Guidance for Lenders on the Paycheck Protection Program Loan Forgiveness Application
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On May 15, 2020, the Small Business Administration (SBA) and the Department of the Treasury released the Paycheck Protection Program (PPP) Loan Forgiveness Application, which provides detailed instructions on how to apply for and calculate the forgiven amount of a PPP loan. The application is available here. For lenders, this application provides an overview of the information SBA expects them to gather to calculate the loan forgiveness amount. Set out below are highlights of new clarifications offered by the application.
Payroll Covered Period Flexibility. Borrowers may receive loan forgiveness for certain payroll costs paid during the eight-week period after receiving the PPP loan. Borrowers may choose between the following dates to determine the start to the eight-week period in which their expenses will be forgiven:
- the PPP Loan Disbursement Date (the Covered Period); or
- the first day of the borrower's first pay period following their PPP Loan Disbursement Date (the Alternative Payroll Covered Period).
A borrower may receive loan forgiveness for certain payroll and nonpayroll costs paid during the Covered Period or the Alternative Payroll Covered Period. Borrowers may also include payroll costs incurred but not paid during the eight-week period if the costs are paid on or before the next regular payroll date immediately following the end of the period.
Loans in Excess of $2 Million. The application requires the borrower to identify whether it, together with its affiliates, received PPP loans with an original principal amount in excess of $2 million. In determining the total loan size, borrowers will want to conduct an affiliation analysis based on the SBA's guidance and the waivers contained in the CARES Act. Presumably, this information will assist the SBA in determining which loans will be subject to mandatory audit.
Reductions in Average Full-Time Equivalency (FTE). The PPP loan forgiveness amount is reduced if there is a reduction in the number of full-time equivalent employees during the eight-week period. The extent of the reduction is based on the "FTE Reduction Quotient," which compares the average FTE employees during the borrower's chosen reference period to the average FTE employees during the Covered Period or the Alternative Payroll Covered Period. Average FTE employees is calculated based on a 40-hour work week, dividing the number of hours worked by an employee by 40. The application permits borrowers to use an alternative simplified method for employees who work less than 40 hours per week in the calculation, and simply counting each such employee as a 0.5 FTE employee. The borrower may choose between several reference periods for purposes of this calculation, which are described in the application.
FTE Reduction Exceptions. The following FTE employee reductions during the Covered Period or the Alternative Payroll Covered Period will not affect the borrower's loan forgiveness amount:
- positions for which the borrower made a good-faith, written offer to rehire an employee which was rejected by the employee; and
- any employees who were fired for cause; voluntarily resigned; or voluntarily requested and received a reduction of their hours.
The borrower is not required to submit with the application documentation verifying the application of the exceptions, although the borrower is required to maintain such documentation.
FTE Reduction Safe Harbor. Under the FTE Reduction Safe Harbor, a borrower is exempt from the reduction of loan forgiveness based on FTE employees if:
- the borrower reduced its FTE employee levels during February 15, 2020 to April 26, 2020; and
- the borrower restores its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the pay period that included February 15, 2020.
The borrower is not required to submit with the application documentation supporting the FTE Reduction Safe Harbor, but the borrower is required to maintain such documentation.
Salary/Hourly Wage Reduction. The CARES Act also requires that the loan forgiveness amount be reduced based on reductions greater than 25% in the annual salaries and hourly wages for certain employees during the Covered Period (or Alternative Payroll Covered Period) compared to certain dates and during certain periods. Like the FTE Reduction, the application provides for a Salary/Hourly Wage Reduction Safe Harbor, which is met if the borrower restores annual salaries and/or hourly wages by June 30, 2020 to at least February 15, 2020 levels.
Documents to Receive from Borrower. When processing an application for loan forgiveness, the lender will need to obtain documentation from the borrower to verify virtually every aspect of the loan forgiveness calculation, such as:
- bank account statements or third-party payroll service provider reports of the borrower documenting the amount of cash compensation paid to employees;
- borrower's tax forms, including payroll tax filings and state quarterly business and individual employee wage reporting and unemployment insurance tax filings;
- payroll receipts or other statements documenting the amount of borrower-employer's contributions to employee health insurance and retirement plans (if the borrower included these payments in the forgiveness amount);
- documentation showing the average number of FTE employees per month during the applicable periods; and
- documentation evidencing the existence of the borrower's nonpayroll costs prior to February 15, 2020 and payments of such costs during the Covered Period.
*Jamie Lee contributed to this Advisory. Ms. Lee is a graduate of the University of Chicago Law School and is employed at Arnold & Porter's Washington, DC office. Ms. Lee is admitted only in Texas. She is not admitted to the practice of law in Washington, DC.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.