Maximizing PPP Loan Forgiveness: Frequently Asked Questions (FAQs)

The latest HR updates are often focused on PPP loans and how to maximize forgiveness.  Here are some FAQs that might illuminate these topics for you.  MP’s HR and payroll experts will answer questions that many PPP loan borrowers are thinking about.  We’ll also discuss some of the best HR strategies for spending PPP loan money, preparing to complete the forgiveness application, and what documentation is needed from a borrower’s payroll system as they work on the application.  

Tips for spending PPP loans for maximum forgiveness: 

Q: Is it a problem to use 100% of PPP funds on payroll costs?  

A: No, that is an acceptable way to spend it. The PPP Flexibility Act, which was the most recent legislation on the matter, requires that a borrower only use 60 percent of PPP funds on payroll costs (to receive forgiveness). They can, of course, use more.  

Q: For businesses whose owners are taking a draw (i.e. they’re not getting a salary or any kind of traditional funds), can they receive any type of compensation from their PPP loan and still receive forgiveness? 

A: In this case, it’s important to consider the business’s net income in 2019 and what portion of that net income the business owner’s compensation is. Don’t exceed the limits for owners, which include $20,033 for the 24-week recovery period.  There may be instances where the net profit is either more or less than the draw.  However, the draw amount is not significant when it comes to allowable PPP compensation, as you cannot exceed the 2019 net income amount. 

Q: Do limitations apply to compensation if the owner is a W2 employee? 

A: Yes. The rule about five percent ownership is an important consideration in this case.  If the owner controls more than five percent of the business, their compensation will be subject to limitations (if the business is aiming for maximum forgiveness).   

Q: Are there any restrictions on using PPP loans for rent? Can the money be used on rent incurred for lease? 

A: Yes, this is similar to the flexibility with wage payment in terms of incurred and paid. Borrowers can use the money for utility payments and rent incurred or paid during your covered period.  They can use that money towards non-payroll costs, and it will be forgiven.  One important caveat is that if a company subleases any of their space (either to an individual or another business), they cannot be forgiven for the full rent amount.  Anything that’s not under the employer’s control or not leased by the employer is not forgivable.  If a workplace is subleasing to someone else, or if the business is simply subleasing, only their portion is forgivable.  

Q: What should a business do if they have PPP money left over? 

A: The first step a business should take is to contact their CPA. They may suggest checking to see if there was a rent payment made during a covered period, or one that wasn’t due until after the end of their covered period that could be included in those costs. If there are some additional payments, or perhaps a compensation for employees for one reason or another, that might also be a good way to spend the money and still receive maximum forgiveness.  If a business or organization does have money left over, it obviously won’t be forgiven or be part of repayment.  

Q: Will the maximum amount for owner compensation be forgiven for a period of more than 8 weeks, but less than 24 weeks?  Will it need to be pro-rated? Or, does a borrower need to wait 24 weeks to apply for forgiveness to get the maximum owner compensation forgiveness?  

A: Yes, it is pro-rated if a borrower chooses a time frame of less than 24 weeks. So, if a client is looking to max out owner compensation, they’ll need to use a full 24-week period.  

Preparing for the forgiveness application for PPP loans: 

Q: What is the threshold for small PPP loans?  Who will be absolved from filing PPP forgiveness applications for loans under two million dollars? 

A: Nothing has officially passed yet, but congress is seriously discussing relief for small PPP Loans under $150,000. If it passes as proposed, these businesses would be able to have their PPP loans 100% forgiven upon signing a one-page attestation that the funds were used for approved expenses. There is also a good chance that a similar type of relief will be provided for loans under $2 million as well.  

Q: Does a two-year loan automatically become a five-year loan?  

A: No. If the terms of a loan were originally 2 years (because it was obtained before June 5th), it will remain 2 years unless a change is requested and approved in writing.  Borrowers should talk to their lenders to see how to change their loan to a five-year loan (and confirm that they can).  

Q: If a borrower chooses the 24-week covered period, can they report wages if they used the full amount of the loan towards wages?  

A: Yes.  In this case, all a business needs to do is show the payroll figures.  Show the wages paid to demonstrate that they were used at least the amount of the loan to pay wages.  Companies will also need to show the hours and the staffing figures to demonstrate that they didn’t reduce hours, pay, or staffing levels over the course of the covered period.   (It’s worth noting that all of this is assuming that the company will be required to fill out a forgiveness application.)  

Q: How do MP clients access the report for PPP loan forgiveness applications?   

A: Reach out to your account manager at MP.  They’ll need your loan origination date.  Then, your account manager can help you access or (generate for you) the report. If you don’t have access to those reports, we recommend getting it.  This data can help you decide which covered period and reference period provide you with the most forgiveness.  The data can also help you monitor your spending if your covered period is not over yet.    

Completing the forgiveness applications PPP loans: 

Q: Will, firing people for a cause create issues with a forgiveness calculation? 

A: No. Make sure to have documentation.  If an employer had people voluntarily leave employment or were terminated for cause (not laid off for financial reasons, but policy violations, like refusing to wear a mask or stealing), those are considered terminating for cause and can be exempted from forgiveness calculations.  

Q: Can I count life insurance in HSA contributions as payroll costs?  

A: Currently, the answer to that question is no. To get maximum forgiveness of a PPP loan, insurance expenses are restricted to health insurance premiums and traditional health insurance. Currently borrowers are waiting on clarification as to whether the new individual coverage HRA’s will be considered applicable for PPP loan use. Because they are ACA compatible, there’s a chance they will be.  

Q:  Our business needed to shut down due to COVID.  We had to cancel contracts with some union employees, and we are just now resolving the matter and paying them.  Their contracts were not active during the PPP loan coverage period.  Will their wages be counted towards forgivable expenses if they were paid out recently?   

A:  While it’s very likely these wages could be considered permissible and forgivable; businesses should check with their lender as they’re reviewing your paperwork.  Keep in mind how the wages were paid.  Was it as regular wages that are going to show up in the W-2, or are they a bonus? Are they a retro pay? Borrowers will need to be able to demonstrate that they were paid or incurred during their PPP loan coverage period.   

Q:  When submitting info from their payroll system, are borrowers required to submit detail that includes each employee’s names and wages? What about confidentiality concerns?  It seems risky to release this information first to the bank, then to the SBA.  

A: Yes, you do.  If you look at the tables on the current PPP loan forgiveness application, it does require you to list individuals and their income amounts during the period, then the supporting documentation as well. Part of the reason for this is that companies need to be able to do a side-by-side comparison of what an employee earned over time.  

Q: If an employer terminates a worker, their vacation payout was included in a biweekly pay, and the amount of that pay was over one hundred thousand dollars annualized, does that affect chances for forgiveness. 

A: Yes.  There are two separate tables. On one, employers will fill out wage information for people who earn less than $100,000.  The other table is for people who earn more than $100,000. The figures mentioned in the question would likely end up in that second table. There would be cap on compensation based on that that pro-rated amount. That figure of $100,00 is the maximum allowed under the PPP program.  

Q: What are the allowable reference payroll period options? 

A: The reference period is up to the employer.  They can choose the more favorable of February 15, 2019- June 30, 2019 or January 1, 2020 – February 29, 2020.  Seasonal employers for tax purposes (i.e. a summer camp or ski resort) are allowed to use any consecutive 12-week period that falls between May 1st, 2019 and September 15th, 2019. 

Q: What happens if an employer uses 60% or more of the PPP loan for payroll expenses, but cannot reach full staffing levels before the end of the covered period? 

A: A business should familiarize itself with the rules surrounding safe harbors. If they can either prove that they could not reach full staffing levels because of government COVID safety restrictions (i.e. this affected the business operations and revenue), it will help them reach maximum forgiveness.  Another option is to have a pay period reflecting pre-pandemic staffing levels prior to the end of 2020. 

Q: Can an employer consider an employee who works 40 hours full–time?  Is any employee who works less than 40 hours part–time? 

A: Yes, the definition of full-time equivalent employees includes 40 hours.  There are a couple of allowable measures of employees who work fewer than 40 hours per week. Companies can count all part time employees as prorated based on a 40-hour work week.  For example, an employee who works 30 hours a week can be counted as .75 of a full-time equivalent. If a business has 2 employees who work 30 hours a week, they can be counted as 1.5 full-time employees.  Another allowable option is that any employee who works less than 40 hours a week is .5 of an employee.  (In the example above, this would put the employer at a disadvantage.) This could be beneficial if the borrower has a lot of employees that work less than 20 hours. If a borrower is a fast-food restaurant, amusement park, etc., and has many workers who do less than 40 hours a week on average, they can all be counted as .5 towards an FTE count.  

Q: What should an employer do if they lay off an employee, then the employee never returns calls or emails to return to work?  The employer doesn’t have any proof that the worker refused an offer of employment because they couldn’t get in touch with them.  

A: A company should start by sending something via certified mail to create proof that the offer was sent.  One of the requirements that frequently gets overlooked is to send documentation to the local unemployment office within 30 days to prove that an offer was sent. This will prove that there was indeed work available. The SBA has promised to release further guidance in the future on how to best prove that, or what document to use.  Additionally, a business should ask their lender for their opinion on this.  Ultimately, they’re going to be the decision maker.