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Loss of Loan Forgiveness for FTE Reduction

June 3, 2020 | Category: Asset Protection, Corporate and Taxation, Estate Planning and Probate, News

The Paycheck Protection Program (PPP) specifically requires certain reductions in a borrower’s loan forgiveness based on reductions in full-time equivalent (FTE) employees  during the 8-week loan forgiveness period (covered period).

The SBA has adopted exemptions to the FTE reduction rules for borrowers who have rehired employees and restored salary and wage levels by June 30, 2020, or who have offered to rehire employees or restore employee hours, even if the employees have not accepted. Specifically, in calculating the loan forgiveness amount, a borrower may exclude any reduction in FTE employee headcount that is attributable to an individual employee if:

  • --the borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
  • --the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
  • --the offer was rejected by such employee;
  • --the borrower has maintained records documenting the offer and its rejection; and
  • --the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer. Further guidance on how borrowers will report rejected rehire offers to state unemployment insurance offices will be provided on the SBA’s website.

For some background, the PPP reduces the amount of the PPP loan that may be forgiven if the borrower reduces FTE employees during the 8-week covered period, as compared to one of the following reference periods, selected by the borrower

  1.   February 15, 2019 through June 30, 2019;
  2.   January 1, 2020 through February 29, 2020; or
  3.   In the case of a seasonal employer, either of the two preceding methods or a consecutive 12-week period between May 1, 2019 and September 15,2019.

The PPP includes certain FTE safe harbors, pursuant to which this reduction in the forgiveness amount is waived, if the borrower eliminates the reduction in FTE employees occurring during a different statutory reference period (February 15 – April 26, 2020) by not later than June 30, 2020 or if the FTEs as of June 30, 2020 equals of exceeds those as of the payroll period including February 15, 2020.

CONFUSED YET?!

If the average number of FTE employees during the 8-week covered period or the 8-week alternative payroll covered period is less than during the chosen reference period, the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees.

For example, if a borrower had 10.0 FTE employees during the chosen reference period and this declined to 8.0 FTE employees during the 8-week covered period, the percentage of FTE employees declined by 20% and, unless one of the above exemptions apply, only 80% of otherwise eligible expenses are available for forgiveness.

As you can see, there are at least 6 different FTE periods a borrower needs to calculate in order to: 1) apply for PPP forgiveness; 2) determine any potential reduction in such forgiveness; and 3) determine if an applicable FTE safe harbor applies.

An FTE employee means an employee who works 40 hours or more, on average, each week. The hours of employees who work less than 40 hours are calculated as proportions of a single FTE employee and aggregated.

Borrowers seeking forgiveness must document their average number of FTE employees during the covered period (or the alternative payroll covered period) and their selected reference period. For purposes of this calculation, borrowers must divide 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 an FTE employee of 1.0. For employees who were paid for less than 40 hours per week, borrowers may choose to calculate FTEs 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. For example, if an employee was paid for 30 hours per week on average during the covered period, the employee could be an FTE employee of 0.75. Similarly, if an employee was paid for ten hours per week on average during the covered period, the employee could be an FTE employee of 0.25. Alternatively, for administrative convenience, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee.

Borrowers may select only 1 of these 2 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. In either case, the borrower shall provide the aggregate total of FTE employees for both the selected reference period and the covered period or the alternative payroll covered period, by adding together all the employee-level FTE employee calculations. The borrower must then divide the average FTE employees during the covered period, or the alternative payroll covered period by the average FTE employees during the selected reference period, resulting in the reduction quotient, for purposes of determining PPP loan forgiveness.

Many of us dealing with the PPP loans and forgiveness process have begun to see situations where small businesses are able to spend most if not all of the loan proceeds on payroll and non-payroll related expenses, eligible for forgiveness, during the eight-week period following disbursement of the PPP loan, only to find their loan forgiveness will be substantially reduced because of reductions in FTEs, whether due to  a reduction in the number of staff, hours or both!

We have been working with many of these small businesses, during the eight-week period, in order to strategize as to how to most practically increase their FTEs, to minimize any reduction in loan forgiveness!

We are here to help!

 

 

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