PPP Update: Forgiveness Rules

Posted By Mike Meyer, Thursday, May 28, 2020


By Patrick O'Brien, JD, legal coordinator, American Med Spa Association

Over the weekend, the U.S. Department of the Treasury has published the new Interim Rules for Loan Forgiveness for the Paycheck Protection Program (PPP). As we have covered in the past (see here), this program has had almost constant updates and refinements. The week prior, the U.S. Small Business Administration (SBA) and Treasury released an application for loan forgiveness that answered many questions. The rules confirm a few key issues left over from the forgiveness application; you can read the rules here. Also, you can visit the Treasury's PPP resource page, which includes rules, an FAQ and the interim rules. Many of the resources are technical in nature, aimed primarily at issues for lending banks or larger businesses. We will discuss a few of the highlights from the rules in this post.

Payroll costs that are eligible for forgiveness were greatly clarified. Because the eight-week forgiveness period may not perfectly match up with a business's pay periods, a few changes were designed to make it easier. One is to allow payroll costs that are incurred (e.g. earned by the employee) and/or paid during the period. This means that wages earned during the eight-week period but paid afterward are still forgivable, provided they are paid no later than the next regular pay date. The other option allows the borrower to use a different eight-week period that matches up with their regular weekly or bi-weekly pay schedule. Also, the rules clarify that both bonuses and hazard pay are eligible for forgiveness, provided they do not exceed a $100,000 annual salary, prorated to the eight weeks.

For non-payroll costs, the rules provide similar flexibility. While the start and end dates of the eight weeks is fixed, funds paid after the end of the period can be forgivable as long as the obligation occurred during the eight weeks and it is paid on or before the next scheduled payment date. Also, non-payroll expense payments on leases or interest on debt for personal property are also forgivable. This was previously assumed limited to rent or mortgage interest on real property or office space; however, this clarification opens up a number of expenses on equipment that are eligible to be forgiven.

The rules also contain major clarifications on the two ways the forgivable amounts can be reduced. Under the program, the amount that can be forgiven is reduced if you have fewer full-time employees (FTE) than before, or if you have reduced their wages more than 25%; the forgivable amount of the loan can be reduced based on the amount each employee's wages were reduced by more than 25%. As an example, if an employee was making $1,000 per week and it was reduced to $700, the forgivable amount of the loan would be reduced by $50 per week—the first $250 being the allowed 25% reduction.

The forgivable amount can also be reduced by the ratio of FTE you had during the eight-week period versus an eight-week measurement time prior to the pandemic. The rules define FTEs as an employee who works 40 hours or more per week. The rules also provide two ways to calculate your FTE numbers, both for the forgiveness period and for the regular measurement period. In this section, each FTE is equal to 1.0, regardless of how many more hours than 40 they work. Each part-time employee is counted as a decimal based on how many hours they typically work, with 30 hours being worth 0.75, 20 hours 0.5, and so on; an alternate simplified rule counts each part time employee as simply 0.5. Borrowers will want to try both calculations to determine which is the most beneficial to their situation.

Fortunately, the rules also provide a number of exceptions and a safe harbor to help lessen the impact of this reduction rule. Changes in employment levels will not count against the borrower if the employee was fired for cause, voluntarily resigns or reduces hours, or rejects a written offer of re-employment. To be clear, only that single FTE loss will not be used, but the forgiveness may still be reduced if there are other reductions in the FTE level. There is also a safe harbor, where if the employer restores the FTE levels by June 30, any FTE reduction will not be used to reduce the forgivable amount.

As we stated before, these rules and the application are still fairly complex, and any borrower will want to seek expert guidance on filling them out properly. If the past is any indicator, there will likely be additional refinements to them.

AmSpa has gathered a number of resources to help our members through this time in our Coronavirus Resource Center, as well as putting together a Re-opening Checklist and Toolkit. We also have frequent webinars on the PPP and discuss issues and updates to the PPP and other relief programs; check the resource center frequently for future dates.

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