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The Small Business Administration (SBA) continues to release more guidance about the Paycheck Protection Program provided under the CARES Act with new interim final rules that clarify the loan forgiveness process as well as PPP review procedures and related borrow and lender responsibilities. In this blog the Anthros team shares answers to the questions we’ve heard most often from clients who received PPP loans.

Q: When will SBA undertake a loan review and how long should borrowers keep their loan documentation?

A: SBA may undertake a review at any time. 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. (Interim Final Rule Loan Review Procedures, page 8)

Q: What effect does a reduction in a borrowers’ number of full-time equivalent (FTE) employees have on the loan forgiveness amount? (i.e. if have fewer full-time employees after receive the loan than at the time applied for the loan).

A: In general, a reduction in FTE employees during the covered period or the alternative payroll covered period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. For example, if a borrower had 10.0 FTE employees during the reference period and this declined to 8.0 FTE employees during the covered period, the percentage of FTE employees declined by 20 percent and thus only 80 percent of otherwise eligible expenses are available for forgiveness. (Interim Final Rule Loan Forgiveness, page 15)

Q: Will a borrower’s PPP loan forgiveness amount be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?

A: No. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation. (Question 40)

Q: Does the cost of a housing stipend or allowance provided to an employee as part of compensation count toward payroll costs?

A: Yes. Payroll costs includes all cash compensation paid to employees, subject to the $100,000 annual compensation per employee limitation. (Question 32)

Q: Are salary, wages, or commission payments to furloughed employees; bonuses; or hazard pay during the covered period eligible for loan forgiveness?

A: 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. (Interim Final Rule Loan Forgiveness, page 11)

Q: What is the general process to obtain loan forgiveness?

A: To receive loan forgiveness, a borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) to its lender (or the lender servicing its loan). As a general matter, the lender will review the application and make a decision regarding loan forgiveness.

The lender has 60 days from receipt of a complete application to issue a decision to SBA. If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for under the statute and applicable regulations, the lender must request payment from SBA at the time the lender issues its decision to SBA. SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its 8 decision to SBA.

The lender is responsible for notifying the borrower of the forgiveness amount. If only a portion of the loan is forgiven, or if the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or before the two-year maturity of the loan. (Interim Final Rule Loan Forgiveness, pages 7-8)

Q: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

A: SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. (Question 46)

Q: Is an employer that repays its PPP loan by the safe harbor deadline eligible for the Employee Retention Credit?

A:  Yes. An employer that applied for a PPP loan, received payment, and repays the loan by the safe harbor deadline will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer for purposes of the credit. (Question 45)

Q: The amount of forgiveness of a PPP loan depends on the borrower’s payroll costs over an eight-week period; when does that eight-week period begin?

A: The eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval. (Question 20)

Q: Do PPP loans cover paid sick leave?

A: Yes. PPP loans covers payroll costs, including costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act. (Question 8)

Q: The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000. Does that exclusion apply to all employee benefits of monetary value?

A: No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:

  • employer contributions to defined-benefit or defined-contribution retirement plans;
  • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
  • payment of state and local taxes assessed on compensation of employees. (Question 7)

How Businesses Can Spend PPP Money: The 75 / 25 Rule

In order to be forgiven, at least 75% of the PPP must be used for payroll costs, and 25% or less may be used for other authorized purposes.

Payroll costs include:

  • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
  • State and local taxes assessed on compensation;
  • Costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums.

Other authorized expenses include

  • Payments of interest (but not payments of principal) on any mortgage obligation;
  • Rent (including rent under a lease agreement);
  • Utilities; or
  • Interest (but not principle) on any other debt incurred before February 15, 2020.

Please do not hesitate to reach out the Anthros Team if you have questions about the Paycheck Protection Program.

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