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On April 3^rd, Treasury released a PPP Borrower Information Fact Sheet that was meant to clarify key questions with respect to the application process. In particular, this document reaffirmed the definition of “Payroll Costs” (Page 2) and clarified that salaries include bonuses and other forms of compensation subject to the $100k cap. It also clearly shows that “other compensation” such as vacation pay and severance were separate items, to be included over and above the cap. The guidance aligned with the way the law was written.  

In the newly-released loan forgiveness application, the SBA defines “payroll” to include an employee’s Cash Compensation and Non-Cash Compensation. Then it further defines Cash Compensation (see below), which is capped at $15,385 per employee during the covered period, to INCLUDE any form of cash compensation such as severance and vacation payouts. This was a very subtle change that went unnoticed by many. This change is contrary to the way the law is written and will have a meaningful impact on borrowers who were expecting these forms of compensation to be “over and above the cap.” We recommend that you review your calculations to determine what impact, if any, this change produces. We will be monitoring this issue as the SBA seems to have silently reversed its prior guidance.

Cash Compensation: Enter the sum of gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period or the Alternative Payroll Covered Period. For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period; therefore, do not enter more than $15,385 in Table 1 or Table 2 for any individual employee. 

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the Sick Pay Bill (passed prior to the CARE Bill).
• Be in constant communication with your bank (about status of your PPP application).
• Consider speaking with your bank to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

FTE Safe Harbor (“Rehire Rule”):  We wanted to do a deep dive into the FTE Safe Harbor rule. The CARES Act and subsequent Interim Final Rules/FAQs go to great lengths to describe how to reduce forgiveness if there is a reduction of FTEs.However, from the beginning, there has been a strangely drafted “rehire rule” that we candidly suspected may have been a drafting error.  However, when the new application came out it became clear that this rule still exists and will be employed. With that being said, we wanted to walk through how this rule works, as the effect is a complete restoration of your FTEs within the calculation even if you don’t hire employees back during the covered period, for some borrowers, this is very meaningful. Here are the rules/steps:

Safe Harbor Rule (i.e., Rehire Rule)

• Compare average weekly # of FTEs from 2/15/20 to 4/26/20 with # of FTEs as of 2/15/20
• If there is a reduction, and it is restored as of 6/30/20, then there is no reduction in the forgiveness amount.

In what appears to be a disproportionate benefit, the SBA is allowing the borrower to completely ignore a mathematical reduction of FTEs during the covered period if 1) it had ANY reduction of employment during the period noted above and 2) it resolved that reduction as of a single point in time (6/30). Documentation requirements appear to require at least a single payment for pay period covering 6/30 and there is no indication how long the individual must remain an employee. We remain skeptical that this will not somehow change or be updated through future guidance, but this is what we have right now.

Let’s look at an example:

Facts:

• Borrower has $250K in eligible expenses during the covered period
• Average weekly # of FTEs during reference period (January 1 –  February 29, 2020) was 300
• Average weekly # of FTEs during covered period was 30 (representing a 90% reduction)
• On 2/15/20, borrower had 35 FTEs
• Between 2/15/20 and 4/26/20, there were 29 average FTEs

Analysis:

• Potential forgiveness amount is $25K (10% of $250K, given 90% FTE reduction)
• If borrower restores to 35 FTEs as of 6/30/20, then the forgiveness amount is $250K (and borrower can ignore the potential reduction of $225K)

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the Sick Pay Bill (passed prior to the CARE Bill).
• Be in constant communication with your bank (about status of your PPP application).
• Consider speaking with your bank to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

Alston & Bird have released their May 20 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.

PPP Forgiveness Application

On Friday, May 15, new guidance regarding the calculation of forgiveness was issued in the form of a forgiveness application. Withum has provided a detailed analysis of the document in this article. The introduction of this document is significant because it clarifies many questions with respect to how the calculation works. We suspect more guidance will come out but it is fair to assume this is the “bulk” of what we should expect to get. We highly recommend that you read the article summarizing the application, but here are some highlights:

• “Paid and incurred” clarified:  This appears to be a big win for borrowers. 
  • For payroll, all costs paid during the covered period will qualify. So if your loan was funded on May 1, and on May 2 you paid payroll relating to the pay period of April 15^th to April 30^th, that can be included. In addition, you can include payroll “incurred” at the end of your covered period even if it was paid outside of your covered period as long as it was paid within the next regularly scheduled pay run. This allows for more than 8 weeks of payroll to be included in the calculation. That said the $15,385 cap is still in place and the certification specifies that “owners” cannot get more than 8 weeks of salary.
  • For non-payroll costs, a similar result, any cost paid during the covered period will be included, and any cost incurred will also be included as long as it is paid by its “next regular due date.” This also opens the door for more than 2 months of rent, interest, etc. to be included. 
• Introduction of “Alternative Payroll Covered Period”: The application allows for the borrower to elect to use an “alternative” covered period for payroll only. This 8-week period would align with you payroll cycle, starting on the first day of the borrowers normal payroll cycle subsequent to their PPP disbursement. This allows borrowers to cleanly align payroll during the covered period. While this makes sense, it seems that there is now a potential benefit to use a normal covered period given the updated “incurred” rules above, allowing for more than 8 weeks of payroll to be forgiven. 
• “Expiration date” of forgiveness application: The application appears to include an “expiration date” of October 31^st. We cannot be sure, but this seems to indicate that applications are due by no later than that date.
• FTEs defined: FTEs are defined as 40 hours per week. There are two methods (Base Method and Simplified Method) to calculate an FTE. You can see both methods in the article linked above.
• FTE reductions: They have expanded exemptions for the FTE reduction calculation, allowing you to ignore employees who were fired for cause, resigned or requested a reduction in hours. Previously you could only ignore reductions for employees who had rejected your offer to return to work.
• FTE reduction “safe harbor”: This FTE reduction “cure” has been in place since the statute was written but has be a source of confusion. Some have thought it was a drafting error but the application clearly concludes it was not. So what does it mean? Even if the borrower reduces their head count during the covered period, they will be deemed to have restored it fully if:
  • (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 the borrower’s pay period that included February 15, 2020

There is no question it is illogical, but it appears you can lower your headcount during the covered period as much as you want, as long as, on a single day, you have more FTEs than you did during your February 15, 2020 payroll run.

• “75% rule” appears to be clarified:  As we suspected, the 75% calculation does not appear to be binary (meaning if 75% of the loan is not spent on payroll there is no forgiveness). The application clarifies that non-payroll costs cannot exceed 25% of total forgivable costs. Therefore, you can spend as much or as little of the loan that you wish, however, the amount of non-payroll costs that are forgiven will not exceed 25% of total forgivable expenses (the remaining 75% constituting payroll costs). Example: If a borrower receives a $500k loan, and spends $250k on payroll costs, the max forgivable non-payroll costs are $83.3k ($250k/75% – $250k).
• Clarifications on how to calculate “wage reductions”:  The application clarifies how the wage reduction calculation will work. It also clarifies that the wage reduction calculation will only be applied to employees who were employed during the covered period. See the article linked above for details. Importantly, the wage reduction calculation will exclude any employee who “during any pay period” made, on an annual basis, more than $100,000 per year. Presumably this would mean that if an employee received a bonus that put them over $1,923 during 1 week of salary, they would be excluded.

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the Sick Pay Bill (passed prior to the CARE Bill).
• Be in constant communication with your bank (about status of your PPP application).
• Consider speaking with your bank to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

Alston & Bird have released their May 18 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.

Can I re-apply for a loan if I returned it? – Last week (May 15), the SBA confirmed that a safe harbor exists for borrowers whose loan is less than $2M. The SBA will not question eligibility as all borrowers in this population will be deemed to have made the application in good faith. This was a significant development as many borrowers returned their loans because, while they believed they were eligible, they were uncomfortable with the amount of ambiguity relating to the “eligibility” standards in place and the threat of criminal action. Based on a discussion with a bank this week, we learned that borrowers could re-apply if they returned their original loan and wish to obtain a new one. We recommend discussing with your bank if this applies to you.

How do you treat furloughed employees with respect to loan forgiveness – We have been getting this question quite a bit over the last few weeks: Is a furloughed employee still and employee or considered laid off for purposes of the forgiveness calculation?  Why does this matter? It matters because when you calculate forgiveness you start with determining a ratio of FTEs during the covered period to FTEs during a base period (see forgiveness calculation). If a furloughed employee is considered laid off, then they represent a reduction in FTEs which reduces overall forgiveness. If they are considered an employee, you need to consider whether they add to the FTE count (based on hours worked) and whether they also have a “salary reduction in excess of 25% of compensation” if they make less than $100,000 a year annually. The current guidance does not address this directly, but it is something we are monitoring closely because the forgiveness impact is different under each scenario. Regardless, we believe that if an employee is furloughed, and the company is still covering benefits, then those benefits would be includable as a forgivable expense.

Partnerships can increase their PPP loans – On May 14, the SBA issued an interim final rule that confirmed partnerships can increase their PPP loans if their initial loan amount did not include partner compensation. During the application process there was a lot of confusion regarding what constituted “payroll costs.” Partners in partnerships are technically not considered employees and many lenders excluded the income allocated to partners from the payroll cost definition. This resulted in a significant decrease in their loan amount and also left partners out in the cold when it came to getting compensated from the PPP loan proceeds during the covered period. This clarification allows partnerships to go back to their lender and to request an increase in the loan amount, which is a welcome change for many especially since it appears that funds continue to remain available for borrowers.

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the Sick Pay Bill (passed prior to the CARE Bill).
• Be in constant communication with your bank (about status of your PPP application).
• Consider speaking with your bank to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

Alston & Bird have released their May 15 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.