Not Submitted with Application.

  • Documentation supporting the listing of each individual employee in the application.
  • Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.
  • Documentation supporting the “FTE Reduction Safe Harbor” calculation.
  • All records relating to the borrower’s PPP 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 retain all such documentation in its files for six years after the date the loan is forgiven or repaid in full.

15. Optional Information Requested.

  • The application requests voluntary disclosure of the name and position of each “Principal” of the borrower, their gender, race, ethnicity and whether they are a veteran.
  • “Principal” includes all 20% or greater owners (including limited partners), officers, directors, individuals hired to manage day-to-day operations, managing partners.
  • The application indicates that the information will have no bearing on the loan forgiveness decision. Disclosing the names of all Principals only has risk for the borrower, without any perceived benefit, and so many borrowers are likely to be unwilling to provide this information.

16. Lender Specific Requirements

  • Similar to the PPP loan application process, the PPP loan forgiveness application may be modified by a PPP lender to include additional lender specific requirements. Borrowers should be prepared that they may need to provide additional information to their PPP lender when applying for forgiveness, including the documents that the SBA is requiring be maintained, but not necessarily submitted.

For more information, please contact Alexis Schostak (248-203-0598 or aschostak@dykema.com), Thomas Vaughn (313-568-6524 or tvaughn@dykema.com), or your Dykema relationship attorney.

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