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New SBA Forgiveness Guidance Offers Clarity + Comfort for Borrowers

Smart Summary

  • New guidance offers clarity on FTE calculation, paid employees who are not working, the authorization of special bonuses, and the process of authorizing forgiveness.
  • Borrowers should focus on choosing the correct method for FTE calculation in order to optimize their forgiveness eligibility.
  • SBA guidance continues to add increased flexibility for borrowers.  

On the heels of providing the PPP Loan Forgiveness Application early last week, the SBA and the Treasury issued additional guidance relating to both forgiveness generally and the manner in which Forgiveness Applications will be reviewed by lenders and the SBA. The newest guidance provides clarity with respect to several areas and the overall tone of the guidance seems to be more borrower-friendly in general. To be sure, many questions remain, but there are some positive conclusions to be reached based on the more recent guidance.


What happens if I received a loan, but I was not eligible?
At the very least, your loan will not be forgiven. Additionally, the SBA may require you to repay the loan amount. Finally, the SBA may pursue “additional remedies.”

How should I calculate FTEs?
As discussed in my previous article, the Forgiveness Application clarified that FTEs are calculated based on 40 hours per week. Additionally, the Forgiveness Application seemed to allow a borrower to count all part-time employees as 0.5 FTEs, regardless of how many hours they actually worked. The new guidance makes clear that this is an alternative to the standard FTE calculation approach. A borrower may only calculate all part-time employees as 0.5 FTEs or calculate all FTEs in accordance with the traditional approach. Whatever approach a borrower chooses, it must apply the same approach to all employees. Therefore, a borrower that has many employees that would count as 0.75 FTEs under the traditional approach would not find much benefit from the new approach because those employees counting as 0.75 FTEs would have to count as 0.5 FTEs. The examples below clarify this point:

Example. Borrower has 4 employees: Employee A works 40 hours per week, Employee B works 35 hours per week, Employee C works 30 hours per week, and Employee D works 5 hours per week.

  • Traditional Approach. Under the traditional approach, Borrower would determine the number of FTEs by dividing each employee’s service hours by 40 and rounding to the nearest tenth. Then, the sum is Borrower’s total FTEs. Any employees working more than 40 hours are capped at 1.0 FTE. Employee A would count as 1.0 FTE. Employee B would count as 0.88 FTEs. Employee C would count as 0.75 FTEs. Employee D would count as 0.13 FTEs. Accordingly, Borrower would be able to claim 2.76 FTEs
  • New Approach. Under the new approach, Borrower would determine the number of FTEs by dividing each employee’s service hours by 40 and rounding to the nearest tenth. Then, the sum is Borrower’s total FTEs. Like the traditional approach, employees at or above 40 service hours are capped at 1.0. Unlike the traditional approach, all part-time employees count as 0.5 FTEs. Therefore, Employee A would still count as 1.0 FTE. Employee B would count as 0.50 FTEs. Employee C would count as 0.5 FTEs. Employee D would count as 0.50 FTEs. Accordingly, under the new approach, Borrower would be able to claim 2.50 FTEs.
  • Takeaway. Although this is a very simple example, it demonstrates that borrowers will need to take stock of their specific situations to ensure they are taking advantage of the approach that results in the most FTEs for purposes of forgiveness when compared to the borrower’s historical period. As a general rule, the more employees a borrower has who work more than 20 hours per week, the less ideal the new approach is for a borrower seeking forgiveness. However, the more employees a borrowers has who work fewer than 20 hours per week, the more favorable the new approach becomes.

How do I account for employees who have not worked, but remained on payroll?
The Forgiveness Application provided that payroll costs are incurred on the day the employee earns the wages (i.e. works). However, the application was silent with respect to employees on payroll who were not working. The new guidance provides that payroll costs for employees who are not working, but have remained on payroll, are incurred based on the schedule established by the borrower. The guidance provides an example relating to the days the employee would normally have worked, but does not make any such mandate with respect to a borrower’s pay schedule. For purposes of FTE calculation, such employees would presumably be calculated based on the service hours for which they received payment in accordance with the same schedule. For example, an employee who does not work but is paid for 20 service hours would count as 0.5 FTEs.

Are bonuses authorized?
The new guidance expressly authorized bonuses, subject to the $15,385 cap on employee cash compensation during the covered period.

What if an employee has his or her hours reduced and, accordingly, their pay reduced? Will this be counted against me twice for purposes of reduction to the forgiveness amount?
No. 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. For example, if an employee has his or her hours cut in half, but the wages remain the same, it would follow that not only would the borrower see a reduction in FTEs, but there would also be a reduction in that employee’s salary in excess of 25% percent, resulting in yet another reduction. However, because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE employee reduction and the borrower is not required to conduct a salary/wage reduction calculation for that employee.

Who will be reviewing my Forgiveness Application?
The lender from which you received your loan will review your forgiveness application. The SBA will act as a backstop and may review loans at its discretion. If you receive an inquiry from the SBA, it will be your responsibility to respond. Should you fail to respond to SBA’s inquiry, then the SBA may find that you were ineligible for a PPP loan or ineligible to receive the loan amount or your claimed loan forgiveness amount.

What will a person reviewing the Forgiveness Application be looking at?
Although they have discretion to review all parts of your application, the review will likely focus on:

  1. Eligibility based on the guidance available at the time of the application;
  2. The borrower’s calculation of its loan amount;
  3. Whether the funds were used for permitted purposes; and
  4. The accuracy of the forgiveness amount for which the borrower applied.

When will I receive a decision as to forgiveness?
Your lender will render a decision within 60 days of the completion of your Forgiveness Application. Once your lender issues its decision, the SBA will have an additional 90 days to review the loan, loan application, and remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment.

What if forgiveness is denied in whole or part?
If the lender denies forgiveness, then the lender must notify the borrower in writing that the lender has issued a decision to the SBA denying the loan forgiveness application. Within 30 days of receiving notice from the lender, you may request that the SBA review the lender’s decision.


Regulatory Tone.
The newest guidance seems to imply that the SBA will likely pursue loan repayment in most cases of an ineligible recipient or misuse of loan funds. To be clear, the SBA does not explicitly confirm such a policy, but there are several examples throughout the guidance that provide some insight into SBA policies. For instance, with respect to an ineligible borrower who received loan funds, the SBA makes a reference to “additional penalties.” We know from the previous guidance that the “additional remedies” include civil or criminal penalties. However, given that the SBA simply refers to additional remedies as opposed to explicitly saying that it will pursue civil or criminal penalties, it represents a change in regulatory tone that could shed some light on the SBA’s policies favoring loan repayment in most cases, while reserving penalties for those most egregious cases. Additionally, the SBA has prevented double-counting with respect to forgiveness reductions. Although this is reading between the lines a bit, borrowers who have acted in good faith should take some solace in this recent tone.

Increased Flexibility.
Another theme of the newest guidance is that the SBA and the Treasury have sought to provide flexibility to borrowers in several areas. Namely, there are options for borrowers to increase the use of their funds and forgiveness amounts in the form of:

  1. alternative FTE calculations;
  2. allowing both cash and accrual basis with respect to forgivable expenses;
  3. the introduction of an Alternative Covered Period;
  4. allowing for forgiveness with respect to payroll costs after the covered period;
  5. express authorization of bonuses to employees; and
  6. preventing a borrower from being counted against doubly in the event hours and wages decrease in conjunction.

The SBA seems to realize that borrowers have dealt with myriad guidance since early April. Accordingly, the SBA again clarified that applications will be subject to scrutiny in light of the guidance available at the time of the borrower’s application . Borrowers should identify relevant guidance at the time of their application. Such information will be important in the event a lender or the SBA questions their application or a decision will need to be appealed.

Cody Myers is a business lawyer with Kegler Brown, working with clients on their funding strategies during the pandemic, including optimizing PPP and SBA EIDL funds and pursuing forgiveness. He can be reached directly at [email protected] or (614) 462-5495.

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