SBA Releases PPP Loan Forgiveness Final RulesMay 26, 2020 Alert
Read more about the rules that the Treasury Department and Small Business Administration recently released for PPP loan forgiveness.
Under the Paycheck Protection Program (PPP) created by the CARES Act, loans may be forgiven if borrowers use the proceeds to maintain their payrolls and pay other specified expenses. The Treasury Department and Small Business Administration recently released interim final rules for PPP loan forgiveness. The final rules reiterate most of the information provided on the PPP loan forgiveness application and instructions and also provide additional guidance on:
- What payroll and non-payroll costs are eligible;
- How to calculate full-time equivalent employees (FTEs); and
- How to apply the reductions to loan forgiveness amount rules.
Eligible Payroll and Non-payroll Costs
The final rules state that salary, wages or commissions paid to furloughed employees and bonuses, or hazard pay paid to employees during the covered period are eligible for forgiveness. The salary, wages, or commission payments to furloughed employees cannot exceed an annual salary of $100,000, as prorated for the covered period. The final rules also provide, that 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, and are thus a similar form of compensation.
Lastly, the final rules provide that advance payments of interest on mortgage obligations are not eligible non-payroll costs and emphasize that principal payments on mortgage obligations are not eligible under any circumstances.
Applying the Loan Reduction Rules
The CARES Act requires certain reductions in a borrower’s loan forgiveness amount based on reductions in full-time equivalent employees or in an employee’s salary and wages during the covered period, subject to a statutory exemption for borrowers who have rehired employees and restored salary and wage levels by June 30, 2020. The final rules confirm a regulatory exemption to the reduction rules for borrowers who have offered to rehire employees or restore employee hours, but the employee declines the offer. The final rules use a question and answer format to illustrate the application of the reduction rules formulas.
FTE Definition and Reduction Calculation
The rules confirm that a reduction in FTE count will generally reduce the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. The guidance also confirms the definition of FTE as an employee who works 40 hours or more, on average, each week and the hours of part-time employees are calculated as proportions of a single FTE and aggregated. Borrowers must document their average number of FTE employees during the covered period or alternative covered payroll period and their selected reference period and then calculate the reduction quotient. If the average number of FTE employees during the covered period or the alternative payroll covered 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.
Borrowers may select from three predetermined reference periods:
- February 15, 2019- June 30, 2019;
- January 1, 2020 – February 29, 2020; or
- For seasonal employers only, either of the two preceding methods or a consecutive 12-week period between May 1, 2019 and September 15, 2019.
FTE employees are calculated by dividing the average number of hours paid for each employee per week by 40, capping this quotient at 1.0. For example, an employee who was paid 48 hours per week during the covered period would be considered to be an FTE employee of 1.0.
For employees who were paid for less than 40 hours per week, borrowers may calculate the full-time equivalency in one of two ways. First, the borrower may calculate the average number of hours a part-time employee was paid per week during the covered period. Second, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee. Borrowers may select only one of these two methods, and must apply that method consistently to all of their part-time employees for the covered period or the alternative payroll covered period and the selected reference period.
To determine the reduction quotient, the borrower must total the FTE employees for both the selected reference period and the covered period or alternative payroll covered period. The FTE average during the covered period or alternative payroll covered period is divided by the FTE average during the reference period, resulting in the reduction quotient.
Effect of Wage or Salary Reduction on Loan Forgiveness
Under the CARES Act, a reduction in an employee’s salary or wages in excess of 25 percent will generally result in a reduction in the loan forgiveness amount, unless an exception applies. Specifically, for each new employee in 2020 and each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25 percent of base salary or wages between January 1, 2020 and March 31, 2020 (the reference period). This reduction calculation is performed on a per employee basis, not in the aggregate.
For example: A borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the reduction. Borrowers seeking forgiveness would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by eight weeks).
Accounting for Reduction Based on Reduction in Employee Count versus Reduction in Salary and Wages
To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction. The agencies have determined that the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.
For example: An hourly wage employee had been working 40 hours per week during the borrower selected reference period (FTE employee of 1.0) and the borrower reduced the employee’s hours to 20 hours per week during the covered period (FTE employee of 0.5). There was no change to the employee’s hourly wage during the covered period. Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE employee reduction and the borrower is not required to conduct a salary/wage reduction calculation for that employee.
No Penalty if Wages and Salaries or FTE Employees are Restored by June 30, 2020
If salary and wages or FTE employee counts were reduced during February 15, 2020 and April 26, 2020 but restored by June, 30, 2020 the borrower is exempt from any reduction in loan forgiveness that would have otherwise been required. This does not change or affect the requirement that at least 75% of the loan forgiveness amount must be attributable to payroll costs.
Loan Forgiveness Not Affected by Terminations for Cause or Voluntary Resignations or Voluntary Reductions in Hours
When an employee is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the covered period or the alternative payroll covered period (FTE reduction event), the borrower may count such employee at the same full-time equivalency level before the FTE reduction event when calculating the FTE employee reduction penalty.
Check out our Paychex Protection Program (PPP) Loan Forgiveness toolkit here. Clients are encouraged to review the applications and instructions and to start gathering the required documentation that will need to be submitted. Employers should also continue to watch for updated guidance related to the loan forgiveness process as additional guidance is expected.
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This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.