Planning for Paycheck Protection Program Forgiveness

One of the key benefits of a Paycheck Protection Program (PPP) loan is the ability to have all or a portion of the loan forgiven.  The amount of a PPP loan that will be forgiven is based initially on the qualifying costs an employer incurs during the 8 week period following loan funding (at least 75% of which must be used for payroll costs to qualify for 100% loan forgiveness).  The initial forgiveness amount is then subject to reduction under a headcount test and a salary test.  The headcount test and salary test reductions, however, do not apply in certain instances when headcount and salary are restored by June 30, 2020.

While the general requirements that must be met for forgiveness are set forth in the CARES Act, further guidance from the SBA is anticipated.  The summaries below are based on the CARES Act and existing SBA guidance.  Future guidance may alter the requirements set forth in the summaries below.

Qualifying Costs during the Covered Period

  • The covered period is the 8 week period beginning on the date of the origination of a PPP loan (i.e. when the loan is funded).
  • Qualifying Costs include:
    • Payroll costs
      • The same definition of payroll costs used to size a PPP loan is used for purposes of forgiveness.
      • Payroll costs do not include the employer’s portion of payroll taxes or workers’ compensation premiums.
      • Payroll costs do not include compensation over $100,000, pro-rated for the covered period (i.e. $1,923/week limit; $100,000/52).
    • Payment of interest on a covered mortgage obligation
      • Limited to liabilities of the borrower covered by a mortgage on real or personal property that was incurred before February 15, 2020.
    • Payment of covered rent obligation
      • Limited to rent obligated under a leasing agreement in force before February 15, 2020.
    • Covered utility payments
      • Limited to payments for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
    • Caution: No more than 25% of the qualifying costs can be for costs other than payroll costs.

Headcount Test

  • First determine the base headcount.
    • The base headcount equals the average number of full-time equivalent employees per month during a period elected by a borrower, either February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020 (seasonal employers can use the period February 15, 2019 through June 30, 2019).
    • FTEs are determined by calculating the average number of FTE employees for each period falling within a month.
      • No guidance addresses a specific method for calculating FTEs. Presumably the calculation will be based on a 40 hour work week and someone who works 40 hours is counted as 1.0, while someone who works 28 hours would be counted as 0.7.
    • Second determine the headcount during the covered period.
    • Reduce forgiveness by multiplying qualifying costs by the quotient of the headcount during the covered period to the base headcount.

Salary Test

  • First determine covered employees.
    • Employees are covered employees unless they received, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000
  • Second determine whether the salary or wages of a covered employee have been reduced by more than 25% of the total salary or wages paid to the employee during the most recent full quarter during which the employee was employed before the covered period (e.g. 1st quarter of 2020).
    • The CARES Act comparison of 25% based on a quarter of wages to wages paid in the 8 week covered period is strange. Future guidance may impose an equal period comparison so employers should be cautious if they are reducing wages by more than 25%.
    • The CARES Act appears to apply the salary test to specific employees, not aggregate payroll. Future guidance will hopefully address issues related to new hires (e.g. hired in March 2020), terminated for cause employees, and replacement employees.
  • Reduce forgiveness by the amount salary or wage reduction in excess of the 25% limitation above.

Restoration Exceptions

  • If there was a reduction in headcount between February 15, 2020 and April 26, 2020 and the employer restores the reduction not later than June 30, 2020 then the headcount test does not apply.
    • Guidance is needed to determine what, if anything, will be required aside from restoring headcount for one day before June 30, 2020.
  • If there was a reduction in salary or wages between February 15, 2020 and April 26, 2020 and the reduction is restored not later than June 30, 2020 the salary test does not apply.
    • Guidance is needed to determine what, if anything, will be required aside from restoring a particular employee’s compensation for one day before June 30, 2020.

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