After receiving numerous complaints about the complexity of the loan forgiveness application form under the Paycheck Protection Program, the SBA and U.S. Department of Treasury on June 16, 2020 approved simplified versions of the forgiveness application. The original loan forgiveness application was 11 pages long, but now many borrowers under the Paycheck Protection Program (“PPP”) will be eligible to apply for forgiveness under a newly streamlined EZ version of the application which is only 3 pages long. Borrowers that cannot qualify to use the EZ version will be able to instead now use a 5-page SBA Form 3508.
To qualify for use of the EZ form, a borrower must be able to fit within at least one of the following three categories:
1. The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP application and did not include any employee salaries in the computation of average monthly salaries in the application.
2. The borrower did not reduce annual salary or wages of employees by more than 25% during the applicable Covered Period compared to the period between January 1, 2020 and March 31, 2020 (with respect to employees who did not receive during any single period during 2019 annualized pay of 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 applicable Covered Period (ignoring reductions that arose from an inability to rehire certain individuals if the borrower was unable to hire similarly qualified employees for unfilled positions by December 31, 2020, or employee hours that the borrower offered to restore and the employee refused).
3. The borrower did not reduce annual salary or wages of employees by more than 25% during the applicable Covered Period compared to the period between January 1, 2020 and March 31, 2020 (with respect to employees who did not receive during any single period during 2019 annualized pay of more than $100,000), and the borrower was unable to operate during the applicable Covered Period at the same level of business activity as before February 15, 2020 due to compliance with guidance issued between March 1, 2020 and December 31, 2020 by HHS, the CDC, or OSHA, related to the maintenance of standards of sanitation, social distancing, or other work or customer safety requirement related to COVID-19.
Borrowers which do not fall into at least one of the above three categories will now apply for forgiveness with the newly issued 5-page SBA Form 3508 (which is less than half the length of the forgiveness application that was in place prior to yesterday).
One possibly significant item in the new forgiveness application materials is that forgivable owner-employee compensation may be capped when using 24-week Covered Period at the lessor of (i) $20,833, or (ii) 2.5 months of the average monthly compensation of that owner-employee during 2019. For the 8-week covered period, forgivable compensation levels were capped at 8/52 of $100,000 (i.e. $15,385). It was assumed that with a 24-week covered period, that cap would be at 24/52 of $100,000 (i.e. 46,154)—and this remains the case for employees who are not owners. For owner-employees, they may now be subject to a significantly lower cap of not more than $20,833. This will need to be clarified.
One other possibly significant item to note in the new forgiveness application materials is the cap on the borrower’s contribution to employee retirement plans. Previously there was little guidance on any limits of employer contributions to employee retirement plans, and this appeared to be a potential avenue to increase the level of “payroll costs” that were eligible for forgiveness (by having the employer make a significant contribution to the employee retirement plan before the applicable Covered Period ended). The new forgiveness applications now have provisions that seemingly cap the forgivable employer contributions to employee retirement plans for “owner-employees” at 2.5/12 worth of the 2019 contribution that the employer made in connection with such owner-employer.