PPP Update – Forgiveness Matters

By Greg Yoder

The SBA has released its loan forgiveness application for the Paycheck Protection Program (PPP). The application is accompanied by instructions that give additional guidance and resolve some (not all) of the questions regarding how to calculate the loan forgiveness amount. There’s a lot of information to digest in the new releases; this article covers some of the highlights.

Alternate Payroll Covered Period. Under CARES, the “Covered Period” was defined as the eight-week period beginning with the date the PPP loan was disbursed. For administrative convenience, employers who use biweekly or weekly payroll may elect to use the “Alternate Payroll Covered Period.” This period is the eight-week period that begins on the first day of the first pay period after the loan disbursement date. It’s important to understand that the alternate period applies only to payroll costs. Non-payroll costs still have to be determined using the Covered Period.1

Paid or incurred. Payroll costs will be counted towards the loan forgiveness amount if they’re paid during the covered period OR if they’re incurred during the covered period and paid on or before the next payroll date. The payroll cost for an employee is incurred when the employee’s pay is earned. Non-payroll costs that are incurred during the covered period can be included as long as they’re paid by the next regular billing date.

The wording in the application also implies that non-wage payroll costs can be included when paid even if they aren’t incurred during the covered period. In other words, there may be an opportunity to increase eligible payroll costs by prepaying costs such as health insurance and retirement plan contributions for employees. It’s not clear whether the SBA actually intended to allow loan forgiveness for amounts that were paid but not incurred during the covered period, and we expect that there may be additional guidance on this issue in the coming months, so we are advising clients to proceed with caution. There is also some indication that health insurance contributions for the owners of some businesses may have to be included in the base compensation amount, which is limited to $15,385 per person in the covered period. This is another area where we’re not certain of SBA’s intent, and we expect additional guidance.

FTE determination. In order to avoid a reduction in loan forgiveness, an employer generally has to maintain the same number of full-time equivalent (FTE) employees during the covered period as they had during a prior reference period. Under the instructions in the application, total FTEs are determined by calculating an FTE for each individual employee and then adding the individual amounts up. For an individual employee, the FTE is calculated by determining the employee’s average hours worked per week and dividing by 40. The result is calculated to one decimal place, and it’s capped at 1.0 for any individual employee: overtime doesn’t count.

The instructions also provide for a simplified method where any employee who works less than 40 hours/week is counted as 0.5 FTE. Whichever method is used for calculating FTEs during the covered period must also be used for calculating FTEs during the employer’s chosen reference period. The application includes a “Schedule A Worksheet” that’s used to calculate both FTEs and employee compensation during the covered period.

Certain former employees may continue to be counted as FTEs even if they are no longer employed or fully employed. These include employees who voluntarily resigned, were fired for cause, or voluntarily requested a reduction in hours. In addition, if the employer attempted to rehire an employee (a “good-faith, written offer”), and the employee refused the offer, that employee can be counted towards the total FTEs, provided they haven’t already been replaced.

FTE Reduction Safe Harbor. As a general rule, employers calculate a ratio of FTEs during the covered period to FTEs during their chosen reference period. If this ratio is less than one, the loan forgiveness amount is reduced. However, if they meet the FTE Reduction Safe Harbor, they aren’t subject to this particular reduction. The safe harbor is also addressed on the Schedule A Worksheet.

To meet the safe harbor, employers have to do three separate calculations of FTEs:

      (A) Their average FTEs for the period from February 15, 2020 through April 26, 2020;
      (B) Their FTEs during the pay period that includes February 15, 2020; and
      (C) The FTEs as of June 30, 2020.

Each calculation must use the same method. In order for the safe harbor to apply, two requirements must be met. First, (A) has to be less than (B). In other words, there must have been a reduction in workforce after February 15. Second, (C) must be greater than or equal to (B); i.e., the workforce level must have rebounded by June 30.

Keep in mind that a reduction in staffing levels is only one way that the loan forgiveness amount gets reduced. In order to get the full forgiveness amount, employers also have to avoid having a reduction in compensation. If any individual employee’s compensation during the covered period is less than 75% of that same employee’s compensation during the reference period, there may be a reduction. Also, the loan forgiveness amount can’t be more than the qualifying payroll costs divided by 75%. In effect, this limitation means that any time payroll costs aren’t at least 75% of the PPP loan amount, the amount forgiven will be less than the full amount of the loan.

Additional Non-Payroll Costs. The application expands “covered mortgage obligations” to include any debt-secured business property, not just real property. This means that the interest (not the principal) paid during the covered property on a loan secured by business personal property can also be included in covered non-payroll costs. Similarly, the instructions include business property in “covered rent obligations,” which appears to mean that lease payments on business equipment are also covered costs.

There’s a lot more to the application and instructions than we’ve covered here, and we expect additional guidance on some of the issues that remain open. The application and instructions themselves are at https://www.sba.gov/document/sba-form–paycheck-protection-program-loan-forgiveness-application. In addition, the SBA regularly updates and expands its PPP FAQ, and you can find that information at https://www.sba.gov/document/support–faq-lenders-borrowers. We look forward to assisting clients with maximizing their loan forgiveness under the PPP, and we welcome all of your questions.

1 Throughout this article, “covered period” refers to either the Covered Period or the Alternate Payroll Covered Period for payroll costs and the Covered Period for non-payroll costs.

Disclaimer: Please note this article is based on the information that is currently available and is subject to change.