Best Practices: Timing of Application for Forgiveness of PPP Loan

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), was signed into law, and the Paycheck Protection Program (“PPP”) was included as part of that legislation.  Subsequently, on June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), was signed into law.  The Flexibility Act modifies certain provisions of the CARES Act specific to the Paycheck Protection Program, including the loan forgiveness covered period (the “Covered Period”).  These changes prompted questions from PPP lenders and borrowers as to whether a borrower has to wait for the Covered Period to expire in order to apply for loan forgiveness.  The purpose of this article is to provide updated guidance issued by the U.S. Small Business Administration (the “SBA”) via the instructions for the PPP Loan Forgiveness Application (SBA Form 3508) issued May 15, 2020 and revised June 16, 2020 (the “3508 Application”) and its interim final rule issued Friday, June 26, 2020 (the “6/26 IFR”) to address these questions. 

To analyze this topic, we must first begin with the definition of Covered Period.  Originally, the CARES Act stated that the Covered Period was the 8-week period following the first disbursement of the loan.  Thereafter, the Flexibility Act amended the Covered Period to be the 24-week period following the first disbursement of the loan, but a borrower could elect to have the Covered Period be the 8-week period following the first disbursement of the loan if the loan was made before June 5, 2020.  The Flexibility Act also clarified that in order to meet the safe harbor exemptions for a reduction in full time equivalent (“FTE”) employees or a reduction in salary or wages, a borrower must re-establish its employment and compensation levels by December 31, 2020.   

Once the updated 3508 Application and instructions were published, it became clear that the extension of the Covered Period could impact the timing of application for loan forgiveness. These documents set forth calculations for “FTE Reduction Safe Harbors” and “Salary/Hourly Wage Reduction,” which now permit a borrower to apply for forgiveness prior to December 31, 2020.  While the prior version of the 3508 Application set a hard deadline of June 30, 2020 for these safe harbor exemptions, the revised 3508 Application states that these figures must be proven by “the earlier of December 31, 2020 and the date this application is submitted.”  While this was helpful in understanding that borrowers do not need to wait until the end of the year to apply for loan forgiveness, there was still a question of whether a borrower that used all of its loan funds needed to wait until the end of the Covered Period in order to apply for loan forgiveness. In other words, when may a borrower apply for loan forgiveness?   

This open question has now been clarified in the 6/26 IFR, which explicitly states that that a borrower may submit a loan forgiveness application before the end of the Covered Period if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.  It is worth noting that if the borrower applies for forgiveness of the loan before the end of the Covered Period and has reduced its number of FTE employees or any employee’s salaries or wages in excess of 25%, the borrower must account for the reduction in FTE employees or excess employee salary or wage reduction for the full Covered Period unless one of the safe harbor exemptions applies.  

As always, we continue to follow guidance related to the CARES Act on a daily basis and will keep you updated as information becomes available.  For more information concerning PPP loans, contact the attorneys at Starfield & Smith, PC at 215.542.7070.