SBA Releases Updated PPP Loan Forgiveness Applications and Instructions, Amends Existing Rules Based on PPPFA – Key Takeaways for BorrowersJune 24, 2020
This article was updated on June 24, 2020 to reflect changes to the PPP made by the new Interim Final Rule issued by the SBA on June 22, 2020 (the “June 22 Interim Rule”). These revisions include clarification of the following:
- A borrower may submit a loan forgiveness application before the end of the borrower’s covered period (but borrowers that have reduced salaries or wages of an employee by more than 25% should be aware they are required to account for the reduction across the entire covered period, regardless of when they submit their forgiveness application).
- A reduction in business activity, for purposes of the new safe harbor, can stem directly or indirectly from compliance with government requirements or guidance (including state or local requirements or guidance based on federal requirements or guidance).
- Borrowers are still required to inform the applicable state unemployment insurance office of an employee’s rejection of a rehire offer.
On June 16, the Small Business Administration (“SBA”) released updated loan forgiveness applications and instructions for the Paycheck Protection Program (“PPP”). A day later, the SBA issued a new Interim Final Rule to amend existing SBA rules on eligibility and loan disbursements. The updated loan forgiveness applications and new rule were issued in order to implement changes to the PPP made by the Paycheck Protection Program Flexibility Act (the “PPPFA”), which became law on June 5. Our Client Alert summarizing the key highlights from the PPPFA can be found here.
Key updates are summarized below.
Two New Loan Forgiveness Applications
Borrowers now have the option of choosing between two forgiveness applications: (1) an updated, standard SBA Form 3508 (together with its instructions, the “Standard Form”) or (2) a new stream-lined, short form version of the Standard Application, SBA Form 3508EZ (together with its instructions, the “EZ Form,” and, together with the Standard Form, the “Revised Applications”).
The EZ Form eliminates from the loan forgiveness calculations reductions related to salary/wage and FTE headcount reductions, and is therefore only available to borrowers that can meet at least one of the following safe harbors:
- Self-Employed Borrowers with No Employees. The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form.
- No Reductions in Salary/Wages or FTE Headcount. The borrower (a) did not reduce the annual salary or hourly wages (rate of pay) of any employee by more than 25 percent during the applicable covered period compared to the period between January 1, 2020 and March 31, 2020 and (b) did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the covered period. The EZ Form provides that for purposes of calculating reductions in number of employees, the borrower may ignore reductions arising from an inability to rehire individuals who were employees on February 15, 2020, if the borrower was unable to hire similarly qualified employees, as well as reductions in an employee’s hours that the borrower offered to restore and the employee refused.
- No Reduction in Salary/Wages and Inability to Return to Prior Business Activity Level. The borrower (a) did not reduce annual salary or hourly wages (rate of pay) of any employee by more than 25 percent during the applicable covered period compared to the period between January 1, 2020 and March 31, 2020 and (b) was unable to operate during the covered period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
Thus, the EZ Form provides a more streamlined forgiveness application for borrowers who meet these safe harbors. All other borrowers must utilize the Standard Form. Separately, the SBA released new sets of instructions for each application.
The instructions to the Revised Applications make clear, in line with the language of the PPPFA, that a borrower’s covered period is either 24 weeks or, if a borrower received its PPP loan prior to June 5, 2020, it may elect to use the original 8-week period established by the CARES Act. A borrower may not elect a covered period that is a length of time somewhere in between 8 weeks or 24 weeks.
The June 22 Interim Rule clarifies that a borrower may submit a forgiveness application at any time before the maturity date of its PPP loan, including before the end of the borrower’s covered period (whether 24 weeks or 8 weeks). However, if a borrower applies for forgiveness before the end of its covered period and has reduced any employee’s salary or wages in excess of 25%, the borrower must account for the salary or wage reduction for the full 8-week or 24-week covered period.
FTE Reduction Safe Harbor for Inability to Return to Prior Business Activity Level
The Revised Applications implement the new safe harbor under the PPPFA, which provides an exemption to a reduction in a borrower’s loan forgiveness amount for full-time equivalent (“FTE”) employee reductions by borrowers who were unable to operate at the same level of business activity as before February 15, 2020 due to compliance with certain requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19. The Revised Applications make clear that the period of time during which a borrower must demonstrate an inability to return to prior business activity levels is the borrower’s covered period.
Although both the PPPFA and the Revised Applications refer only to federal requirements or guidance, the June 22 Interim Rule states that the SBA interprets the safe harbor to include both direct and indirect compliance with federal government requirements or guidance “because a significant amount of the reduction in business activity” resulting from such requirements or guidance “is the result of state and local government shutdown orders that are based in part on guidance from the three federal agencies.” Absent further SBA guidance narrowing this exception, it would seem that many borrowers may qualify, given that business is not expected to be “back to normal” in the near term for most of the economy.
Borrowers that qualify for this safe harbor should note that they must maintain copies of applicable COVID requirements or guidance for each business location, as well as relevant borrower financial records.
Safe Harbor Date for Eliminating FTE Reductions
The prior version of the PPP loan forgiveness application required a borrower to enter its FTE headcount on June 30, 2020 for purposes of determining if it met the safe harbor requirement for eliminating reductions in FTE headcount. The PPPFA extended this date from June 30, 2020 to December 31, 2020. Many borrowers with covered periods expiring well before December 31 were concerned that their FTE headcount would be measured on December 31. The Standard Form clarifies that, for the purposes of qualifying for the FTE safe harbor based on the rehiring of employees, the date for restoring a borrower’s FTE levels to its February 15, 2020 level is the earlier of (1) December 31, 2020 or (2) the date the forgiveness application is submitted.
FTE Exception for Offers to Rehire, Certain Employee Terminations
The Standard Form makes it clear that FTE reductions in the following circumstances will not reduce a borrower’s loan forgiveness:
- Positions for which the borrower makes a good-faith, written offer to a former employee who was employed on February 15, 2020 and the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020;
- The borrower makes a good-faith, written offer to restore any reduction in hours of an employee, at the same salary or wages, during the applicable covered period but the employee rejects the offer; or
- During the applicable covered period, an employee (i) is fired for cause, (ii) voluntarily resigns, or (iii) voluntarily requested and received a reduction in hours.
The third exception above is not in the PPPFA, and appears to come from the SBA rule issued on June 1, 2020. The June 1 Interim rule also included an exception for former employees who refuse written offers of employment if the employer reported the refusal to the State unemployment agency within 30 days; however, it did not require the borrower to show an inability to hire a similarly qualified employee. That is a new requirement under the PPPFA, and it is unclear what will be required to satisfy the requirement. The June 22 Interim Rule makes clear that the portion of the June 1 Interim Rule requiring a borrower to report a refusal of employment to the State unemployment agency remains in effect.
Forgivable Compensation Limits for Employees and Owners
While previous SBA rules limited the forgivable compensation a borrower could pay to employees during the applicable covered period to $15,385 each (representing annual compensation of $100,000, as prorated for the 8-week covered period), the June 17 Interim Rule confirms that the limit has been increased to $46,154, or 24-weeks of pay, to coincide with the new 24-week covered period provided by the PPPFA.
However, the June 17 Interim Rule provides a much more limited increase for owners (owner-employees, self-employed individuals and general partners). The rule increases the maximum forgivable compensation payable to these individuals to 2.5 months’ worth of such individual’s 2019 net profit (up to $20,833) if the borrower elects the 24-week covered period. Previously, the SBA set the limit at 8 weeks of 2019 net profit, or $15,385. The SBA explained that the cap will prevent windfalls that otherwise might have occurred, for example, where a borrower with one employee uses all of the loan proceeds (calculated on the basis of 2 employees) to compensate himself or herself over a 24 week period while not hiring back the laid off employee.
Supporting Documentation and Recordkeeping Requirements
Borrowers using either the Standard Form or the EZ Form must submit documentation related to their payroll and eligible non-payroll expenses during their covered period. The list of documentation in this respect is consistent with the list included in the prior version of the loan forgiveness application, a summary of which can be found here.
Borrowers using the Standard Form must also submit documentation showing their average FTE count over their selected baseline reference period. Borrowers under the EZ Form are not required to submit any documentation with respect to FTE headcount. Every borrower must also maintain documentation supporting its use of any of the safe harbor exceptions (whether related to salary/wage reductions, FTE headcount reductions, or an inability to return to prior business activity levels), as well as the other certifications required for eligibility for a PPP loan, including the necessity of the loan certification.
If the borrower does not apply for loan forgiveness within 10 months after the last day of the borrower’s covered period, the loan is no longer deferred and the borrower must begin paying principal and interest.
This summary does not include or address every provision of Paycheck Protection Program under the CARES Act, which should be read in its entirety. Furthermore, pursuant to the CARES Act, the SBA continues to promulgate regulations for the implementation of the Paycheck Protection Program and, as such, there is still uncertainty relating to details of implementation.
We are here to help answer specific questions and offer advice on your options. Please contact any member of our Corporate & Business Group to discuss.