Navigating Paycheck Protection Program (PPP) Loan Forgiveness
PPP Loan Forgiveness is Confusing!
The Small Business Administration approved Paycheck Protection Program (PPP) loans totaling $342.3 billion in its first round of funding, then an additional $175 billion in its second round of funding in 2020. Now that the Covered Period for those loans is drawing to end, small businesses must apply for loan forgiveness by completing an application form.
For thousands of businesses, understanding how loan forgiveness works and calculating totals can be extremely confusing. Thereʼs a lot of information to wrap your head around which is why weʼve put together this booklet.
Weʼre going to cover the most important topics, such as what HR experts have learned since the application was released, what terms small businesses should be familiar with, and how small businesses can complete their PPP Loan Forgiveness applications step by step.
When you’re done, we’ll have covered four key points on PPP loan forgiveness:
- Education on new official guidance for filling out the application
- Identifying which payroll and non-payroll costs are eligible for forgiveness
- Filling out the PPP Loan Forgiveness Application, step by step
- Calculating your loan forgiveness amount
Know What Periods are Covered
The PPP forgiveness application offers two different options for defining periods of time for purposes of loan forgiveness. First, we have the option of the “Covered Period.” This is the eight-week or 56-day period where the funds must be used immediately after the loan was dispersed.
If a borrower receives funds on Monday, April 20th, that would be the first day of the covered pay period. The last day would be June 14th, which is eight weeks or 56 days later.
The alternative option is the “Alternative Payroll Covered Period.” This is where a borrower with a biweekly pay period, or a more frequent payroll schedule, can elect to calculate eligible payroll costs using the same eight-week period, but it instead begins on the first day of their first pay period following their loan disbursement date.
For example, letʼs say a borrower received their loan proceeds on Monday, April 20th and the first day of their first pay period following that disbursement is on Sunday, April 26th. If they use the “payroll covered” option, the first day of the Covered Period is April 26th and the last of the Covered Period is Saturday, June 20th, or 56 days later.
There are sections of the forgiveness application that reference both the Covered Period and the Alternative Payroll Covered Period. When you decide what method to use, itʼs important to be consistent with that method throughout the application, except when the instructions reference only the “Covered Period.” In those cases, youʼll want to use that method.
Itʼs important to know that full-time equivalent (FTE) means 40 hours. The two options for calculating FTE are the “calculation method” and the “alternative measurement method.” In the calculation method, you will take the average number of hours paid per week, then divide that by 40 and round to the nearest tenth with the maximum for each employee being capped at 1.
|Employee||Scheduled Hours||FTE Calculation|
|Total||145 hours||3.4 FTEs|
For someone that works 35 hours a week, youʼll divide 35 by 40. This would equal 0.875, which is going to be 0.9 when rounded to the nearest tenth.
A simplified method is the alternative measurement method, which simply assigns 1.0 FTEs to any employee who works 40 hours a week or more and then assigns 0.5 FTEs for any employee who works fewer than 40 hours a week.
|Employee||Scheduled Hours||FTE Calculation|
|Total||145 hours||2.5 FTEs|
As you can see, we assigned 1.0 to any employee that worked 40 hours or more and 0.5 for any employee who worked fewer than 40 hours. The calculation method gave us 3.4 full-time equivalents, whereas the alternative method totals 2.5 full-time equivalents.
Just to reiterate, the borrower can choose which method would be the most beneficial to them as an employer. You want to use the calculation method that doesnʼt inflate the FTE count.
In terms of salary and hourly wage reduction, employers cannot reduce employee salaries by more than 25% during the Covered Period or the Alternative Payroll Covered Period. If you restore your wage levels to the pre-pandemic rates, your forgiveness may not be impacted.
You will want to compare your salary or hourly wages from the Covered Period to the period of January 1st, 2020 to March 21st, 2020 to determine if you have any salary or hourly wage reductions.
PPP Forgiveness Safe Harbors
“Smaller businesses are taking a bigger hit through the pandemic. Those businesses are also less likely to have access to an adequate source of liquidity in the current economic environment.“
Many of you might have thought you had to apply as quickly as possible because of certain “first come, first served”-type messaging. Then, the Small Business Administration (SBA) said that the loans needed to be certified in good faith. Applicants needed to prove that the current economic uncertainty made the loan necessary to support their ongoing operations.
The good news is that the SBA then implemented a “Safe Harbor” policy which states that if you received a loan under $2 million, it will be presumed that you clarified the necessity of the loan in good faith. The reason for this is that smaller businesses are taking a bigger hit through the pandemic. Those businesses are also less likely to have access to an adequate source of liquidity in the current economic environment.
Additionally, the SBA just doesn’t have the bandwidth to review all these loans, so they decided to focus their auditing resources on larger loans.
There is also a Safe Harbor policy in place surrounding the reduction of your FTE count. This states that loan forgiveness will not be impacted if both the following conditions are met:
- You reduced FTE employee levels in the period beginning February 15th, 2020, and ending April 26th, 2020;
- You restored FTE employee levels by June 30th, 2020 — to FTE levels during the pay period that included February 15th, 2020.
There are also exceptions to the FTE reductions. The first exception states that if you had to lay off and then recall employees, but had employees voluntarily reject that offer, your forgiveness will not be impacted. To keep this exception, you must do the following:
- Offer the employee the same salary or wages and the same number of hours,
- Document a written offer to rehire the employee, and
- Document the employee’s rejection of that offer.
It’s also important to note that any employee who rejects this offer for reemployment may forfeit eligibility for unemployment.
The second FTE reduction exception states that forgiveness will not be impacted by any employees who were fired for cause, who voluntarily resigned, or who voluntarily requested and received a reduction of their hours.
Any FTE reductions, in this case, do not reduce your loan forgiveness, which is great news!