PPP Loan Forgiveness & Instructions

Calculating loan forgiveness and potential adjustments for FTE and salary adjustments

The SBA published the Loan Forgiveness Application and accompanying instructions over the weekend. The application and instructions provide important definitions and information on calculating loan forgiveness and potential adjustments to forgiveness, such as the potential adjustments for FTE and salary reductions. The application and instructions can be found at this link: https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf

We continue to encourage everyone to read and familiarize themselves with the information and wanted to help you understand some of the key concepts in the process. Over the upcoming days we will be publishing templates to help you with the actual calculations.

Basic Loan Information

The Loan Forgiveness Application requires certain information about your loan. This includes the SBA PPP Loan Number and your lender’s loan number. If you don’t already have this information you will want to request it from your lender as soon as possible.

Covered Period

You need to determine the Covered Period for your loan. This is the eight-week (56-day) period from the date you received your PPP loan. For example, if your loan funded on Monday, April 20th, your Covered Period runs from April 20th through Sunday, June 14th. This period is important because the Covered Period is one element that determines which expenses are eligible to apply toward loan forgiveness.

Alternate Covered Payroll Period

The Loan Forgiveness Application provides you with the opportunity to elect an Alternate Covered Payroll Period if you have a biweekly (or more frequent) payroll cycle. The Alternate Covered Payroll Period is the eight-week (56-day) period that begins on the first day of your first payroll period following your loan disbursement date. From example, if the loan disbursed on Monday, April 20th and the first day of your first payroll following that date is Sunday, April 26th, the first day of the Alternate Covered Payroll Period is Sunday, April 26th and it ends on Saturday, June 20th (56 days later). The ability to elect the Alternate Covered Payroll Period is intended to lessen the administrative burden by allowing borrowers with to tie forgiveness to specific payroll periods versus the date of loan disbursement. It is important to note that if you elect the Alternate Covered Payroll Period, you must use this consistently for the determination of all Eligible Payroll Costs and it does not apply to non-payroll expenses that are eligible for forgiveness.

For sake of ease, we will simply use the term Covered Period in the remainder of this article.

Eligible Payroll Costs

The definition of eligible payroll costs remains unchanged from that used during the loan application process. It includes:

• Cash compensation paid to employees subject to a limit of $100,000 on an annual basis. This translates to no more than $15,385 per employee during the Covered Period. $15,385 is the eight-week equivalent of $100,000 annually.
• Employer contributions for employee health insurance and employee retirement plans.
• Employer state and local taxes assessed on employee compensation.

You are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the Covered Period. There are a couple of key definitions and points to note here:

• Payroll costs are considered paid on the day that paychecks are distributed or an ACH credit transaction has been initiated.
• Payroll costs are considered incurred on the date that employee pay is earned.

There has been some discussion about how payroll costs that were incurred (earned) but not paid during the final pay period of the Covered Period would be handled. Concern that these payroll costs would be not eligible for forgiveness had led some to consider changing pay cycles to accelerate payment to ensure costs incurred were paid during the Covered Period, and therefore eligible for inclusion in the forgiveness calculation. This is not necessary because the loan application specifically states that payroll costs incurred but not paid during the last pay cycle of the Covered Period are eligible if those costs are paid on or before the next regular pay date.

For example, if your Covered Period ends June 14th and your payroll that includes payroll incurred up through June 14th would not regularly be paid until June 30th, you can include the payroll costs incurred through June 14th in eligible payroll expenses, as long they are paid on or before June 30th. This is welcome news.

Non-payroll Costs

You are generally eligible for forgiveness for non-payroll costs paid during the Covered Period. (Note: The Alternative Covered Payroll Period does not apply here.) These costs include:

• Business mortgage interest payments on mortgages on real or personal property obligations incurred prior to February 15, 2020. You may not include principal payments and you may not include interest prepayments.
• Business rent or lease payments for lease agreements in force before February 15, 2020.
• Business utility payments for which service began before February 15, 2020. Eligible utility services include electricity, gas, water, transportation, telephone, or internet access.

It is important to note that you are not required to report any expenses for which you don’t intend to seek forgiveness and that the total of the non-payroll expenses cannot exceed 25% of the loan forgiveness amount.

Loan Forgiveness Reduction

Once you calculate the potential forgiveness based on eligible payroll and non-payroll costs, you need to determine whether that amount is subject to reduction. There are two reasons your forgiveness amount may be reduced:

Salary/Hourly Wage Reduction – Salary and wage reductions are applied if you reduced the annual salary or hourly rate of certain employees by more than 25% during the Covered Period. First, you must identify any employee that worked for you during the Covered Period and earned less than $100,000 on an annualized basis for all pay periods in 2019 or did not work for you in 2019. If the annual salary or hourly rate during the Covered Period was reduced by more than 25% compared to their annual salary or hourly rate from January 1, 2020, to March 31, 2020, your loan forgiveness might be reduced.  It is important to note that you are not looking at whether overall wages were reduced by other factors such as loss of hours. Changes in hours worked are covered in the FTE calculation. What counts in this calculation is a specific reduction in the rate of pay expressed as either salary or an hourly rate.

The actual reduction is calculated on an employee by employee basis and is expressed in dollars. The method of determining the salary/wage reduction is a multi-step process. It is important to note that the loan reduction is not a dollar-for-dollar reduction. The loan reduction is the 8-week equivalent of the annual salary or hourly rate reduction that exceeds the 25% threshold. The PPP Schedule A Worksheet and Instructions for the PPP Schedule Worksheet included in pages 7-9 in the link provided above, take you through the steps to calculate. Again, we will be providing a template in the coming days to assist here. There is a Safe Harbor for salary/hourly wage reductions. You may avoid reductions in your loan forgiveness by restoring the salary or hourly wage of impacted employees to a level that is at least equal to the salary/hourly wage as of February 15, 2020, by no later than June 30, 2020.

FTE Headcount Reduction –  If you reduced your average weekly full-time equivalent headcount during the Covered Period, as compared with the Measurement Period you select, your loan forgiveness might be reduced. The FTE calculation is based on hours paid. Even if you didn’t decrease the absolute numbers of employees, if you reduced employee paid hours during the Covered Period, this will impact your FTE headcount, and you may have an FTE Headcount Reduction. To determine if you are subject to a potential reduction, you must calculate the weekly FTE for each employee and average the total over the Covered Period. You have two options for performing this calculation.

• The first is to use the average number of hours paid per week divided by 40, with the maximum number for any employee being 1. For example, an employee working an average of 30 hours per week would be a .75 FTE (30/40).
• Alternatively, you may use a simplified method which assigns 1 to any employee paid for 40 hours or more hours per week with employees working less than 40 assigned a value of .5.

Once you have determined your average weekly headcount during the Covered Period, you must compare this to average weekly FTE headcount for the Measurement Period, using the same method for the Measurement Period that you used for the Covered Period. As discussed in an earlier post, the measurement period is either February 15, 2019 to June 30, 2019, or January 1, 2020 to February 29, 2020. You select the measurement period with the lowest FTE count. (Note: If you are a seasonal employer, there are some other options, not covered here, that you will want to understand to make the best decision possible.) If the calculated FTE count is lower in the Covered Period than in the Measurement Period, you may be subject to a reduction by the percentage by which the number is lower.

Fortunately, not all headcount reductions will count against you. There are exceptions for specific reductions and a Safe Harbor.

• FTE Reduction Exceptions – Any position you made a good-faith, written offer to rehire during the Covered Period that was rejected by the employee, terminations for cause, voluntary resignations, and hour reductions that were voluntarily requested and granted are exceptions to the FTE Reduction.
• FTE Safe Harbor – Finally, if you restore your headcount to at least the same level as the payroll period that included February 15, 2020, by no later than June 30, 2020, you will be exempted from reductions in loan forgiveness.

Required Documentation

Finally, the Loan Forgiveness Application specifies which documents you must submit with your application. It also specifies which documents you must maintain and are not required to submit. These documents must be maintained for a period of six years following the date the loan is forgiven or fully repaid and you must make these documents available for inspection by authorized representatives of the SBA, including representatives of its Office of Inspector General. The requirements are too lengthy to try to summarize here and can be found on page 10 of the document in the link provided at the beginning of this article.

It is clear that this is still a complicated process and we will continue to monitor developments. While we attempt to provide information to help you navigate there is no substitute for professional assistance. The PlusPoint team has followed this topic closely and is well-versed to answer your questions and assist you with the loan forgiveness process. Please let us know how we can best assist you.