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Houston Harbaugh Blog

New PPP Forgiveness Applications and Interim Rule; Some Key Issues Clarified; Borrowers Prepare to Apply for Loan Forgiveness

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On Wednesday, June 17, the SBA published two new forgiveness applications-a long-form and an "EZ" form-along with revised instructions, and on the day before, published another interim final rule (#19). The revised loan applications incorporate the changes made to the PPP program under the Paycheck Protection Program Flexibility Act ("Flexibility Act") signed into law on June 5 and replace the prior version of the form. (Here is a link to the EZ Forgiveness Application and its Instructions and  the Full Forgiveness Application and its Instructions.) The new rule supplements two recent rules amending SBA guidance to reflect changes under the Flexibility Act, this focusing primarily on the forgiveness provisions. For a discussion of the Flexibility Act click HERE.

The new applications incorporate the Flexibility Act provisions and provided guidance and clarifications. They:

  • Clarify the application of the new expanded covered period (24 weeks) and how payroll and other forgivable expenses are computed under it;
  • Clarify application of the new requirement that at least 60% of loan forgiveness must consist of payroll;
  • Provide new insights on what are "owner-employees" and confirm when fringe benefits paid on their behalf may be forgivable;
  • Confirm that the safe harbor for restoring FTE's may be established by borrowers at any time prior to December 31, 2020 (and borrowers need not show compliance on December 31, 2020, or defer filing forgiveness applications until then);
  • Add the new FTE safe harbor introduced under the Flexibility Act for a decline in business due to COVID-19 related regulations and provide some additional insights; and
  • Provide a simplified means of applying for forgiveness in the EZ application for self-employed individuals with no employees and certain other limited categories of borrowers.

LONG-FORM FORGIVENESS APPLICATION:

Covered Period-24 Weeks or 8 Weeks

The application incorporates the Flexibility Act's expansion of the period during which expenses are eligible for loan forgiveness ("covered period") to 24 weeks following loan funding. Any borrower which obtained its loan before June 5, 2020, may elect an 8-week covered period instead.

Observation: Although some Borrowers may find that an in-between period (say 14 weeks) would be optimal in terms of their timing for expending their PPP loan, the two alternatives-8 or 24 weeks-are the only choices. As discussed in our alert relating to the Flexibility Act, a pre-June 5, 2020 borrower that has not been able to expend all of its PPP loan in 8 weeks may choose the 24-week option. Such a borrower should ensure that it will be able to retain its FTE levels during the extended period.

Minimum Payroll Allocation (60%)

The application provides that the total forgiveness may not exceed the total payroll incurred during the covered period divided by .60 (sixty percent). The application has been updated to reflect the reduction in the percentage from 75% to 60% provided under the Flexibility Act.

Observation: The Flexibility Act provides that a borrower would be ineligible for any forgiveness if it failed to expend payroll during its covered period of at least 60% of its total loan. The SBA in its earlier rule interpreted this as meaning any failure to achieve this 60% benchmark would result in a pro-rata reduction of forgiveness and not all forgiveness. The application follows the SBA's earlier interpretation.

Employee Payroll and Compensation to Owners

Employee Payroll. The Schedule A Worksheet instructions (as well as the 19th Interim Rule) confirm that a borrower with either an 8-week or 24-week covered period is eligible for forgiveness on account of cash compensation that does not exceed an annual salary of $100,000. The cash compensation limit for any employee is $46,154 (24/52 x $100,000) if a 24-week period is elected and $15,385 (8/52 x $100,000) if an 8-week period is elected. An employee continues to be eligible for weekly forgiveness during the final 16 weeks at the same rate (i.e., $1,923/week) that they wereeligible in the first 8 weeks.

Compensation to Owners The Schedule A instructions provide that the amounts paid to owners (owner-employees, a self-employed individual, or general partner) are capped at $15,833 (8/52 x $100,000) if an 8-week period is chosen, but is capped $20,833 if a 24-week period is selected. The 24-week cap for owner-employees, self-employed individuals, and general partners is computed based on 2.5 months (2.5/12 x $100,000 = $20,833) and not 24 weeks as one would expect.

The 19th Interim Rule explains the rationale for this different limit as it applies to self-employed individuals: "This approach will prevent windfalls that Congress did not intend." It goes on to provide an example of a self-employed individual with one employee who obtains a loan based on the compensation of both that owner and employee (double what the owner would have been entitled to if the owner had no employee). The owner fired the employee and then paid himself/herself with the loan proceeds that would have otherwise been payable to the employee. In effect, the owner receives double the amount that Congress intended would be available to the owner. The purposes of the CARES Act are not furthered as the owner's employee was fired (not sustained). Presumably, this rationale applies also to the other two categories of owners-general partners and owner-employees. Congress capped all three categories of "owners" in their forgiveness at 2.5 months (not 24 weeks) of pay apparently to protect against such potential abuse.

Observation:

The revised application continues to refer to an "owner-employee" as did the prior version, but still has not defined the term. The instructions relating to health care benefits (discussed below) refer to "owner-employees of an S-corporation" indicating that an owner-employee can be a shareholder of such an S-corporation. The SBA has not provided guidance as to whether shareholders of a C corporation or members of an LLC can be "owner-employees". The rationale above suggests that the inclusion of owner-employees together with general partners and self-employed individuals stems from their ability to control actions of the borrower and would suggest that under any event an "owner-employee" must have some significant level of control. Still, further guidance is needed.

Employee Benefits-Health Insurance and Pensions

The revised application added some clarification as to what benefits may be eligible for forgiveness. Payments of health insurance on behalf of employees are eligible, except for those made on behalf of self-employed individuals, general partners, or owner-employees of S-corporation, which are ineligible "because such payments are already included in their compensation". Payments of employee contributions to employee retirement plans are eligible, except that those made on behalf of self-employed individuals and general partners are ineligible "because such payments are already included in their compensation". Apparently, payments of employee retirement payments to owner-employees of S-corporations are eligible for forgiveness. Further, since payments of healthcare and retirement benefits on behalf of other categories of owner-employees (other than S-corporation shareholders) are not excluded, presumably, they are both eligible for forgiveness.

Observation:

As discussed above, the application (on line 9) provides that payroll payments to owner-employees-i.e., salary and wages-are eligible for forgiveness, subject to the applicable caps ($15,385 if an 8-week is chosen and $20,833 if a 24-week is chosen). Since the health care and pension payments are listed on separate lines (lines 6 and 7, respectively), those caps do not apply to healthcare and pension payments on behalf of owner-employees as the application is written. Prior guidance from the SBA had suggested that pension and health insurance payments on behalf of owner-employees are included under these caps. The application is confirming that healthcare and pension payments on behalf of owner-employees are not subject to those caps. Perhaps the SBA will provide further guidance on this point.

Safe Harbor for Restoring Employees

The CARES Act had initially provided that a borrower could avoid reduction of forgiveness arising because of a reduction of FTE's by restoring the reduction on or before June 30, 2020. The prior version of the forgiveness application had provided that in order to meet this safe harbor, the borrower must show that it had restored its FTE count on June 30, 2020, to its pre-COVID number (i.e. to its FTE count on February 15, 2020). Meeting the threshold before the date was not enough. The Flexibility Act extended the June 30 safe harbor date to December 31, 2020. There was concern that the revised application would require that the borrower meet its target number of employees on December 31 (and therefore could not apply for forgiveness until that date).

That is not the case. The revised application provides that the borrower meets its safe harbor if, on the date on which it submits its application (so long as that date is before December 31, 2020), the borrower meets its target level of employees. A borrower whose covered period has expired and who seeks to use the FTE safe harbor may apply for forgiveness as soon as it has restored its FTE count to its target figure.

Observation:

This is particularly good news for borrowers who elect to use an 8-week covered period and need to use the FTE safe harbor. They need not wait until December 31, 2020, to apply for forgiveness.

Safe Harbor for Reduction of Business Due to COVID-19 Compliance

The application has incorporated the new FTE reduction safe harbor added in the Flexibility Act. This eliminates any reduction of forgiveness attributable to a drop in FTE's if the borrower suffers a decline in business between February 15, 2020, and the end of the covered period due to compliance with COVID-19 sanitation, social distancing and other requirements imposed by HHS, CDC, and OSHA. The application states that the borrower who qualifies for this safe harbor must include with its application copies of the applicable requirements "for each borrower location and relevant borrower financial records."

Observation: While this documentation advice is helpful, there remains minimal guidance on how a borrower must demonstrate that it meets this safe harbor. We recommend that borrowers document the various regulations which have applied to their business and how they were adversely affected by it, including financial information.

EZ FORM FORGIVENESS APPLICATION:

The new EZ forgiveness application simplifies the information required by the application by, among other things, eliminating the computations for FTE's. The EZ form may be used by a borrower if it meets one of the following three criteria:

  1. Is a self-employed individual, independent contractor or sole proprietor and has no employees.
  2. Did not reduce annual salary or wages by more than 25% during specified periods of any employees whose annualized pay is less $100,000 ("Wage Reductions") and did not reduce the number of employees or average paid hours of employees between January 1, 2020, and the end of its covered period.
  3. Had no Wage Reductions and met the business reduction safe harbor relating to COVID-19 described above.

Observation: This form is a nice alternative to simplify the process for those who qualify.

Houston Harbaugh attorneys are available to help with this and other business issues as you proceed through the pandemic. Contact the attorney with whom you regularly deal or the below author of this article: Harrison S. Lauer, Houston Harbaugh, [email protected]; (412) 288-2229.

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