PPP Loan Forgiveness: Conditions, Exceptions and Safe Harbor Provisions

The Salary Protection Program (PPP) was regulated by the Coronavirus Aid and Economic Security (CARES) Law and administered by the Small Business Administration with support from the Treasury Department. The program, for which loan applications closed on August 8, aims to help small businesses retain their workforce, rehire laid-off employees, and pay for expenses such as loan interest, rents, and service fees. As Treasury Secretary Steven T. Mnuchin explained, "The$525 billion worth of 5.2 million loans to American small businesses under the PPP provided significant economic relief and supported 51 million workers." The best part of the Salary Protection Program is that PPP loans can be fully forgiven if certain criteria are met. Below are the criteria for maximizing the amount of PPP Loan Forgiveness, the exceptions that can be used, and the safe harbor provisions.

PPP Loan Forgiveness Covered Period

On March 27, 2020, the CARES law enacted on March 27, 2020 set the Covered Period for PPP lending at 8 weeks. On June 5, 2020, the PPP Flexibility Law came into force, increasing the Covered Period from 8 weeks to 24 weeks. For PPP loans taken before June 5, 2020, it is possible to choose the Covered Period as 8 weeks (56 days) or 24 weeks (168 days).

Normally, the Covered Period begins on the date the PPP loan is disbursed to the Borrowing Business, regardless of the date the loan agreement is signed. However, for administrative convenience, businesses that pay their employees every 2 weeks or more frequently may choose to use the Alternate Covered Salary Period, which begins on the first payday after the day of the PPP loan disbursement.

The Covered Period ends on December 31, 2020 in each case. Therefore, for loans disbursed after July 16, 2020, the Covered Period will be less than 24 weeks (168 days).

Employment Conditions for PPP Loan Forgiveness

The main objective of PPP Loans is to enable borrowing businesses to maintain their labor force levels. PPP loan customers are required to maintain an average Full Time Equivalent (FTE) workforce during the Covered Period (or Alternative Covered Salary Period) relative to a selected reference period. Otherwise, the amount of PPP Loan Forgiveness may be reduced in proportion to the reduction in Full Time Equivalent (FTE).

Reference Period

There are basically 2 options for the reference period:

1. February 15, 2019 - June 30, 2019
2. January 1, 2020 - February 29, 2020

For employers with seasonal workers, a third option is to use any 12-week period from May 1, 2019 to September 15, 2019. Employers with seasonal workers should use the 12-week period from May 1, 2019 to September 15, 2019 as the reference period for calculating the maximum PPP loan amount.

FTE Employment Calculation

The maximum value that the FTE can take is 1.0, and for employees working 40 hours or more per week, the FTE is taken as 1.0. For employees working less than 40 hours per week, the FTE is calculated by dividing the weekly working hours by 40 and rounding the quotient to the nearest tenth. Also, as a simpler method, it is preferable to take the FTE value as 0.5 for employees with less than 40 working hours per week. Total average FTE is obtained by summing the FTE values of all employees.

The amount of PPP Loan Forgiveness may be reduced if the average weekly FTE of the Borrower Business in the Covered Period (or Alternative Covered Salary Period) has decreased compared to the selected reference period.

In order to compensate for the reduction in FTE, the Borrower entities may rehire or hire new employees who were previously laid off or placed on unpaid leave.

FTE Reduction Exceptions

FTE workforce level reductions due to the following exceptions will not reduce the amount of PPP Loan Forgiveness:

1. After February 15, 2020, an employee who was laid off after February 15, 2020, has declined a written offer of rehire made in good faith by the employer and a similarly qualified employee cannot be hired for that position until December 31, 2020 or until the PPP Loan Forgiveness application is filed, whichever is earlier. If a former employee declines an offer of rehire, the employer must notify the appropriate unemployment office within 30 days.
2. During the Covered Period (or Alternate Covered Salary Period), a good faith offer made in writing by the employer to an employee whose hours have been reduced to reinstate the hours at the same salary or wage has been rejected and no new person has been hired for the position
3. In the Covered Period (or Alternative Covered Salary Period), the employee

1. dismissed for a valid reason
2. voluntary resignation
3. reduction of working hours at his/her own request

and no new person has been hired for this position.

Safe Harbor Provisions for FTE Reduction

Despite all good faith efforts by businesses receiving PPP loans, it may not be possible for them to increase the FTE workforce level to the reference period levels due to the current circumstances. Therefore, where any of the following safe harbor provisions apply, businesses will be exempt from the condition that the amount of PPP Loan Forgiveness is reduced due to a reduction in the FTE Workforce level.

1. The borrower will be exempt from the reduction of the amount of PPP Loan Forgiveness if its operations were partially or completely suspended between February 15, 2020 and the Covered Period due to regulations and guidelines issued by the Ministry of Health, the Center for Disease Control and Prevention and the Occupational Safety and Health Administration between March 1, 2020 and December 31, 2020 for the protection of sanitation standards, social distancing or employees and customers due to COVID.
2. If the borrower has reduced its FTE workforce level between February 15, 2020 and April 26, 2020, it will be exempt from the reduction of the PPP Loan Forgiveness amount if it increases its FTE workforce level to the FTE workforce level in the payment period covering February 15, 2020 by December 31, 2020.

Salary/Hourly Rate Conditions for PPP Loan Forgiveness

Businesses receiving PPP credits are also expected to maintain a certain income level for their employees. For each employee who earned $100,000 or less in annual compensation during any period in 2019, or who never worked for the business receiving the PPP loan in 2019, if their earnings in the Covered Period (or Alternative Covered Salary Period) are reduced by more than 25% from January 1, 2020 to March 31, 2020, the reduction in excess of 25% will be deducted from the PPP Loan Forgiveness amount.

For any period in 2019, employees earning more than $100,000 in annual equivalent earnings at the PPP Loan recipient will not be counted in the Salary/Hourly Wage Reduction calculation.

Safe Harbor Provision on Salary/Hourly Wage Reduction

Even if an employee's earnings have fallen by more than 25%, the borrower will be exempt from the requirement to reduce the amount of PPP Loan Forgiveness where the following safe harbor provision applies.

If an employee's annual salary or hourly wage was reduced to the February 15, 2020 level between February 15, 2020 and April 26, 2020, and the annual salary or hourly wage is increased to the February 15, 2020 level by the PPP Loan Forgiveness application date or December 31, 2020, whichever is earlier, the borrower will be exempt from the requirement to reduce the amount of PPP Loan Forgiveness due to the Salary/Hourly Wage Reduction for that employee.

Salary Expense Requirements for PPP Loan Forgiveness

Cash Salary Payments to Employees

All payments made to employees in cash, including tips, commissions, bonuses and risk payments, are forgivable salary expenses. When calculating cash salary payments, the gross amount before deducting taxes, social benefit payments and similar payments should be taken into account instead of the net amount paid to the employee.

For each employee, the total salary payment that may be eligible for PPP Loan Forgiveness may be up to a maximum of $100,000 per annum of salary pro-rated over the Covered Period.

If the 8-week Covered Period is used, the forgivable amount for each employee will be the lesser of $15,385 (the 8-week equivalent of $100,000 per year) or the sum of the cash payment paid to or earned by the employee during the Covered Period.

If the 24-week Covered Period is used, the forgivable amount for each employee will be the lesser of $46,154 (the 24-week equivalent of $100,000 per year) or the sum of the cash payment paid to or earned by the employee during the Covered Period.

Non-Cash Salary Payments for Employees

Non-cash salary payments made by the PPP Borrower for its employees during the Covered Period (or Alternative Covered Salary Period) that fall into one of the following categories will be eligible for PPP Loan Forgiveness.

1. Contribution payments made by the employer for the employee's health plans, excluding pre-tax or after-tax contributions made by employees
2. Contribution payments made by the employer for the employee's pension plans, excluding pre-tax or after-tax contributions made by employees
3. Total local and state taxes paid by the borrower for employee salaries (state unemployment insurance tax, etc.)

Payments to Business Owners

The amount of cash and non-cash payments made to business owners, self-employed individuals, and partners of collective undertakings who are employees of the business that may be used for PPP Loan Forgiveness may not exceed their 2019 earnings or the equivalent of $100,000 in annual earnings determined by the Covered Period.

If the 8-week Covered Period is used, the forgivable amount for payments to each person with business owner status may be the lower of $15,385 (the 8-week equivalent of $100,000 per year) or the 8-week equivalent of 2019 revenues.

If the 24-week Covered Period is used, the forgivable amount for payments to each person with business owner status may be the lower of $20,833 (2.5 months' equivalent of $100,000 per year) or 2.5 months' equivalent of 2019 revenues.

Expenses Applicable for PPP Loan Forgiveness

PPP Credits can be used for salary costs and other eligible expenses. However, at least 60% of the PPP Loan is expected to be spent on salary expenses as described above. Otherwise, the amount of PPP Loan Forgiveness will be reduced proportionally.

Current Salary Expenses

Businesses receiving PPP loans can generally use salary expenses paid or accrued during the Covered Period (or Alternative Covered Salary Period) for PPP Loan Forgiveness. Salary expenses are considered paid when paychecks are distributed or when the electronic transfer instruction is issued. Salary expenses are accrued when they are earned by the employee.

Normally, salary expenses must have been paid in the Covered Period (or Alternative Covered Salary Period). Salary expenses accrued before the Covered Period but paid during the Covered Period are eligible for PPP Loan Forgiveness. Salary expenses accrued but not yet paid as of the last day of the Covered Period (or Alternative Covered Salary Period) will be eligible for PPP Loan Forgiveness if paid on or before the next salary payment date.

Applicable Non-Salary Expenses

Current salary expenses consist of interest payments on business mortgage loans, rent payments for business purposes and other service expenses:

1. Interest payments on mortgaged real estate and movable (such as automobile loans) purchase loans for business purposes contracted before February 15, 2020, excluding principal payments
2. Payments before February 15, 2020 related to business lease and finance lease agreements
3. Payments for services that started before February 15, 2020, such as electricity, natural gas, water, telephone, transportation or internet

The Alternative Covered Salary Period applies only to salary payments. Therefore, only the Covered Period can be used for non-salary expenses. To be eligible for PPP Loan Forgiveness, non-salary expenses must be paid in the Covered Period, accrued in the Covered Period if the billing date is after the Covered Period, and paid on or before the next regular billing date. Valid non-salary expenses accrued before the Covered Period and paid in the Covered Period may also be included in the forgivable amount. Applicable non-salary expenses may not exceed 40% of the total amount forgiven.

PPP Loan Forgiveness Amount

In order for the PPP Loan to be fully forgiven or for the PPP Loan Forgiveness amount to be maximized, the PPP Loans must be spent in accordance with the criteria described above, the exception and safe harbor provisions must be taken into account and all expenditures must be accurately recorded and documented. Otherwise, the amount of PPP Loan Forgiveness will be reduced and the PPP Loan Forgiveness application may be partially or fully rejected.

If you would like to get information about PPP Loan Forgiveness or if you would like to get professional support in the PPP Loan Forgiveness application process, you can contact us.