Key Provisions of the PPP Loan Forgiveness Request Released by the Treasury Department | Balch & Bingham LLP
KEY POINTS TO REMEMBER
- Borrowers using bi-weekly and weekly payroll schedules may choose to use an alternate payroll covered period that begins on the first day of the first payroll period following disbursement of the PPP loan.
- Certain eligible payroll and non-payroll costs incurred, but not paid, during the Covered Period (or Alternate Payroll Period) may be waived if paid on or before the next pay date. the normal billing date.
- Employers are exempt from FTE reduction calculations to the extent former employees reject a rehire offer in good faith, were terminated for cause, voluntarily resigned, or requested and received a reduction in hours.
On Friday, May 15, 2020, the Treasury Department released the Paycheck Protection Program (“PPP Loan”) Pardon Application for Borrowers (the “Application”). An interim final rule on PPP loan relief and other guidelines are expected to be released as early as this week. This Client Alert provides a brief overview and interpretation of the key provisions contained in the Application. The complete application can be found here.
Pay schedule flexibility [p. 1]
The application offers some borrowers some flexibility as to when to begin their eight-week (56-day) period for using PPP loan proceeds. Borrowers using a fortnightly Where monthly the payroll schedule must begin this period on the date the PPP loan was disbursed (“covered period”). However, borrowers who use bi-weekly Where weekly the payroll schedule may use the Covered Period or, at its discretion, may begin this period on the first day of the first pay period following the date the PPP Loan was disbursed (“Alternate Payroll Covered Period”). The reason why the request limits the period covered by the alternative payroll to bi-weekly and weekly payroll schedules, but it is suspected that additional guidance on this issue could allow for broader use of the period covered by alternative payroll.
Summary of costs eligible for rebate [p. 4]
Eligible salary costs are generally reimbursable if:
- Equal to an amount equal to at least 75% of the total amount of the discount; and
- Have been incurred or paid during the covered period (or the period covered by the alternative payroll).
However, payroll costs incurred, but not paid, in the last pay period of the Covered Period (or Alternate Payroll Covered Period) may be waived if paid on or before the next pay date. , even if it is later than the end of the period. Borrowers can only recognize a salary cost once, either when it is incurred or when it is paid. Although the request is not clear on this point, based on the strict eight-week (56-day) period, our interpretation is that any salary costs incurred before the start date of the period cannot be included in calculation of the rebate, regardless of when it is paid.
For more information on what is considered payroll costs, see the Paycheck Protection Program Interim Final Rule published April 2, 2020 (85 FR 20811).
Eligible non-salary costs are generally exempt if:
- Equal to an amount not exceeding 25% of the total amount of the rebate; and
- Have been incurred or paid during the Covered Period.
However, non-payroll costs incurred but not paid during the Covered Period may be waived if paid by the next regular billing date, even if later than the end of the period. Eligible non-salary costs include:
- Mortgage bonds covered: interest payments (excluding any prepayment or principal payment) on any commercial mortgage obligation on real or personal property incurred before February 15, 2020
- Lease obligations covered: professional rents or rents paid under rental contracts for real estate or movable property in force before February 15, 2020; and
- Covered utility payments: commercial payments for an electricity, gas, water, transport, telephone or Internet access service whose service began before February 15, 2020.
As with salary costs, a non-salary cost can only be counted once, when it is incurred or when it is paid. The request is silent on the use of the alternate payroll coverage period for non-payroll costs. Additional tips may clarify.
Average reduction of FTE employees [Instructions for PPP Schedule A Worksheet pp. 7-8]
The application provides for the reduction of the PPP loan forgiveness amount based on any reduction in the average number of full-time equivalent (FTE) employees during the Covered Period (or Alternate Payroll Period) relative to 1) February 15, 2019 to June 30, 2019 or 2) from January 1, 2020 to February 29, 2020. To calculate the average FTE, the Borrower must calculate the average number of hours worked per week and divide by 40 and round to tenths the closer (capped at 1.0). Alternatively, the borrower can use a simplified calculation of 1.0 for all employees working 40 hours or more per week and 0.5 for all employees working less than 40 hours per week. Borrowers are exempt from the FTE reduction calculation to the extent that former employees:
- Reject a bona fide written offer of rehire;
- have been terminated for cause;
- Voluntary resignation; Where
- Voluntarily requested and obtained a reduction in hours.
In addition, an ETP safe harbor allows a borrower to avoid a discount reduction. In order to qualify for Safe Harbor, the borrower must have, out of the total number of FTE employees for the pay period that includes February 15, 2020:
- Had a reduction in the number of FTE employees between February 15, 2020 and April 26, 2020, and
- Withdrawal of said reduction before June 30, 2020.
Wage or hourly wage reduction [Instructions for PPP Schedule A Worksheet pp. 7-8]
The application provides for the reduction of the amount of the PPP loan forgiveness based on a reduction of 25% or more in an individual employee’s salary or hourly wage during the covered period or the period covered by the alternative pay compared to average wage or hourly wage. during the first quarter of 2020 (from January 1, 2020 to March 31, 2020).
The Application does not specifically provide a safe harbor for wages or hourly wages, but does mention that a Borrower who reinstates wages or hourly wages may eliminate the reduction. Based on the CARES Act, we anticipate that new guidance will clarify whether the same test used for ETP safe harbor will be applicable to salary or hourly safe harbor. Additionally, while not specifically exempt under the claim from wage or hourly wage calculations, we interpret that only employees who are employed throughout the Covered Period or Alternate Payroll Covered Period are included in the calculation.