Forgiveness Thoughts

As the Federal government continues to seek expanded funding for the Paycheck Protection Program (PPP), there are many companies that have received their loan funds and started the 8-week period to use the funds. The main benefit of the PPP is that it provides forgiveness of the loan if the borrower maintains its workforce (headcount) and salaries during the 8-week period after receiving the loan funds.

Here are some important provisions related to the forgiveness of the PPP loan:

  1. 75%/25% Rule – The SBA with its Interim Final Rule included a provision that allows up to 25% of the forgivable amount to be related to non-payroll related items. Limiting non-payroll costs to 25% of the forgiveness amount aligns the overarching focus on keeping workers paid and employed.
  2. Reduction of forgiveness related to the number of employees - Borrowers that use loan proceeds for allowable purposes may have their forgiveness reduced if their full-time equivalent (FTE) employees are not the same as they were during a base period as defined by the CARES Act. That is, if the borrower’s FTEs during the base period in 2019 is greater than the number of FTEs during the 8-week period after receiving the loan funds then the forgiveness will be reduced by that percentage.
  3. Reduction of forgiveness related to the salary and wages - Borrowers that responded to the COVID-19 pandemic by reducing employee wages and salaries may also have a reduction of the loan forgiveness if that reduction was greater than 25% of non-highly compensated employees, as defined by the CARES Act. The reduction is related only to employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.
  4. Opportunity for exemption from reduction - There is an opportunity for the borrower’s forgiveness reduction to not be considered if they meet the re-hire exemption. If a borrower were to experience a reduction of FTEs between February 15, 2020 and April 26, 2020 (i.e. layoffs, furloughs, etc) and/or a reduction in the salary or wages of 1 or more employees as described in the CARES Act, they’re eligible. In order to meet the exemption, the borrower must eliminate the reduction in FTEs by June 30, 2020 and/or eliminated the reduction in the salary or wages of such employees.

To complicate things there are several unclear matters to be addressed in the forgiveness provisions. The following matters require additional clarification from the Treasury or SBA, as outlined below to help you prepare:

1.   The 75%/25% rule is based on allowable uses of the loan proceeds, but do those costs need to be incurred or paid or incurred and paid. As stated in the CARES Act forgiveness is defined as the sum of costs incurred and payments made during the covered period. The terminology of “incurred and payments made” in the CARES Act

As stated in the CARES Act forgiveness is defined as the sum of costs incurred and payments made during the covered period.   The terminology of “incurred and payments made” in the CARES Act is causing confusion for many borrowers.  Many incur certain costs, like health care insurance premiums that are incurred as the employee provides service to the employer, but will be paid 30 days after.  So was it the intent of the CARES Act to only allow for 1 month of health care benefits because if an organization does not change their internal process of bill payments they may only pay 1 month of health care costs that were incurred and paid.   However, if the interpretation were to be incurred or paid, there is the potential to prepay certain costs, which also does not seem to be the intent of the CARES Act. 

2. Did the CARES Act intend to have allowable uses to be different from forgiveness amounts?

The CARES Act specifically allows for the use of loan proceeds to pay interest on any other debt obligations that were incurred before the 8-week loan period, which recognizably could be quite broad, however, in the forgiveness section of the CARES Act there is no mention of the other debt obligations.

Additionally, bonuses likely were included in maximum loan calculations.  It remains to be seen if during the loan period an accrual of a bonus is an allowable use, or does it have it to be paid.  What if bonuses paid represented what an employer expected to pay for the 2020 service; could that be included in allowable uses and part of the forgiveness amount?

3. How do borrowers calculate an FTE during the 8-week period and the base periods for the reduction of forgiveness related to the number of employees?

There are a couple issues here.  The CARES Act  does not specifically address the definition of a full-time equivalent (i.e. is it based on a 30 hrs work week, 37.5 hrs, 40 hrs., etc).   Also, the calculation is based on monthly average FTEs for the base period (February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020) which may include a partial month.   Another issue is what if an employee were to terminate their employment voluntarily.  Does that go against the Company’s forgiveness calculation?

4. How do borrowers calculate FTEs at February 15, 2020 and April 26, 2020?  

In order to qualify for the re-hire exemption, borrowers will need to validate that they had a reduction of either FTEs or salaries and wages during the dates described in the CARES Act.  However, as noted in the previous item there is not a clear calculation of FTEs during a period.

Further its unclear how to calculate FTEs at a specified date. 

5. What’s the definition of an employee who did not receive, during any single pay period in 2019, wage or salary at an annualized rate of pay in an amount more than $100,000.

The CARES Act requires employers to consider in determining the reduction related to salaries and wages of any employee that did not receive  an annualized wage or salary of $100,000 during any pay period in 2019.  Interpreting this definition is causing confusion because factoring in a bonus during 2019 for a non-highly compensated employee could be the difference between including the employee or not. 

6. The definition of the wage reduction according to the CARES Act for non-highly compensated is a comparison between the most recent full quarter during which the employee was employed before the covered period and the 8-week period. 

In computing the dollar amount of the reduction, the CARES Act requires borrowers to compare the most recent full quarter during which the employee was employed before the 8-week loan period.  A difference of greater than 25% between those two periods further reduces a borrowers’ forgiveness.  However, those two periods are not comparable.  A full quarter could be 12 weeks; it could be 13 weeks.  In either event, a full quarter is not 8 weeks so an employee’s wage and salary should be expected to be less than during the most recent full quarter. Is that really the intention of the CARES Act?  Or is it looking to compare the weekly or biweekly pay of the two periods and compare them to each?

Please visit our Coronavirus Resource Center for related content.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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