As the Small Business Administration (SBA) nears the launch next week of its portal to accept loan forgiveness applications for the Paycheck Protection Program (PPP), the agency on Tuesday released a series of frequently asked questions on forgiveness.
SBA said that borrowers and lenders “may rely on the guidance provided” in the FAQs as SBA’s interpretation.
The portal for accepting forgiveness applications is scheduled to open Aug. 10.
The FAQs began with three questions on general loan forgiveness.
The first addressed forms for sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan application, saying those borrowers automatically qualified to use the Loan Forgiveness Application Form3508EZ or lender equivalent and should complete that application.
The next said that lenders could use scanned copies of documents, eSignatures and eConsents for applications and documentation. The third address whether borrowers needed to make payments on the loan prior to SBA remitting a forgiveness amount.
“As long as a borrower submits its loan forgiveness application within 10 months of the completion of the Covered Period, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA,” SBA stated. “If the loan is fully forgiven, the borrower is not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, any remaining balance due on the loan must be repaid by the borrower on or before the maturity date of the loan. Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount. The borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven. The lender is responsible for notifying the borrower of remittance by SBA of the loan forgiveness amount (or that SBA determined that no amount of the loan is eligible for forgiveness) and the date on which the borrower’s first payment is due, if applicable.”
The next section of FAQs addressed payroll costs.
It began by stating that payroll costs incurred during covered periods, but paid after, were eligible for forgiveness as long as they were paid “on or before the next regular payroll date.” In addition, payroll costs incurred before the covered period and paid during the covered period also are eligible for forgiveness.
The next question asked whether borrowers were required to calculate payroll for partial pay periods.
“If the borrower uses a biweekly or more frequent (e.g., weekly) payroll cycle, the borrower may elect to calculate eligible payroll costs using the eight-week (for borrowers that received their loans before June 5, 2020 and elect this Covered Period length) or 24-week period that begins on the first day of the first payroll cycle following the PPP Loan Disbursement Date (referred to as the Alternative Payroll Covered Period),” SBA stated. “However, if a borrower pays twice a month or less frequently, it will need to calculate payroll costs for partial pay periods.”
When calculation cash compensation, SBA stated the gross amount should be used. It added that payroll costs include all form of cash compensation, including tips, commissions, bonuses and hazard pay – reminding borrowers that forgivable compensation is limited to $100,000 on an annualized basis.
The next question addressed how group health care benefits would be considered under payroll costs.
“Employer expenses for employee group health care benefits that are paid or incurred by the borrower during the Covered Period or the Alternative Payroll Covered Period are payroll costs eligible for loan forgiveness,” SBA stated. “However, payroll costs do not include expenses for group health care benefits paid by employees (or beneficiaries of the plan) either pre-tax or after tax, such as the employee share of their health care premium. Forgiveness is not provided for expenses for group health benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period.
“If a borrower has an insured group health plan, insurance premiums paid or incurred during the Covered Period or Alternative Payroll Covered Period qualify as ‘payroll costs,’ as long as the premiums are paid during the applicable period or by the next premium due date after the end of the applicable period. As noted, only the portion of the premiums paid by the borrower for coverage during the applicable Covered Period or Alternative Payroll Covered Period is included, not any portion paid by employees or beneficiaries or any portion paid for coverage for periods outside the applicable period.”
It added that generally, employer contributions for employee retirement benefits that are paid or incurred by the borrower during the Covered Period or Alternative Payroll Covered Period qualify as “payroll costs” eligible for loan forgiveness.
The next section of the FAQs dealt with nonpayroll costs.
It began by saying costs incurred before or after the covered period – as addressed in the payroll cost section – could be eligible for forgiveness based on when they were paid.
It added that the Alternative Payroll Covered Period only applies to payroll costs, and nonpayroll costs must be pair or incurred during the covered period to be eligible for loan forgiveness.
Interest on unsecured credit is not eligible for forgiveness. However, payments made on recently renewed leases or interest payments on refinanced mortgage loans are eligible if the original lease or mortgage existed prior to Feb. 15, 2020.
Among the covered utility payments eligible for forgiveness under the CARES Act are a “payment for a service for the distribution of … transportation.” SBA stated that is a service for the distribution of transportation refers to transportation utility fees assessed by state and local governments.
Electricity supply charges which are separate from electricity distribution charges are eligible for forgiveness, SBA stated.
The final section of the FAQs address reductions in loan forgiveness.
The first question addressed the issue of a reduction in employees, in a situation where the borrower offered to rehire employee(s) but the employee(s) declined.
“In calculating its loan forgiveness amount, a borrower may exclude any reduction in FTE employees if the borrower is able to document in good faith the following: (1) an inability to rehire individuals who were employees of the borrower on Feb. 15, 2020 and (2) an inability to hire similarly qualified individuals for unfilled positions on or before Dec. 31, 2020. Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. The documents that borrowers should maintain to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.”
SBA stated that borrowers should include employees who made more than $100,000 in 2019 when calculating the reduction exceptions.
“The FTE Reduction Exceptions apply to all employees, not just those who would be listed in Table 1 of the Loan Forgiveness Application (SBA Form 3508 or lender equivalent). Borrowers should therefore include employees who made more than $100,000 in the FTE Reduction Exception line in Table 1 of the PPP Schedule A Worksheet,” SBA stated.
The next question addressed how borrowers calculate reductions in pay in their forgiveness amount.
“Certain pay reductions during the Covered Period or the Alternative Payroll Covered Period may reduce the amount of loan forgiveness a borrower will receive. If the salary or hourly wage of a covered employee is reduced by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period, the portion in excess of 25 percent reduces the eligible forgiveness amount unless the borrower satisfies the Salary/Hourly Wage Reduction Safe Harbor,” the SBA stated.
Finally, the last question asked, for purposes of calculating the loan forgiveness reduction required for salary and hourly wage reductions in excess of 25 percent, whether all forms of compensation were included, or only salaries and wages.
“For purposes of calculating reductions in the loan forgiveness amount, the borrower should only take into account decreases in salaries or wages,” SBA stated.