Other Loan Questions and Answers
June 2020 – Updates On PPP Info (Interim Final Rule)
This is a digest of the new forgiveness application from the Treasury Department and their Interim Final Rule. A quick disclaimer before we get started, and you might recognize this disclaimer from any of the countless prior PPP updates we’ve provided over the last 3+ months or so. This is an INTERIM final rule – key word being interim, and meaning, there will be more. Below is our take on what just came out. Some of the guidance appears to actually contradict itself, so we just know further clarification and/or amendments are coming down the pike. When? It’s anybody’s guess. And as per usual with the Treasury’s offerings, many things are open to interpretation STILL!
There’s a lot to unpack here, so buckle up. We’re diving right in.
Covered Period. When you submit your forgiveness application, you’ll be required to specify whether you’re applying for forgiveness based on a 24-week OR an 8-week “Covered Period.” *Only loans disbursed before June 5 can elect to apply using an 8-week Covered Period.
Can I pick any 8-week period within my 24 weeks? No. This is strictly an either/or situation, no in-betweens. Your Covered Period must either be the 24-week (168-day) period – OR the 8-week (56-day) period – beginning on the date your loan was disbursed.
FTE. Lots of great news on this front, particularly for us hospitality people. First, and foremost, any reduction in FTE will now be FULLY excused if the borrower certifies that they were “unable to operate during their Covered Period at the same level of business as before February 15, 2020” because of federal regulations established between March and December requiring that the business maintain certain standards of sanitation, social distancing, and similar COVID-related safety requirements.
Huh? The SBA has essentially given you a pass on restoring your FTE, as long as you can certify that you haven’t been able to restore your normal business operations since receiving your PPP loan because of health/safety regulations being enforced by the CDC or OSHA. This is referred to as the FTE Reduction Safe Harbor 1.
What if I’ve been able to operate “normally” since getting my PPP? As long as you have the documentation to support it, you can still take advantage of the FTE Reduction Safe Harbor 2 or the FTE Reduction Exceptions.
FTE Reduction Safe Harbor 2 = Assuming that you reduced your FTE levels between February 15, 2020 and April 26, 2020, you’ll be given a pass on FTE as long as you restore your February 15, 2020 FTE levels by December 31, 2020.
FTE Reduction Exceptions = You won’t be penalized for any FTE reduction that resulted from an inability to rehire a pre-COVID employee, as long as you can prove that you were also unable to fill that position with a similarly-qualified individual by December 31, 2020. And, as a reminder, you also won’t be penalized for a lower FTE that resulted from any for-cause terminations, resignations, or any employee requests for reductions in hours/pay that occurred during your Covered Period.
December 31, 2020. As you probably remember, you initially had until June 30, 2020 to normalize your payroll in order to qualify for full loan forgiveness. Well, the PPPFA changed that deadline to December 31, 2020.
Why is this date relevant? This “deadline” only applies to you if you need to take advantage of the payroll-specific exceptions in order to qualify for full loan forgiveness, the details for which are outlined above. This date has absolutely nothing to do with your spending, nor does it extend the time you have to use your PPP money.
So do I need to keep people employed until December? No. The SBA has now clarified that your payroll levels (for purposes of the FTE Reduction Safe Harbor 2 or FTE Reduction Exemptions) will be measured as of the date you submitted your forgiveness application OR December 31, 2020, whichever is earlier. So while this means that you don’t necessarily need to maintain your payroll levels until December, you will need to ensure that your payroll remains normalized until the date you submit your forgiveness application.
Salary/Hourly Wage Thresholds. As a reminder, in order to qualify for full loan forgiveness, you can’t reduce employees’ salaries and/or wages by more than 25% during the Covered Period. The original interpretation of this was that we needed to pay all returning employees the equivalent of 8 weeks of their Q1 gross pay, irrespective of how much (if any) the employee had actually worked during the Covered Period; this was a calculation that we’d been applying to all employees, whether hourly or salaried, to be conservative, as we awaited further, more complete guidance.
Well, we have some good news! The newest set of instructions released by the SBA tends to indicate that an hourly employee’s pay threshold is measured as a per-hour rate of pay, as opposed to a per-week total extrapolated from the employee’s Q1 earnings. So, here’s where things stand now…
Salaried Employees = Any salaried employee that is re-hired or reinstated to your payroll during the Covered Period should, on average, make no less than 75% of their average annual salary from Q1. Our calculation for salaried employees essentially remains unchanged, but you should be mindful of the fact that if you are using the 24-week Covered Period, your returning salaried employees must be paid the equivalent of 24 weeks of their pre-COVID salary (or a slightly reduced version that still falls within 75% of their Q1 salary).
Hourly Employees = For any hours actually worked during the Covered Period, your returning hourly employees should be paid at 75% of their Q1 average hourly rate.
*We’re of the opinion that an employee’s average Q1 hourly rate should be calculated on a weekly basis (each week’s gross pay divided by that week’s total hours worked) and then averaged to reach a hourly wage rate for Q1.
Wait, what’s the real difference here? As long as an employee’s hourly wage rate is within 75% of what it was during Q1 2020, you’ve satisfied the necessary threshold. It’s our position that you no longer need to restore pre-COVID schedules, give employees extra hours to make up the difference, or worry about hitting certain take-home requirements for each employee on a week-to-week basis. So, irrespective of how many hours an employee actually works during the Covered Period – whether they’re on the payroll for all 24 weeks or just 1 – you would only need to match their hourly rate to their Q1 average to be in the clear.
Employee Compensation. Each employee’s cash compensation – the sum of all gross wages, tips, commissions, paid leave, and severance paid out to that employee during the Covered Period – remains capped at an annual salary of $100,000.
|24 WEEKS*||8 WEEKS|
|$46,154 maximum||$15,385 maximum|
* The SBA specifically notes that, since loan amounts were based on 2.5 x average monthly payroll, the per-employee maximums for the 24-week Covered Period will only be reached if you’ve reduced FTE by the permitted means listed above and then reallocated those funds to pay other employees.
Owner Compensation. Payments made to owners (owner-employees, self-employed individuals, or general partners) can be considered forgivable payroll costs, subject to the $100,000 annualized cap and the additional terms outlined below.
|24 WEEKS||8 WEEKS|
|2.5 months’ worth of 2019 compensation|
(capped at $20,833)
|8 weeks’ worth of 2019 compensation|
(capped at $15,385)
How do I calculate my 2019 compensation? The SBA has now explicitly stated that 2019 compensation should be calculated for each type of owner as follows:
C-Corporation Owner-Employees = 2019 employee cash compensation + employer retirement/health insurance contributions made of owner’s behalf
S-Corporation Owner-Employees = 2019 employee cash compensation + employer retirement contributions made on owner’s behalf*
* employer health insurance contributions cannot be separately added, as those payments should already included in their cash compensation
Schedule C Filers = owner’s compensation replacement based on 2019 net profit, as lasted on line 31 of last year’s IRS Form 1040 Schedule C
General Partners = 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235
Self-employed individuals, whether a Schedule C filer or a general partner, cannot add retirement and/or health insurance contributions as a supplement to their compensation because those amounts are already included in their net self-employment income.
The New App On The Block:
When the SBA made revisions to its standard forgiveness application, it also released a new short-form iteration of the same document known as the “EZ” application, and much to my chagrin, it was not cruisin’ down the street in it’s ’64 (that’s an Eazy-E reference. Not the best joke in the world, but I was desperate to force it in here. Sorry not sorry). And just as the name denotes, the EZ application allows certain borrowers to use a more simplified, streamlined process in order to apply for loan forgiveness.
Who can apply using the EZ application? In order to qualify, you’ll need to be able to certify, under penalty of fraud, that your circumstances satisfy one of the following:
- You do not have employees; or
- You did not reduce salaries or hourly wages by more than 25% during the Covered Period AND you did not reduce your FTE levels between January 1, 2020 and the end of the Covered Period; OR
- You did not reduce salaries or hourly wages by more than 25% during the Covered Period AND you qualify for the FTE Safe Harbor 1 (which, as a reminder, requires you to certify that you were unable to operate during the Covered Period at the same level of business activity as you were before the crisis).
What’s the difference between the two applications? The EZ form is not only shorter in length than the standard application, but it also eliminates the upfront requirement to submit extensive documentation to your bank. A borrower using the EZ form is only required to provide summarized totals for each category of covered PPP expenses, as opposed to affirmatively submitting detailed documentation verifying the total amount(s) spent in each category of costs (including, for example, a detailed per-employee breakdown of all payments made during the Covered Period). Needless to say, we want to avoid that at all costs.
What’s the advantage of applying with the EZ form? While the SBA and your bank still reserve the right to request additional documentation during their respective review(s) of your application, the EZ form only requires that you include your spending totals and very basic generalized documentation spending during the Covered Period. So if you want to reduce the risk of having your records opened up during the process, let’s make sure that you spend in a way that will allow you to qualify for the EZ application.
Trust the Process:
Forgiveness Application Process. You will be submitting your loan forgiveness application to your bank. Similar to the application process itself, each bank has discretion to implement its own intake process, whether via an online portal or otherwise. We’re hoping the banks had enough lead time at this point to get this right. I don’t have to remind anybody about the nightmare that was the original loan application process.
What’s the deadline for submitting my forgiveness application? Technically you have 10 months from the last day of your Covered Period to submit the forgiveness application. However, you may want to do so much earlier than that based on some of the conditions outlined above.
How soon will I know if I’ve been approved? The bank is required to issue its forgiveness decision to the SBA within 60 days of receiving your complete application. If they ask for additional documentation during this process, the 60-day clock starts over. Then, the SBA has 90 days to review and remit payment to the bank for the appropriate forgiveness amount plus any interest accrued, and, if applicable, with any EIDL advance deducted from the total being paid to the bank. At that point, it’s your bank’s responsibility to notify you of your approved forgiveness amount, the date it received payment from the SBA, and, if applicable, the date by which your first payment is due.
You can plan on a lot more being released soon about this process and what to expect. And as new info comes out, you know we’ll be there to break it down for you.
APRIL 2020 QUESTIONS AND ANSWERS
If we rehire people to use PPP proceeds, will they be giving up their right to full unemployment benefits?
Unfortunately, yes. Employees will not be eligible to collect full unemployment benefits for as long as they remain on your payroll.
This said, New York has waived the waiting period associated with unemployment benefit applications. So, to the extent you are not able to retain your staff beyond the 8 week covered period, your employees would be eligible to reapply for unemployment benefits without suffering a waiting period, and the unemployment benefits would be retroactive to the termination date.
Can I just hire family members and put them on payroll to meet these forgiveness requirements?
Borrowers are required to certify that they will spend this money in good faith on the permitted purposes. Simply hiring friends or family members in favor of laid-off staff would very likely run afoul of that certification. We encourage borrowers to try to rehire the same people who were on their payrolls prior to the pandemic.
To the extent that those same people are not willing to return to payroll, or cannot be located, then you are free to replace those employees with different employees. There is no penalty associated with doing so. In this case, we advise borrowers to ensure that any replacement employee is independently qualified for the position in question, and would be a suitable long-term replacement.
Can I reclassify a 1099 independent contractor as an employee in order to meet the forgiveness requirements?
Not necessarily. The reclassification of an employee can be an incredibly complicated process, and while you may ultimately be able to do this successfully, it is not as simple as having them re-hired and/or issuing new paperwork. As a general rule, please reach out to Lee Jacobs (email@example.com) and Megan Shaw (firstname.lastname@example.org) from our Employment Group before implementing any change like this one.
Can I apply for both the PPP and the EIDL?
Yes. However, you cannot apply for both loans if you are planning to use the loan proceeds for the same purpose. Said differently, you cannot double-dip for the same type of cost (e.g., rent, payroll, etc.). If the funds are used for different businesses expenses, not for duplicative purposes, you may apply — and be approved — for both loans. So for example, if you apply for the PPP and the EIDL, you may use the EIDL proceeds to pay vendors, and the PPP proceeds to pay payroll costs.
What if I’m approved for an EIDL – or the $10,000 advance – and then approved for a PPP?
The outstanding amount of an EIDL may be refinanced into a Paycheck Protection Program loan. In addition, any emergency EIDL advance received by a borrower who subsequently receives a PPP loan will be subtracted from the calculation of the loan forgiveness amount referenced above.