PPP Changes Over the Last Two Weeks, Including Paycheck Protection Program Flexibility Act Signed into Law

June 2020

Over the last two weeks, the U.S. Small Business Administration (“SBA”) and the U.S. Department of Treasury (“Treasury”) have been busy issuing long sought after guidance on the Paycheck Protection Program (PPP). Many borrowers and lenders were holding their breath on this new guidance issued by the SBA as the new Paycheck Protection Program Flexibility Act (PPPFA) was recently signed into law on Friday, June 5, 2020, by the President. You can find a copy of the PPPFA here.

While forgiveness of the PPP loan has been a critical factor that drew many businesses to apply for the program, it has become an ongoing source of heartburn as the SBA and Treasury were nearly three weeks late in releasing guidance and the forgiveness application – not to mention, much of the new guidance tends to contradict or completely replace the original PPP rules set forth in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). 

First, the PPPFA will modify the PPP retroactively to the date of the passage of the CARES Act. Below are the key takeaways from the PPPFA:

  • Borrowers can choose to extend the 8-week covered period to 24 weeks, or they can keep the original 8-week period. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
  • The payroll requirement drops to 60% from 75%, but is now a cliff, meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven.
  • Borrowers can use the new 24-week covered period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by December 31, 2020, a change from the previous deadline of June 30, 2020.
  • There are two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good-faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows borrowers to adjust because they could not find qualified employees or were unable to restore business operations to February 15, 2020, levels due to COVID-19 related operating restrictions.
  • Borrowers now have 5 years to repay the loan instead of 2 years. The interest rate remains at a fixed one percent (1.00%).
  • It allows businesses that took a PPP loan to also delay payment of their payroll taxes, which was prohibited under the CARES Act.
  • Borrowers have 10 months after the end of the covered period to apply for loan forgiveness. A borrower that fails to apply for forgiveness within 10 months after the end of the covered period will be required to begin making loan payments on the date that is 10 months after the end of the covered period.

While the terms of the PPPFA are relatively favorable for borrowers, the PPPFA still leaves some questions unanswered and does not shed any light on the mandatory SBA audits for loans in excess of $2 million.

Additionally, just prior to the PPPFA being enacted, the SBA issued two interim rules that remain relevant and consistent with the PPPFA. These two interim final rules along with the PPP loan forgiveness application now answer long-awaited questions, including the definition of utilities, the definition of full-time equivalent employees (FTEs), the calculation of FTEs, and much more. FMJ has compiled a list of the key frequently asked questions and answers (FAQS) below. You can also find the full FAQs at the following links: (1) Business Loan Program Temporary Changes; Paycheck Protection Program-Requirements-Loan Forgiveness, (2) Business Loan Program Temporary Changes; Paycheck Protection Program-SBA Loan Review Procedures and Related Borrower and Lender Responsibilities, and (3) PPP Loan Forgiveness Application

At the end of the day, what has not changed each borrower will still need to submit a loan forgiveness application to their lender when the time comes. If you are a borrower that has questions or needs guidance as to how to complete the forgiveness application, our PPP Loan Application and Audit Team can assist you with the loan forgiveness process. Similarly, if you’re a lender our PPP Loan Application and Audit team can provide general advice and strategy to establish a process and procedure for reviewing the loan forgiveness application.

If you are interested in learning more or engaging the PPP Loan Application and Audit Team, please contact Jim Seifert at james.seifert@fmjlaw.comBob Fafinski at robert.fafinski@fmjlaw.comNate Brandenburg at nathan.brandenburg@fmjlaw.com, or Jordanne Kissner at jordanne.kissner@fmjlaw.com.


Relevant FAQ From SBA Interim Final Rules

A. Eligible Expenses

When must payroll costs be incurred and/or paid to be eligible for forgiveness? In general, payroll costs paid or incurred during the eight consecutive week (56 days) covered period are eligible for forgiveness. Borrowers may seek forgiveness for payroll costs for the eight weeks beginning on either: (a) the date of disbursement of the borrower’s PPP loan proceeds from the Lender (i.e., the start of the covered period); or (b) the first day of the first payroll cycle in the covered period (the “Alternative Payroll Covered Period”).

When must nonpayroll costs be incurred and/or paid to be eligible for forgiveness? A nonpayroll cost is eligible for forgiveness if it was: (a) paid during the covered period; or (b) incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.

How does the SBA define “utilities” for eligible nonpayroll costs? SBA defines “utilities” as business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

Are salary, wages, or commission payments to furloughed employees; bonuses; or hazard pay during the covered period eligible for loan forgiveness? Yes. The CARES Act defines the term “payroll costs” broadly to include compensation in the form of salary, wages, commissions, or similar compensation. If a borrower pays furloughed employees their salary, wages, or commissions during the covered period, those payments are eligible for forgiveness as long as they do not exceed an annual salary of $100,000, as prorated for the covered period.

The Administrator, in consultation with the Secretary, has determined that this interpretation is consistent with the text of the statute and advances the paycheck protection purposes of the statute by enabling borrowers to continue paying their employees even if those employees are not able to perform their day-to-day duties, whether due to lack of economic demand or public health considerations. This intent is reflected throughout the statute, including in section 1106(d)(4) of the Act, which provides that additional wages paid to tipped employees are eligible for forgiveness.

The Administrator, in consultation with the Secretary, has also determined that, if an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness because they constitute a supplement to salary or wages, and are thus a similar form of compensation.

B. Full-Time Equivalent Employees

What does “Full-Time Equivalent Employee” mean? Full-time equivalent employee means an employee who works 40 hours or more, on average, each week. The hours of employees who work less than 40 hours are calculated as proportions of a single full-time equivalent employee and aggregated, as explained further below in subsection d.

The CARES Act does not define the term “full-time equivalent employee,” and the Administrator, in consultation with the Secretary, has determined that full-time equivalent is best understood to mean 40 hours or more of work each week. The Administrator considered using a 30 hour standard, but determined that 40 hours or more of work each week better reflects what constitutes full-time employment for the vast majority of American workers.

How should a borrower calculate its number of full-time equivalent (FTE) employees? Borrowers seeking forgiveness must document their average number of FTE employees during the covered period (or the alternative payroll covered period) and their selected reference period. For purposes of this calculation, borrowers must divide the average number of hours paid for each employee per week by 40, capping this quotient at 1.0. For example, an employee who was paid 48 hours per week during the covered period would be considered to be an FTE employee of 1.0.

For employees who were paid for less than 40 hours per week, borrowers may choose to calculate the full-time equivalency in one of two ways. First, the borrower may calculate the average number of hours a part-time employee was paid per week during the covered period. For example, if an employee was paid for 30 hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.75. Similarly, if an employee was paid for ten hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.25. Second, for administrative convenience, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee. The Administrator recognizes that not all borrowers maintain hours-worked data, and has decided to afford such borrowers this flexibility in calculating the full-time equivalency of their part-time employees.

Borrowers may select only one of these two methods, and must apply that method consistently to all of their part-time employees for the covered period or the alternative payroll covered period and the selected reference period. In either case, the borrower shall provide the aggregate total of FTE employees for both the selected reference period and the covered period or the alternative payroll covered period, by adding together all of the employee-level FTE employee calculations. The borrower must then divide the average FTE employees during the covered period or the alternative payroll covered period by the average FTE employees during the selected reference period, resulting in the reduction quotient.

The Administrator, in consultation with the Secretary, determined that because the Act does not define the term FTE employee, this approach to measurement of FTE is a reasonable and appropriate exercise of the Administrator’s rulemaking authority, as it balances the need for a reasonable measurement of FTE employee headcount with the need to limit borrower compliance burdens and ensure administrative feasibility.

C. Loan Forgiveness

Will a borrower’s loan forgiveness amount be reduced if the borrower laid-off or reduced the hours of an employee, then offered to rehire the same employee for the same salary and same number of hours, or restore the reduction in hours, but the employee declined the offer? No. Employees whom the borrower offered to rehire are generally exempt from the CARES Act’s loan forgiveness reduction calculation. This exemption is also available if a borrower previously reduced the hours of an employee and offered to restore the employee’s hours at the same salary or wages. Specifically, in calculating the loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if

  • i. The borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
  • ii. the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
  • iii. the offer was rejected by such employee;
  • iv. the borrower has maintained records documenting the offer and its rejection; and
  • v. the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.

The Administrator and the Secretary determined that this exemption is an appropriate exercise of their joint rulemaking authority to grant de minimis exemptions under section 1106(d)(6). Section 1106(d)(2) of the CARES Act reduces the amount of the PPP loan that may be forgiven if the borrower reduces full-time equivalent employees during the covered period as compared to a base period selected by the borrower. Section 1106(d)(5) of the CARES Act waives this reduction in the forgiveness amount if the borrower eliminates the reduction in full-time equivalent employees occurring during a different statutory reference period by not later than June 30, 2020. The Administrator and the Secretary believe that the additional exemption set forth above is consistent with the purposes of the CARES Act and provides borrowers appropriate flexibility in the current economic climate. The Administrator, in consultation with the Secretary, have determined that the exemption is de minimis for two reasons. First, it is reasonable to anticipate that most laid-off employees will accept the offer of reemployment in light of current labor market conditions. Second, to the extent this exemption allows employers to cure FTE reductions attributable to terminations that occurred before February 15, 2020 (the start of the statutory FTE reduction safe harbor period), it is reasonable to anticipate those reductions will represent a relatively small portion of aggregate employees given the historically strong labor market conditions before the COVID-19 emergency.

Will a borrower’s loan forgiveness amount be reduced if an employee is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction? No. When an employee of the borrower is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the covered period or the alternative payroll covered period (FTE reduction event), the borrower may count such employee at the same full-time equivalency level before the FTE reduction event when calculating the section 1106(d)(2) FTE employee reduction penalty. The Administrator and the Secretary have decided to exempt such employees from the calculation of the FTE reduction penalty.

Section 1106 is silent concerning how to account for employees who are fired for cause, voluntarily resign, or voluntarily request a reduced schedule. The Administrator and the Secretary have determined that such an exemption is de minimis, because a limited number of borrowers will face an FTE reduction event during the covered period or the alternative payroll covered period. Further, borrowers should not be penalized for changes in employee headcount that are the result of employee actions and requests. Borrowers that avail themselves of this de minimis exemption shall maintain records demonstrating that each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction. The borrower shall provide such documentation upon request.

D. SBA Review of PPP Loan (any size)

What borrower representations and statements will SBA review? The Administrator is authorized to review the following:

  • Borrower Eligibility: The Administrator may review whether a borrower is eligible for the PPP loan based on the provisions of the CARES Act, the rules and guidance available at the time of the borrower’s PPP loan application, and the terms of the borrower’s loan application. See FAQ 17 (posted April 6, 2020). These include, but are not limited to, SBA’s regulations under 13 CFR 120.110 (as modified and clarified by the PPP Interim Final Rules) and 13 CFR 121.301(f) and the information, certifications, and representations on the Borrower Application Form (SBA Form 2483 or lender’s equivalent form) and Loan Forgiveness Application Form (SBA Form 3508 or lender’s equivalent form).
    Loan Amounts and Use of Proceeds: The Administrator may review whether a borrower calculated the loan amount correctly and used loan proceeds for the allowable uses specified in the CARES Act.
  • Loan Forgiveness Amounts: The Administrator may review whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s Loan Forgiveness Application (SBA Form 3508 or lender’s equivalent form).

When will SBA undertake a loan review? For a PPP loan of any size, SBA may undertake a review at any time in SBA’s discretion. For example, SBA may review a loan if the loan documentation submitted to SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan, or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower. 13 CFR 120.524(c). As noted on the Loan Forgiveness Application Form, the borrower must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.

Lenders must comply with applicable SBA requirements for records retention, which for Federally regulated lenders means compliance with the requirements of their federal financial institution regulator and for SBA supervised lenders (as defined in 13 CFR 120.10 and including PPP lenders with authority under SBA Form 3507) means compliance with 13 CFR 120.461.

Will I have the opportunity to respond to SBA’s questions in a review? Yes. If loan documentation submitted to SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower, SBA will require the lender to contact the borrower in writing to request additional information. SBA may also request information directly from the borrower. The lender will provide any additional information provided to it by the borrower to SBA. SBA will consider all information provided by the borrower in response to such an inquiry.

Failure to respond to SBA’s inquiry may result in a determination that the borrower was ineligible for a PPP loan or ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower.

If SBA determines that a borrower is ineligible for a PPP loan, can the loan be forgiven? No. If SBA determines that a borrower is ineligible for the PPP loan, SBA will direct the lender to deny the loan forgiveness application. Further, if SBA determines that the borrower is ineligible for the loan amount or loan forgiveness amount claimed by the borrower, SBA will direct the lender to deny the loan forgiveness application in whole or in part, as appropriate. SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.

Section 1106(b) of the CARES Act provides for forgiveness of a PPP loan only if the borrower is an “eligible recipient.” The Administrator has determined that to be an eligible recipient that is entitled to forgiveness under section 1106(b), the borrower must be an “eligible recipient” under 15 U.S.C. 636(a)(36)(A)(iv) and rules and guidance available at the time of the borrower’s loan application. This requirement promotes the public interest, aligns SBA’s functions with other governmental policies, and appropriately carries out the CARES Act’s PPP provisions, including by preventing evasion of the requirements for PPP loan eligibility and ensuring program integrity with respect to this emergency financial assistance program. It is also consistent with the CARES Act’s nonrecourse provision, 15 U.S.C. 636(a)(36)(F)(v), which limits SBA’s recourse against individual shareholders, members, or partners of a PPP borrower for nonpayment of a PPP loan only if the borrower is an eligible Start Printed Page 33013 recipient of the loan. Accordingly, the PPP Loan Forgiveness Application (SBA Form 3508 or lender’s equivalent form) notes that SBA may direct a lender to disapprove a borrower’s loan forgiveness application if SBA determines that the borrower does not qualify as an eligible recipient for the PPP loan.

May a borrower appeal SBA’s determination that the borrower is ineligible for a PPP loan or ineligible for the loan amount or the loan forgiveness amount claimed by the borrower? Yes. SBA intends to issue a separate interim final rule addressing this process.