New PPP Guidance Continues Promotion of Forgiveness
May 27, 2020
By: Mark A. Mangano
Recent guidance from the Treasury Department (Treasury) and the Small Business Administration (SBA) continues to promote an inclusive definition of forgivable expenses. On May 22, 2020, Treasury published its fourteenth interim final rule related to the Paycheck Protection Program (PPP): “Business Loan Program Temporary Changes; Paycheck Protection Program-Requirements-Loan Forgiveness” (Fourteenth IFR).
The CARES Act introduced the PPP and one of its key features, the potential to have all or a portion of a PPP loan forgiven. The language of the CARES Act left open to interpretation significant questions related to forgiveness. With the release of the PPP Loan Forgiveness Application on May 16, 2020, Treasury and the SBA began to answer those questions. For the most part, the interpretations have been in favor of borrowers seeking forgiveness.
With the Fourteenth IFR, Treasury and the SBA continue to clarify the forgiveness application and process, embrace interpretations that expand the definitions of forgivable expenses, and promote ease and simplicity in preparing a rather complex forgiveness application. This article highlights some of the interpretations in the Fourteenth IFR that are beneficial to borrowers.
Payroll costs paid or incurred during the eight consecutive week covered period are eligible for forgiveness (Eight Week Period). The borrower may choose to have the Eight Week Period begin on the date of disbursement of the PPP loan to the borrower or the first day of the first payroll cycle in the Eight Week Period. For borrowers with bi-weekly or more frequent payroll cycles, the interpretation permits forgiveness of both payroll costs actually paid during the Eight Week Period and payroll costs incurred during the Eight Week Period that are paid at the next payroll date after expiration of the Eight Week Period. This interpretation appears to increase the possibility of achieving full forgiveness of payroll expenses by effectively including payroll costs incurred outside the Eight Week Period.
Salaries, wages, commissions, or similar compensation paid to furloughed employees are considered forgivable payroll expenses even if the employees did not actually work. Borrowers may pay furloughed workers based upon schedules established by the borrower for the amount the employee would have worked.
Hazard pay and bonuses
If an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness because they constitute a supplement to salary or wages.
Reductions to forgiveness amount
The PPP forgiveness process provides for potential forgiveness reduction based upon two measures of employment activity: reductions in the average number of full-time equivalent (FTE) employees and reductions in compensation beyond 25%. There has been substantial uncertainty regarding how these two separate forgiveness reduction formulas would be applied.
Safe harbor exemptions
If the borrower reduced employee salaries and wages or hours during the safe harbor period of February 15, 2020 and April 26, 2020 and eliminates the reductions on or before June 30, 2020, the borrower is exempt from the associated forgiveness reduction calculations. Even if a borrower cannot take advantage of the safe harbor exemptions, there is substantial relief from forgiveness reduction calculations.
Employees whom the borrower offered to rehire are generally exempt from the CARES Act’s loan forgiveness reduction calculation. A borrower may exclude any reduction in the full-time equivalent (FTE) employee headcount that is attributable to an individual employee if:
- The borrower made a good faith, written offer to rehire (or, if applicable, restore the reduced hours) during the Eight Week Period;
- The offer was for the same salary or wage and same number of hours as earned by the employee in the last pay period prior to the separation or reduction in hours;
- The offer was rejected;
- The borrower has maintained records documenting the offer and its rejection; and
- The borrower informed the applicable state unemployment insurance office of the employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.
The SBA will provide information on the process for reporting rejected employment offers on its website.
Also exempt are employees who are fired for cause, voluntarily resign, or voluntarily request a reduced schedule during the Eight Week Period. Borrowers seeking this exemption must maintain records supporting the exemption.
FTE reduction calculation
In general, a reduction in FTE employees during the Eight Week Period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. The borrower must divide the average FTE employees during the Eight Week Period by the average FTE employees during the selected reference period.
The Fourteenth IFR offers options for calculating FTEs. FTE is defined as an employee who works 40 hours or more, on average, each week. Employees who work 40 hours or more in a week count as 1.0 FTE. For employees who work less than 40 hours a week the borrower may choose one of two options:
- The borrower may calculate the actual average number of hours a part-time employee was paid per week during the Eight Week Period and divide that number by 40; or
- The borrower may elect to use a full-time equivalency of 0.5 for each part-time employee.
The borrower must use the selected option in calculating FTEs for both the Eight Week Period and the selected reference period.
Reduction in salary and wages
After any reduction in forgiveness based upon the number of FTEs has been calculated, the amount of compensation is reviewed. The salary and wage reduction formula is applied to each individual employee. Only the amount of salary reduction in excess of 25% of the salary the employee received in the reference period is deducted from the forgiveness amount.
Significantly, the reduction in salary and wages formula applies only to the portion of the decline in employee salary and wages that is not attributable to an FTE reduction. If the rate of pay for an employee remained the same but the employee received less compensation due to a reduction in hours, there is no reduction in forgiveness related to the lower compensation level.
This article highlighted recent developments. The process for obtaining PPP forgiveness remains complex and the rules continue to evolve. If you have a PPP loan we encourage you to carefully review the PPP Loan Forgiveness Application and associated guidance and consult with your trusted advisors with knowledge of the forgiveness process.
To assist you in your research, I have included links to the PPP Loan Application and the Fourteenth IFR.
Fourteenth SBA interim final rule; Business Loan Program Temporary Changes; Paycheck Protection Program-Requirements-Loan Forgiveness 5/22/2020
PPP Loan Forgiveness Application 5/16/2020