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PPP Loan Forgiveness

ADDITIONAL GUIDANCE REGARDING LOAN FORGIVENESS

UNDER THE PAYCHECK PROTECTION PROGRAM (PPP)

Updated June 29, 2020
 
In connection with the signing into law of the Paycheck Protection Program Flexibility Act of 2020 (the Flexibility Act), which amended the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Small Business Administration (SBA) released additional guidance regarding the Paycheck Protection Program (PPP) and loan forgiveness.  The following is intended to be a general overview of certain guidance provided by SBA regarding PPP loan forgiveness.
 
Please note that the following information is intended to be a general overview only and is based upon Univest Bank and Trust Co.’s current understanding of guidance issued by SBA and the U.S. Department of the Treasury. This information may be supplemented and revised as more guidance becomes available and does not constitute legal or tax advice. Recipients of PPP loans should contact legal and tax/accounting professionals for questions regarding eligibility and loan forgiveness or for any legal or tax advice. Full PPP requirements can be found online at home.treasury.gov.
 
Loan Forgiveness in General
SBA has confirmed that Section 1106(b) of the CARES Act provides that, subject to several important limitations, borrowers shall generally be eligible for forgiveness of their PPP loan in an amount equal to the sum of the following costs incurred and payments made during the covered period (as described below):
  1. payroll costs;
  2. interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal);
  3. payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; and
  4. business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
 
For purposes of SBA’s recent guidance, the term “nonpayroll costs” refers to the payments described in 2, 3 and 4 above. SBA has revised prior guidance and confirmed that eligible nonpayroll costs cannot exceed 40 percent of the loan forgiveness amount.
 
SBA has indicated that 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, wages, commissions, income, or net earnings from self-employment, or similar compensation.
 
Loan Forgiveness Process
What is the general process to obtain loan forgiveness?
To receive loan forgiveness, SBA has confirmed that a borrower must complete and submit PPP Loan Forgiveness Application Form 3508 or Form 3508EZ, as applicable (or the equivalent forms provided by the lender) (the Loan Forgiveness Application) to its lender.
 
Please note that before Univest Bank and Trust Co. begins to accept Loan Forgiveness Applications, borrowers will be contacted with specific instructions regarding when and how you should submit the information required by the Loan Forgiveness Application to Univest through an online application process. 
 
SBA has indicated that SBA Form 3508EZ (or the equivalent form provided by the lender) can be used if the borrower can make one of the representations below:
  1. the borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form;
  2. the borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (both discussed below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); AND the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period. (For purposes of the foregoing, borrowers are instructed to ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020, and to ignore reductions in an employee’s hours that the Borrower offered to restore and the employee refused.); or
  3. the borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, borrowers are instructed that “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); AND the borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
 
The Covered Period is defined in the Loan Forgiveness Application as either: (1) the 24-week (168-day) period beginning on the date that the borrower received the PPP loan proceeds from the lender, or (2) if the borrower received its PPP loan before June 5, 2020, an eight-week (56-day) Covered Period if elected by the borrower. For example, if a borrower is using a 24-week Covered Period and received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, October 4. However, in no event may the Covered Period extend beyond December 31, 2020.
 
The Loan Forgiveness Application uses the following description for the Alternative Payroll Covered Period. For administrative convenience, borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 24-week (168-day) period or, for loans received before June 5, 2020 at the election of the borrower, the eight-week (56-day) period that begins on the first day of their first pay period following the date that the borrower received PPP loan proceeds from the lender. For example, if the borrower is using a 24-week Alternative Payroll Covered Period and received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, October 10. Borrowers that elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in the Loan Forgiveness Application to “the Covered Period or the Alternative Payroll Covered Period.” However, borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in the Loan Forgiveness Application to “the Covered Period” only. In no event may the Alternative Payroll Covered Period extend beyond December 31, 2020.
 
If a borrower is not able to make one of the representations above, the borrower is not permitted to use SBA Form 3508EZ and must instead use SBA Form 3508 (or the equivalent form provided by the lender).
 
As a general matter, the lender will review the application and make a decision regarding loan forgiveness. Each lender has 60 days from receipt of a complete application to issue a decision to SBA. If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for, the lender must request payment from SBA at the time the lender issues its decision to SBA. SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to SBA. If applicable, SBA will deduct EIDL Advance Amounts from the forgiveness amount remitted to the Lender as required by section 1110(e)(6) of the CARES Act. If SBA determines in the course of its review that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application (for example, because the borrower lacked an adequate basis for the certifications that it made in its PPP loan application), the loan will not be eligible for loan forgiveness. If only a portion of the loan is forgiven, or if the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or before the maturity of the loan. The lender is responsible for notifying the borrower of remittance by SBA of the loan forgiveness amount (or that SBA determined that no amount of the loan is eligible for forgiveness) and the date on which the borrower’s payment is first due, if applicable. If SBA determines that the full amount of the loan is eligible for forgiveness and remits the full amount of the loan to the lender, the lender must then mark the PPP loan note as “paid in full” and report the status of the loan as “paid in full.” The general loan forgiveness process described above applies only to loan forgiveness applications that are not reviewed by SBA prior to the lender’s decision on the forgiveness application.
 
When must a borrower apply for loan forgiveness or start making payments on a loan?
SBA has indicated that a borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period. If the borrower does not apply for loan forgiveness within 10 months after the last day of the covered period, or if SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender must notify the borrower of the date the first payment is due. The lender must report that the loan is no longer deferred to SBA on the next monthly SBA Form 1502 report filed by the lender.
 
When must payroll costs be incurred and/or paid to be eligible for forgiveness?
SBA has stated that, in general, payroll costs paid or incurred during the covered period are eligible for forgiveness. For purposes of loan forgiveness, the covered period is the 24-week period beginning on the date the lender disburses the PPP loan (ending no later than December 31, 2020). Alternatively, a borrower that received a PPP loan before June 5, 2020 may elect for the covered period to end eight weeks after the date of disbursement of the PPP loan. Borrowers may seek forgiveness for payroll costs for the applicable covered period beginning on either: (1) the date of disbursement of the borrower’s PPP loan proceeds from the lender (i.e., the start of the covered period); or (2) the first day of the first payroll cycle in the covered period (the “alternative payroll covered period”). Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs incurred during the borrower’s last pay period of the covered period or the alternative payroll covered period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the covered period (or alternative payroll covered period) to be eligible for forgiveness. Payroll costs are generally incurred on the day the employee’s pay is earned (i.e., on 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 that the employee would have performed work).
 
SBA has indicated that it recognizes that the covered period will not always align with a borrower’s payroll cycle. For administrative convenience of the borrower, a borrower with a bi-weekly (or more frequent) payroll cycle may elect to use an alternative payroll covered period that begins on the first day of the first payroll cycle in the covered period and continues for either (a) eight weeks, in the case of a borrower that received its PPP loan before June 5, 2020 and elects to use an eight-week covered period, or (b) 24 weeks, in the case of all other borrowers. If payroll costs are incurred during this alternative payroll covered period, such payroll costs will be eligible for forgiveness if they are paid no later than the first regular payroll date thereafter.
 
SBA provided the following example:
 
Are salary, wages, or commission payments to furloughed employees; bonuses; or hazard pay during the covered period eligible for loan forgiveness?
SBA has stated that the answer to this question is yes. SBA has indicated that the CARES Act defines the term “payroll costs” broadly to include compensation in the form of salary, wages, commissions, or similar compensation. If a borrower pays furloughed employees their salary, wages, or commissions during the covered period, those payments are eligible for forgiveness as long as they do not exceed an annual salary of $100,000, as prorated for the covered period. SBA has determined that this interpretation is consistent with the text of the statute and advances the paycheck protection purposes of the statute by enabling borrowers to continue paying their employees even if those employees are not able to perform their day-to-day duties, whether due to lack of economic demand or public health considerations. SBA has also determined that, if an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness because they constitute a supplement to salary or wages, and are thus a similar form of compensation.
 
Are there caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation?
Yes. SBA has indicated that, for borrowers that received a PPP loan before June 5, 2020 and elect to use an eight-week covered period, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at eight weeks’ worth (8/52) of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual, whichever is less, in total across all businesses. For all other borrowers, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at 2.5 months’ worth (2.5/12) of 2019 compensation (i.e., approximately 20.83 percent of 2019 compensation) or $20,833 per individual, whichever is less, in total across all businesses. C-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf. S-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation. Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit. 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. For self-employed individuals, including Schedule C or F filers and general partners, retirement and health insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation.
 
Nonpayroll Costs Eligible for Loan Forgiveness
When must nonpayroll costs be incurred and/or paid to be eligible for forgiveness?
SBA has indicated that a nonpayroll cost is eligible for forgiveness if it was: (1) paid during the covered period; or (2) incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period. SBA has provided the following example:
Example: A borrower that received a loan before June 5, 2020 uses a 24-week covered period that begins on June 1 and ends on November 15. The borrower pays its electricity bills for June through October during the covered period and pays its November electricity bill on December 10, which is the next regular billing date. The borrower may seek loan forgiveness for its June through October electricity bills, because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of its November electricity bill through November 15 (the end of the covered period), because it was incurred during the covered period and paid on the next regular billing date.
 
Are advance payments of interest on mortgage obligations eligible for loan forgiveness?
No. SBA has indicated that advance payments of interest on a covered mortgage obligation are not eligible for loan forgiveness because the CARES Act’s loan forgiveness provisions regarding mortgage obligations specifically exclude “prepayments.” SBA has provided that principal on mortgage obligations is not eligible for forgiveness under any circumstances.
 
Reductions to Loan Forgiveness Amounts
SBA has confirmed that Section 1106 of the CARES Act, as amended by Section 3(b)(2) of the Flexibility Act, specifically requires certain reductions in a borrower’s loan forgiveness amount based on reductions in full-time equivalent employees or in employee salary and wages, subject to an important statutory exemption for borrowers that have eliminated the reduction on or before December 31, 2020. In addition, Section 3(b)(2) of the Flexibility Act also adds exemptions from reductions in loan forgiveness amounts based on employee availability and business activity. Further, a regulatory exemption to the reduction rules is available for borrowers that have offered to restore employee hours at the same salary or wages, even if the employees have not accepted.  SBA has stated that the instructions to the Loan Forgiveness Application and the additional guidance provided by SBA and summarized below explain how the statutory forgiveness reduction formulas work.
 
Will a borrower’s loan forgiveness amount be reduced if the borrower reduced the hours of an employee, then offered to restore the reduction in hours, but the employee declined the offer?
No. SBA has indicated that in calculating the loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:
  1. the borrower made a good faith, written offer to restore the reduced hours of such employee;
  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 reduction in hours;
  3. the offer was rejected by such employee; and
  4. the borrower has maintained records documenting the offer and its rejection.
 
SBA has indicated that further information regarding how borrowers will report information concerning rejected rehire offers to state unemployment insurance offices will be provided on SBA’s website.
 
What effect does a reduction in a borrower’s number of full-time equivalent (FTE) employees have on the loan forgiveness amount?
SBA has provided that, in general, a reduction in FTE employees during the covered period or the alternative payroll covered period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. SBA has indicated that the borrower must first select a reference period: (i) February 15, 2019 through June 30, 2019; (ii) January 1, 2020 through February 29, 2020; or (iii) in the case of a seasonal employer, either of the two preceding methods or a consecutive 12-week period between May 1, 2019 and September 15, 2019. If the average number of FTE employees during the covered period or the alternative payroll covered period is less than during the reference period, the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees. As an example, SBA has indicated that if a borrower had 10.0 FTE employees during the reference period and this declined to 8.0 FTE employees during the covered period, the percentage of FTE employees declined by 20 percent and thus only 80 percent of otherwise eligible expenses are available for forgiveness.
 
In addition, SBA has provided that a borrower is exempted from the loan forgiveness reduction arising from a proportional reduction in FTE employees during the covered period if the borrower is able to document in good faith the following:
  1. an inability to rehire individuals who were employees of the borrower on February 15, 2020; and
  2. an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020.
 
Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. SBA has indicated that the documents that borrowers should maintain to show compliance with this exemption include, but are not limited to, the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.
 
SBA has also provided that borrowers are exempted from the loan forgiveness reduction arising from a reduction in the number of FTE employees during the covered period if the borrower is able to document in good faith an inability to return to the same level of business activity as the borrower was operating at before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 (COVID Requirements or Guidance). Specifically, borrowers that can certify that they have documented in good faith that their reduction in business activity during the covered period stems directly or indirectly from compliance with such COVID Requirements or Guidance are exempt from any reduction in their forgiveness amount stemming from a reduction in FTE employees during the covered period. Such documentation must include copies of applicable COVID Requirements or Guidance for each business location and relevant borrower financial records. SBA has indicated that further information regarding how borrowers will report information concerning rejected rehire offers to state unemployment insurance offices will be provided on SBA’s website.
 
The following example has been provided:
Example: A PPP borrower is in the business of selling beauty products both online and at its physical store. During the covered period, the local government where the borrower’s store is located orders all non-essential businesses, including the borrower’s business, to shut down their stores, based in part on COVID-19 guidance issued by the CDC in March 2020. Because the borrower’s business activity during the covered period was reduced compared to its activity before February 15, 2020 due to compliance with COVID Requirements or Guidance, the borrower satisfies the Flexibility Act’s exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period, if the borrower in good faith maintains records regarding the reduction in business activity and the local government’s shutdown orders that reference a COVID Requirement or Guidance as described above.
 
What does “full-time equivalent employee” mean?
SBA has provided that full-time equivalent employee means an employee who works 40 hours or more, on average, each week. The hours of employees who work less than 40 hours are calculated as proportions of a single full-time equivalent employee and aggregated, as explained further below.
 
How should a borrower calculate its number of full-time equivalent (FTE) employees?
SBA has indicated that borrowers seeking forgiveness must document their average number of FTE employees during the covered period (or the alternative payroll covered period) and their selected reference period. For purposes of this calculation, SBA has explained that 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 employees who were paid for less than 40 hours per week, SBA has determined that borrowers may choose to calculate the full-time equivalency in one of two ways. First, the borrower may calculate the average number of hours a part-time employee was paid per week during the covered period. As an example, SBA has provided that if an employee was paid for 30 hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.75. Similarly, if an employee was paid for ten hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.25. Second, for administrative convenience, SBA has provided that borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee. Borrowers may select only one of these two methods, and must apply that method consistently to all of their part-time employees for the covered period or the alternative payroll covered period and the selected reference period.
 
In either case, SBA has provided that the borrower shall provide the aggregate total of FTE employees for both the selected reference period and the covered period or the alternative payroll covered period, by adding together all of the employee-level FTE employee calculations. The borrower must then divide the average FTE employees during the covered period or the alternative payroll covered period by the average FTE employees during the selected reference period, resulting in the reduction quotient.
 
What effect does a borrower’s reduction in employees’ salary or wages have on the loan forgiveness amount?
SBA has confirmed that, under section 1106(d)(3) of the CARES Act, a reduction in an employee’s salary or wages in excess of 25 percent will generally result in a reduction in the loan forgiveness amount, unless an exception applies. 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), subject to exceptions for borrowers who restore reduced wages or salaries. SBA has provided that this reduction calculation is performed on a per employee basis, not in the aggregate.
 
SBA has provided the following examples:
Example: A borrower is using a 24-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).
 
Example: A borrower that received a PPP loan before June 5, 2020 has elected to use an eight-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by eight weeks).
 
How should borrowers seeking loan forgiveness account for the reduction based on a reduction in the number of employees (Section 1106(d)(2)) relative to the reduction relating to salary and wages (Section 1106(d)(3))?
To ensure that borrowers are not doubly penalized, SBA has clarified that 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. SBA has provided the following example:
Example: An hourly wage employee had been working 40 hours per week during the borrower selected reference period (FTE employee of 1.0) and the borrower reduced the employee’s hours to 20 hours per week during the covered period (FTE employee of 0.5). There was no change to the employee’s hourly wage during the covered period. 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.
 
If a borrower restores reductions made to employee salaries and wages or FTE employees by not later than December 31, 2020, can the borrower avoid a reduction in its loan forgiveness amount?
Yes. SBA has confirmed that Section 1106(d)(5) of the CARES Act provides that 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 December 31, 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 under section 1106(d)(3) of the CARES Act. Similarly, if a borrower eliminates any reductions in FTE employees occurring during the safe harbor period by December 31, 2020 or earlier, SBA has confirmed that the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees.
 
Will a borrower’s loan forgiveness amount be reduced if an employee is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction?
No. SBA has confirmed that when an employee of the borrower is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the covered period or the alternative payroll covered period (FTE reduction event), the borrower may count such employee at the same full-time equivalency level before the FTE reduction event when calculating the section 1106(d)(2) FTE employee reduction penalty. SBA has indicated that borrowers should not be penalized for changes in employee headcount that are the result of employee actions and requests. However, borrowers that avail themselves of this exemption must maintain records demonstrating that each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction. Borrowers must provide such documentation upon request.
 
Documentation Requirements
What must borrowers submit for forgiveness of their PPP loans?
SBA has confirmed that the Loan Forgiveness Application form and instructions detail the documentation each borrower must submit with its Loan Forgiveness Application (SBA Form 3508, SBA Form 3508EZ or a lender equivalent), the documentation each borrower is required to maintain and make available upon request, and the documentation each borrower may voluntarily submit with its loan forgiveness application. SBA Loan Forgiveness Application Form 3508 can be found online with the applicable instructions available here. SBA Loan Forgiveness Application Form 3508EZ is available here with applicable instructions also available online.
 
SBA Reviews of Individual PPP Loans
Will SBA review individual PPP loans?
Yes. SBA has confirmed that it may review any PPP loan.
 
What borrower representations and statements will SBA review?
SBA has confirmed that it is authorized to review the following:
  1. Borrower Eligibility. SBA may review whether a borrower is eligible for the PPP loan based on the provisions of the CARES Act, the rules and guidance available at the time of the borrower’s PPP loan application, and the terms of the borrower’s loan application.
  2. Loan Amounts and Use of Proceeds. SBA may review whether a borrower calculated the loan amount correctly and used loan proceeds for the allowable uses specified in the CARES Act.
  3. Loan Forgiveness Amounts. SBA may review whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s Loan Forgiveness Application. 
 
When will SBA undertake a loan review?
SBA has stated that it may undertake a review at any time in its discretion. Each borrower is required to retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.
 
Will I have the opportunity to respond to SBA’s questions in a review?
Yes. SBA has confirmed that if loan documentation submitted to SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower, SBA will require the lender to contact the borrower in writing to request additional information. SBA may also request information directly from the borrower. The lender must provide any additional information provided to it by the borrower to SBA. SBA stated that it will consider all information provided by the borrower in response to such an inquiry, but failure to respond to SBA’s inquiry may result in a determination that the borrower was ineligible for a PPP loan or ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower.
 
If SBA determines that a borrower is ineligible for a PPP loan, can the loan be forgiven?
No. If SBA determines that a borrower is ineligible for the PPP loan, the loan amount or the loan forgiveness amount claimed by the borrower, SBA will direct the lender to deny the Loan Forgiveness Application in whole or in part, as appropriate. SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.
 
Loan Forgiveness Process for Lenders
What will a lender review?
The SBA has provided that, when a borrower submits SBA Form 3508 or lender’s equivalent form, the lender must:
  1. Confirm receipt of the borrower certifications contained in the SBA Form 3508 or lender’s equivalent form.
  2. Confirm receipt of the documentation borrower must submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the SBA Form 3508 or lender’s equivalent form.
  3. Confirm the borrower’s calculations on the borrower’s the SBA Form 3508 or lender’s equivalent form, including the dollar amount of the (A) Cash Compensation, Non-Cash Compensation, and Compensation to Owners claimed on Lines 1, 4, 6, 7, 8, and 9 on PPP Schedule A and (B) Business Mortgage Interest Payments, Business Rent or Lease Payments, and Business Utility Payments claimed on Lines 2, 3, and 4 on the PPP Loan Forgiveness Calculation Form, by reviewing the documentation submitted with the SBA Form 3508 or lender’s equivalent form.
  4. Confirm that the borrower made the calculation on Line 10 of the SBA Form 3508 or lender’s equivalent form correctly, by dividing the borrower’s Eligible Payroll Costs claimed on Line 1 by 0.60.
 
When a borrower submits SBA Form 3508EZ or lender’s equivalent form, the lender must:
  1. Confirm receipt of the borrower certifications contained in the SBA Form 3508EZ or lender’s equivalent form.
  2. Confirm receipt of the documentation borrower must submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the SBA Form 3508EZ or lender’s equivalent form.
  3. Confirm the borrower’s calculations on the borrower’s the SBA Form 3508EZ or lender’s equivalent form, including the dollar amount of the Payroll Costs, Business Mortgage Interest Payments, Business Rent or Lease Payments, and Business Utility Payments claimed on Lines 1, 2, 3, and 4 of the SBA Form 3508EZ or lender’s equivalent form, by reviewing the documentation submitted with the SBA Form 3508EZ or lender’s equivalent form.
  4. Confirm that the borrower made the calculation on Line 7 of the SBA Form 3508EZ or lender’s equivalent form correctly, by dividing the borrower’s Eligible Payroll Costs claimed on Line 1 by 0.60.
 
It is important to note that the SBA has confirmed that providing an accurate calculation of the loan forgiveness amount remains the responsibility of the borrower, and the borrower attests to the accuracy of its reported information and calculations on the Loan Forgiveness Application. The borrower will not receive forgiveness without submitting all required documentation to the lender. Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness and are permitted to rely on borrower representations.
 
What is the timeline for the lender’s decision on a loan forgiveness application?
The lender must issue a decision to SBA on a loan forgiveness application not later than 60 days after receipt of a complete Loan Forgiveness Application from the borrower. That decision may take the form of an approval (in whole or in part); denial; or (if directed by SBA) a denial without prejudice due to a pending SBA review of the loan for which forgiveness is sought. In the case of a denial without prejudice, the borrower may subsequently request that the lender reconsider its application for loan forgiveness, unless SBA has determined that the borrower is ineligible for a PPP loan.
 
If a lender issues its decision to SBA approving a Loan Forgiveness Application (in whole or in part), the lender must request payment at the time the lender issues its decision to SBA. SBA will, subject to any SBA review, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to SBA. The lender will notify the borrower of remittance by SBA of the loan forgiveness amount (or that SBA determined that no amount is eligible for forgiveness) and the date on which borrower’s first payment is due, if applicable.
 
If a lender determines that a borrower is not entitled to forgiveness in any amount, the lender must provide SBA with the reason for its denial and must also notify the borrower in writing that the lender has issued a decision to SBA denying the loan forgiveness application. SBA reserves the right to review the lender’s decision in its sole discretion. SBA has provided that, within 30 days of notice from the lender, a borrower may request that SBA review the lender’s decision by reviewing the loan in accordance with the guidance provided. Within 5 days of receipt, the lender must notify SBA of a borrower’s request for review. If the borrower does not request SBA review or SBA declines the request for review, the lender will notify the borrower of the date on which the borrower’s first payment is due. If SBA accepts a borrower’s request for review, SBA will notify the borrower and the lender of the results of the review. If the SBA denies forgiveness in whole or in part, the lender will notify the borrower of the date on which the borrower’s first payment is due.

 
We hope that this updated information is helpful to you as you prepare for the loan forgiveness stage of the PPP process. As we have previously indicated, we will contact you separately with specific instructions regarding how you should submit the information required by the Loan Forgiveness Application to Univest.  However, in the meantime, we recommend that you review the Loan Forgiveness Application, instructions and guidance, all of which can be found here.
 
We continue to encourage you to work with your legal and tax/accounting professionals if needed to ensure that PPP loan proceeds are used in accordance with the requirements of the CARES Act, and recommend that you keep detailed records and supporting documentation regarding how PPP loan proceeds were spent so that you can easily meet requests for documentation from Univest and SBA.
 
Please note that the foregoing information is intended to be a general overview only and is based upon our current understanding of guidance issued by SBA and the U.S. Department of the Treasury. This information may be supplemented and revised as more guidance becomes available and does not constitute legal or tax advice. Recipients of PPP loans should contact legal and tax/accounting professionals for questions regarding eligibility and loan forgiveness or for any legal or tax advice.
 
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