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Paycheck Protection Program (PPP) - Loan Forgiveness Explained – REVISED Based on Interim Final Rule

The Coronavirus Aid, Relief, and Economic Stability (CARES) Act, passed on March 27, 2020, includes the Paycheck Protection Program providing businesses with favorable funding to help keep employees working at their normal salary levels.

Since its inception on April 3, 2020, more than four million loans have been guaranteed totaling $531 billion. With an overwhelming response to this Small Business Administration, SBA, loan program, employers seek ways to maximize their loan dollars and take full advantage of its forgiveness.

The CARES Act PPP Loan Forgiveness Provisions

Beside the favorable loan terms of 1% interest for two years, the loan comes with forgiveness. This provision “forgives” expenses the employer pays during the first 8-weeks following receipt of loan monies, as long as the employer uses funds primarily to maintain payroll costs and avoids reductions in headcount or salary. A separate forgiveness application is the mechanism for achieving forgiveness on the loan.

According to the law, there are three things that reduce the amount of loan forgiveness:

  1. Reduction in headcount
  2. Reduction in salaries
  3. Disproportionate amount of expenses paid toward non-payroll expenses

The law and the April 2, 2020 interim rules provide basic information on the forgiveness parameters. Throughout this program, the SBA continues to provide regular updates to their website to guide employers. As employers receive their loan funds, they need to understand just how to get the most out of the loan and its forgiveness. Emerging inquiries uncover the need for details regarding specific usage and calculations to maximize the loan's forgiveness feature.

SBA Releases PPP Loan Forgiveness Application and Interim Final Rule

The draft interim final rule for the Paycheck Protection Program (PPP) on loan forgiveness supplement the PPP Loan Forgiveness Application released on May 15, 2020. This new guidance provides some additional clarifications and examples, not part of the 11-page application or its instructions, and provides much of the help borrowers need to maximize their loan forgiveness.

The following FAQ includes the forgiveness provisions of the law, interim guidance, and guidance from both the application and the interim final rule.

Application Process and Covered Period

  • Employers may apply electronically or by paper through their lender.
  • The borrower completes and submits the loan forgiveness application to the lender.
    1. The lender has 60 days to determine loan forgiveness entitlement
    2. The lender issues the forgiveness amount determination to the borrower and the SBA within 60 days
    3. If eligible for loan forgiveness:
      1. entitled, the lender must request payment from the SBA at the time it issues its forgiveness determination
      2. Loans, or loan applications, not subject to SBA review:
        1. The SBA remits payment within 90 days to the lender, including any accrued interest through the payment date, deducting any EIDL Advance Amounts borrower received, if applicable
        2. The SBA will deduct EIDL Advance amounts
      3. Loan, or loan applications, subject to SBA review:
        1. A separate interim rule, SBA Loan Review Procedures, and Related Borrower and Lender Responsibilities, will describe its process and procedures
    4. If not eligible for loan forgiveness or only a portion of the loan is forgivable, any remaining balance must be repaid by the borrower on or before the end of the two-year term
  • The “covered period” (CP) begins the day of the PPP funds disbursement, i.e. date funds are received, and ends 56 calendar days after that date. [The CP for funds received on April 20 is Monday, April 20 – Sunday, June 14.]
  • Employers with bi-weekly pay periods (or more frequent) may select an “Alternative Payroll Covered Period” (APCP) that begins on the first day of their first payroll following their PPP loan disbursement date. (If loan proceeds are received April 20 and the employer's first payroll period following that day begins April 26, then the APCP is Sunday, April 26 through Saturday, June 20.)


Amount Eligible for Loan Forgiveness

  • Payroll costs consist of:
    • compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation;
    • cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);
    • payment for vacation, parental, family, medical, or sick leave;
    • allowance for separation or dismissal;
    • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement;
    • payment of state and local taxes assessed on compensation of employees; and
    • for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation
    The Act expressly excludes the following:
    • Any compensation of an employee whose principal place of residence is outside of the United States;
    • The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
    • Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
    • Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127)
    Eligible expenses include payroll costs incurred and payroll costs paid in the CP or APCP
    1. Incurred = day the employee’s pay is earned - i.e. the day the employee worked [For employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower – typically, each day the employee would have performed work]
    2. Paid = date the paycheck is distributed or date ACH initiated
    3. Incurred but not paid in last payroll of CP or APCP = includable if paid on or before the next regular payroll period following the end of the CP or APCP
    1. Cash compensation – includes gross salary, wages, tips, commissions, paid leaves (vacation, family, medical, or sick leave but not including leave covered by the Families First Coronavirus Response Act, FFCRA), and allowances for dismissal or separation. (Cash compensation limited to an annual salary of $100,000, i.e. $15,385 in CP/ APCP.) This includes, compensation to owner-employees, self-employed individuals, and general partners capped at the lower of $15,385 or the 8-week equivalent of their applicable compensation in 2019.
    2. Health Insurance Costs – Total amount of employer contributions for employee health insurance, including self-insured and employer-sponsored group health plans – this excludes any pre or after-tax contributions by employees.
    3. Retirement Costs – Total amount of employer contributions to employee retirement plans excluding any pre or post-tax contributions by employees.
    4. Taxes – State and local taxes assessed on employee compensation, e.g. state unemployment insurance – do not include any taxes withheld from employee earnings
  • Yes. These fall into the definition of “payroll costs”. As long as the borrower pays the furloughed employees their salary, wage, or commissions during the covered period, they are eligible for loan forgiveness. Likewise, hazard and bonus pay are eligible as a supplement to salary or wage. REMINDER: any payroll costs exceeding an annual maximum salary of $100,000 for the prorated period, i.e. $15,385, will not be eligible for loan forgiveness.
  • Yes. Payroll compensation for these individuals can be no more than the lesser of 8/52 of their 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual in total across all businesses.

    In particular, owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf. Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit. 3 General partners are capped by the amount of their 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. No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as such expenses are paid out of their net self-employment income.

  • Payments made during the CP or incurred during the CP and paid on or before the next regular billing date, for the following arrangements entered into prior to February 15, 2020:
    1. Mortgage interest payments for obligations on real or personal property, excluding advance payments or prepayments;
    2. Business rent or lease payments for real or personal property; and
    3. Payment for utility services including electricity, gas, water, transportation, telephone, or internet
    4. These three items are collectively referred to as “non-payroll costs”. Total non-payroll costs may not exceed 25% of the total forgiveness amount.


Reductions to Loan Forgiveness Amount

  • The percentage of employee retention from the CP or APCP compared to the employer-chosen reference period. Dividing these two numbers results in a percentage. This percentage is then applied to the total forgiveness proceeds.
    Reduction Determination – based on Full-Time Equivalent (FTE) Employees
    1. Average number of FTE employees/mo. → during CP or APCP
    2. ÷ Average number of FTE employees/mo. → 2/15/19-6/30/19 or 1/1/20-2/29/20 (employer’s choice)
    3. Seasonal employers may also choose a consecutive 12-week period between 5/1/19 and 9/15/19 or either of the two periods listed above
    Calculating Full-time Equivalent (FTE) Employees
    1. Employers may choose one of two ways to calculate full-time equivalent employees:
      1. Actual = for each employee, take the average number of hours worked per week, divide by 40, and round to the nearest tenth
      2. Simplified = Count each full-time employee working 40 hours or more per week as 1.0 and each employee who works less than 40 hours per week as 0.5.
    FTE Employee Exemptions
    1. Do not count employees for whom, a good faith, written offer, of rehire was made during CP/APCP but was declined by employee; or
    2. who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours;
    3. AND these positions were not filled by a new employee
    FTE Employee Safe Harbor
    1. Employer is exempt from FTE employee reduction if:
      1. The employer reduced its FTE employee levels in the period beginning February 15, 2020 and ending April 26, 2020; AND
      2. The employer restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the pay period that included February 15, 2020
  • When attributable to an individual employee if:
    1. the borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
    2. the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
    3. the offer was rejected by such employee;
    4. the borrower has maintained records documenting the offer and its rejection; and
    5. the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer
  • A salary/hourly wage reduction of 25% or more, for a particular employee, when comparing annualized salary/hourly wage during the CP/APCP to the annualized salary/wage for the period of January 1, 2020 through March 31, 2020.
    1. Applies to each individual whose principal place of residence is in the United States and whose annual 2019 compensation was $100,000 or less or who did not work for the employer in 2019
    2. Employees who worked at any point during the CP/APCP whose principal place of residence is in the United states and whose pay in any period of 2019, when annualized, is more than $100,000 is not subject to this reduction provision
    Reduction Determination
    • $ Average annual salary/hourly wage during CP or APCP
    • ÷ $ Average annual salary/hourly wage during the period of 1/1/20-3/31/20
    • No reduction to loan if result is 75% or more
    • If less, see safe harbor and reduction calculation
    Salary Restoration Safe Harbor Exemption
    • Eligibility - if annual average salary/hourly wage for the period of February 15, 2020 to April 26, 2020 is less than the average annual salary/hourly wage as of February 15, 2020
    • Applicability - if the average annual salary/hourly wage as of June 30, 2020 is equal or greater than the average annual salary/hourly wage as of February 15, 2020, then there is no reduction
    Per person reducation calculation
    • $ Average annual salary/hourly wage during 1/1/20 – 3/31/20 x 0.75
    • $ Average annual salary/hourly wage during CP or APCP
    • $ Salary/hourly wage difference (*)


    • If salary = $ Salary difference* x 8 ÷ 52
    • If hourly = average hours worked per week for 1/1/20-3/31/20 x hourly wage difference* x 8

    FTE Employee Safe Harbor

    Employer is exempt from FTE employee reduction if:

    • The employer reduced its FTE employee levels in the period beginning February 15, 2020 and ending April 26, 2020; AND
    • The employer restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the pay period that included February 15, 2020


Certifications and Documentation Requirements

  • Employers will initial and certify a number of items including:
    1. All funds were used for PPP-eligible expenses, e.g. payroll costs, business mortgage interest, business rent or lease payments, or business utility payments
    2. The form includes all applicable reductions based on FTE employee and salary changes
    3. Non-payroll costs do not exceed 25% of the amount requested
    4. Understanding that if proceeds were used for non-eligible purposes, the federal government may pursue recovery and/or criminal fraud charges
    5. Required documentation and tax documents submitted to the lender are accurate and applicable and that the SBA may share these documents with authorized representatives
    6. Understanding that the SBA may request additional information, as necessary
  • SUBMIT Documents required for submission with PPP Loan Forgiveness Application
    • PAYROLL: Bank accounts statements, payroll service reports for CP/APCP time periods. tax forms covering CP/ APCP period, payment receipts, cancelled checks, Form 941 and other applicable tax forms, state wage reports, supporting documents showing employer contributions to employee health insurance and retirement plans
    • FTE: Documentation showing FTE counts for CP/APCP and employer-chosen reference period, including payroll tax filings reported or to be reported (e.g. Form 941), state quarterly business and individual employee wage reporting
    • Non-Payroll: Verification of existence of mortgage interest, rent or leasing arrangements, and utility services prior February 15, 2020, cancelled checks, account statements, copies of agreements, invoices ---expense documentation should cover CP/APCP time period plus one month after the CP/APCP time period ends
    MAINTAIN Documents that each borrower must maintain (submission not required
    • PPA Schedule A Worksheet, including FTE Reduction Safe Harbor calculationListing of each individual employee, their salary information, and FTE employee status, information on individuals with salaries in excess of $100,000 in 2019Employee status changes including employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule
    • Listing of each individual employee, their salary information, and FTE employee status, information on individuals with salaries in excess of $100,000 in 2019
    • Employee status changes including employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule


For additional insights on stimulus guidance that employers can leverage the wake of the COVID-19 pandemic, visit the  OneDigital Coronavirus Stimulus Guidance Page, or reach out to your local OneDigital advisory team.