Paycheck Protection Program Forgiveness Guidance Issued

Regulation | May 29, 2020 | by

New federal guidance on the Paycheck Protection Program details how borrowers can secure loan forgiveness.

On May 22, the Small Business Administration (SBA) and the Department of the Treasury issued guidance for Paycheck Protection Program borrowers on loan forgiveness. Under the CARES Act, the full amount of PPP loans can be forgiven if borrowers maintain their payroll and staffing levels. PPP loans were disbursed starting in early April, and loan forgiveness will be available in coming weeks.

The guidance document and the accompanying Loan Forgiveness Application detail how borrowers can secure full forgiveness. This article is meant to summarize the guidance for LeadingAge members.

LeadingAge will continue to monitor regulatory and legislative activity related to PPP and keep our members informed. Members may reach out with questions or concerns to

June 4 update: This guidance was issued before Congress passed the Paycheck Protection Program Flexibility Act, which modifies many of the terms of the PPP loans. Once that bill is enacted, SBA and Treasury would likely issue new or updated guidance to reflect the program's modifications. 


Loan Forgiveness Process

Borrowers should complete the Loan Forgiveness Application to their lender. Lenders will likely program the application into their respective web platforms, so be sure to see what information specific lenders share on this matter.

Once a borrower submits the application, lenders have 60 days to issue a decision on forgiveness to SBA. SBA then has 90 days to confirm loan forgiveness, including completing any review of individual loans for compliance with PPP rules. Previous guidance from SBA indicates that the agency will review all loans over $2 million before confirming forgiveness.

If SBA determines in its review of the loan that borrowers were not eligible for PPP loans, the forgiveness application will be denied. SBA will communicate the outcome of its review to lenders, who are then responsible for sharing that with borrowers. In other words, borrowers will primarily communicate with their lender.

Payroll Costs

The guidance addresses several aspects of the payroll costs of the PPP loan, which by regulation must account for at least 75% of loan funds.

Allowable Payroll Costs

The CARES Act and subsequent guidance have defined payroll costs broadly, which this guidance reflects. Specifically, included payroll costs are: “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, wages, commissions, income, or net earnings from self-employment, or similar compensation.”

Timing of PPP Funds for Payroll

The May 22 guidance provides borrowers with two options for how to schedule the use of their PPP loan funds.

Specifically, borrowers may use the loan funds for 8 weeks (56 days) starting on either the day they receive funds from their lender or the first day of the first payroll cycle in the eight week period. So, a borrower could receive their loan funds on a Wednesday and use the loan funds starting either that day or whenever the next payroll cycle started, such as the following Monday. The guidance notes that this will help borrowers match the PPP loans with their existing payroll schedules, reducing administrative burden associated with the loan.

Payroll for Furloughed Workers

A key goal of the PPP is to continue getting paychecks to workers, even if their employer is closed and they are furloughed. As such, this new guidance confirms previous language from the federal government, that pay for furloughed workers is a forgivable use of PPP funds up to an annualized salary of $100,000.

Forgiveness of Bonus and Hazard Pay

Hazard pay and bonus pay are forgivable uses of PPP funds and can be forgiven so long as the employee’s total compensation does not exceed $100,000 on an annualized basis.

Non-Payroll Costs

Per federal regulation, up to 25% of PPP loan funds may be used for non-payroll costs, specifically rent, mortgage interest (not principal) and utilities.

Utilities identified in the guidance for which PPP funds may be spent and forgiven include “electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.”

Non-payroll costs can be forgiven if they were paid during the eight week loan period or if the costs were incurred during the eight week period but paid for after the fact (e.g., a utility bill paid for July costs that is due in August).

Borrowers may not use PPP loans to prepay or otherwise make advanced payments for mortgage interest.

Loan Forgiveness Reduction and Safe Harbor

PPP loan forgiveness is conditioned on borrowers maintaining their payroll, both with respect to their FTE staffing and with how much staff are paid. The guidance addresses multiple scenarios in which borrowers could see the amount of their loan that is forgiven reduced (and thus would have to pay back some of their loan). It also provides safe harbor from certain situations to protect loan forgiveness.

Attempted Rehires/Hours Restoration

The guidance provides accommodation for borrowers who have laid off staff or reduced staff hours. Specifically, if borrowers offer to rehire laid off employees at the same salary and same number of hours as when they were laid off, or if they offer to restore reduced hours, they are exempt from losing loan forgiveness if affected staff reject those offers. Here is the process outlined in the guidance for how to document this process.

  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.

Reduction of FTE

If a borrower reduces their FTE count, their PPP loan forgiveness will be reduced by the same percent as the FTE reduction. The guidance outlines how to calculate this.

  1. First, borrowers should select a reference period. Per the guidance, the reference period can be February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020. Seasonal employers have more flexibility on choosing a reference period, but that is likely not applicable to aging services.
  2. The average number of FTE employees during the reference period will be compared to the eight week period used for payroll in the PPP loan.
  3. If the average number of FTEs during the loan period is less than that of the reference period, loan forgiveness will be reduced by that percentage.

For example, if a borrower had an average of 10 FTEs during the reference period but 8 FTEs during the loan period, their loan forgiveness would be reduced by 20%. 80% of their loan would be forgiven, and they would have to repay 20% of what they received.

The guidance also directs borrowers how to calculate their FTE counts. Specifically, “borrowers must divide the average number of hours paid for each employee per week by 40, capping this quotient at 1.0. For example, an employee who was paid 48 hours per week during the covered period would be considered to be an FTE employee of 1.0.”

For part time employees, borrowers may either calculate based on a formula of (hours worked)/(40 hours), which would return counts such as .75 FTE for employees working 30 hours per week or .25 FTE for those working 10 hours per week, or can assume .5 FTE for each part time employee. Only one of these options may be used and must be applied to all part-time employees.

An exception applies to this part of loan forgiveness reduction if FTE cuts are restored by June 30. Specifically, “if a borrower eliminates any reductions in FTE employees occurring during the safe harbor period by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees”.

Reduction of Salary

Loan forgiveness will be reduced by employee if borrowers reduce salaries by 25% or more.

Specifically, “for each new employee in 2020 and each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25 percent of base salary or wages between January 1, 2020 and March 31, 2020 (the reference period)”.  

Reduction is calculated by each employee, not by an average across employees or otherwise in aggregate.

An exception applies if salary cuts are restored by June 30. Per the guidance, “if certain employee salaries and wages were reduced between February 15, 2020 and April 26, 2020 (the safe harbor period) but the borrower eliminates those reductions by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in salaries and wages.”

Borrowers cannot be doubly penalized due to cuts in FTE and salary. Specifically, the guidance says “To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.”

Firing for Cause, Resignations and Schedule Reduction Requests

PPP borrowers will not have their loan forgiveness reduced if an employee is “fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule”. In these cases, borrowers can “count such employee at the same full-time equivalency level before the FTE reduction event when calculating” their FTE levels for loan forgiveness.