If your company obtained a Paycheck Protection Program (PPP) loan, you likely have been patiently (or not so patiently) waiting for guidance on loan forgiveness. And, you’ve probably also been hoping that some of the rules would be relaxed.
Fortunately, the Small Business Administration (SBA) has finally provided more specific guidance for employers who are seeking assurance regarding their strategies for loan forgiveness. In addition, on June 5, 2020, Congress passed the Paycheck Protection Program Flexibility Act, which makes many welcome changes to the PPP.
This article hits the highlights of the Paycheck Protection Program and answers some of the top questions employers have been asking us during the last few months about PPP loan forgiveness. Changes to the PPP are frequent, so be sure to check the Treasury Department’s website for updates. If you’re unfamiliar with the Paycheck Protection Program loans, please see our earlier article.
Q. What are the key changes made by the Paycheck Protection Program Flexibility Act?
A. Here are the 5 key changes:
Q. How does my company request loan forgiveness?
A. A company will need to complete the lender’s loan forgiveness form unless the lender uses the SBA’s Loan Forgiveness Application. It is anticipated that most banks will use the SBA’s Loan Forgiveness Application, which can be found here.
Q. To qualify for loan forgiveness, 60% of the PPP loan must be used for payroll costs during the covered period following disbursement of the loan. What if my company received the PPP loan in the middle of a payroll period?
A. For employers who pay on a semi-monthly (twice per month), monthly, or longer basis, the covered period begins on the date of disbursement of the loan. Employers with a bi-weekly (every other week or more frequent) payroll cycle have a choice to use either the covered period beginning on the date of disbursement of the loan, or the 24-week period beginning on the first day of the first payroll cycle following disbursement of the loan, referred to as the “alternative covered period.”
Q. What about the “paid vs. incurred” debate that I’ve heard about? Has that been resolved?
A. Yes, thankfully that has been resolved as follows:
Q. What about bonuses? Hazard pay? Wages paid to furloughed employees? Do those count as payroll costs?
A. Yes they do, with some caveats. The amount of salary, wages, bonuses, hazard pay, etc. paid to an employee will count towards the 60% if, together, it does not exceed annualized compensation of $100,000 as prorated for the covered period.
Q. How will full-time equivalent (FTE) employee reductions (either complete layoffs or partial layoffs) that occur during the PPP loan period impact the amount of my loan forgiveness?
A. Average FTE counts are based on whichever of the following reference periods you choose to use:
If the average number of FTEs during the covered loan 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, subject to the exceptions described below.
For example, if you had 100 FTEs during the reference period and this declined to 80 FTEs during the loan period, the percentage of FTEs declined by 20 percent, which means that only 80 percent of otherwise eligible expenses are available for forgiveness. The basic formula used to determine the loan forgiveness amount from FTE reductions multiplies the loan amount by the quotient of the average FTEs in the reference period, then divides that by the average FTEs in the covered loan period. You then subtract that number from the loan amount.
Q. Did the government define “full-time equivalent employee” (FTE)
A. Fortunately yes. “Full-time equivalent employee” (FTE) 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 FTE employee and aggregated.
To calculate how many FTE employees your company has (subject to a rule of administrative convenience*), you must divide the average number of hours paid for each employee per week by 40 and cap the resulting quotient at 1.0. For example, an employee who was paid 48 hours per week on average during the covered period would be considered to be an FTE employee of 1.0 (they would not count as more than one FTE employee). An employee who was paid 30 hours per week on average during the covered period would be considered to be an FTE employee of 0.75.
*The rule of administrative convenience allows an employer to use a full-time equivalency of 0.5 for each part-time employee as long as it does so consistently for all part-time employees.
Q. If we laid off an employee as a result of COVID-19 and then offered to rehire them but they refused, will they be included in the loan forgiveness reduction calculation for reductions in FTE?
A. Generally no. You may exclude any reduction in FTE employee headcount that is attributable to an employee’s rejection of your offer to rehire them if the following requirements are met:
Be sure to maintain records documenting these offers and refusals.
Q. What if we reduced an employee’s hours (but did not lay them off) as a result of COVID-19 and then offered to reinstate them to their prior schedule but they refused. Will they be included in the loan forgiveness reduction calculation for reductions in FTE employees?
A. Generally no. You may exclude any reduction in FTE employee headcount that is attributable to an employee’s rejection of your offer to restore their reduced hours if the following requirements are met:
Be sure to maintain records documenting these offers and refusals.
Q. What if we were unable to eliminate a reduction in FTE employees for some other reason?
A. As a result of the Paycheck Protection Program Flexibility Act, the amount of loan forgiveness will not decrease due to a reduction in FTE employees if either:
A. Average employee wages are determined over the reference period of January 1, 2020 through March 31, 2020. The amount of any wage reductions that exceed 25% of the base salary or wages paid during the reference period will be counted against loan forgiveness on a dollar for dollar basis. For example, assume a full-time employee had a weekly salary of $1,000 during the reference period. During the covered loan period, the employee continues working full time, but has their pay dropped to $700 per week. Since the pay reduction is greater than 25% (a 25% reduction would be $750 per week), the amounts in excess of 25% will count against loan forgiveness. Using our example, $50 per week would count against forgiveness, which, over the 24-week covered loan period would add up to $1,200, and thus would be deducted from the forgivable portion of the loan.
An exception exists for employees who were paid more than the annualized equivalent of $100,000 in any pay period during 2019. If you reduce the salary of such an employee during 2020, it will not reduce the forgivable portion of your company’s loan regardless of how large their pay reduction is during 2020.
Q. But what if an employee’s pay was less because I reduced their hours? Which reduction rule applies?
A. You would use the FTE reduction formula, not the wage reduction formula.
Q. What if an employee is fired for cause, voluntarily resigns, or voluntarily goes part-time? Can that reduce the forgivable portion?
A. No. Companies will not be penalized for changes in employee headcount due to the employee’s actions and requests. Records must be maintained demonstrating the termination for cause, voluntary resignation, or voluntary request for a schedule reduction.
Q. If I have a wage or FTE reduction during the covered loan period, don’t I have until December 31, 2020 to fix things by restoring wages, hours, or employment?
A. Probably not in ways that will be useful to employers. The “safe harbor” rule only applies to FTE and wage reductions occurring during the period from 2/15/2020 through 4/26/2020, so any FTE or wage reductions in place after 4/26/2020 won’t be fixed by restoring wages, hours, or employment.
Q. I have a self-funded group health plan. How do I include group health plan coverage in “payroll costs” for purposes of PPP loan forgiveness?
A. The cost of providing group health plan coverage can count towards “payroll costs” for purposes of PPP loan forgiveness. Unfortunately, the SBA guidance and recent law changes did not clarify how a self-funded group health plan should calculate the cost of that coverage. In the absence of specific guidance, we believe a reasonable approach is to add up the COBRA rates during the covered period for enrolled plan participants and use the sum as the cost of providing group health plan coverage. A significantly more aggressive approach would be to add up the benefit payments your organization actually makes during the covered period under its self-funded group health plan. Check with your lender for additional guidance.
Contact your lender for additional guidance or clients with access can contact the Hotline with additional questions.
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