The Payroll Protection Program (PPP) was designed as a loan to help businesses survive the COVID-19 pandemic. The program provides for partial or full loan forgiveness financed by the SBA, provided that loan proceeds are used according to SBA guidelines during the applicable time periods for use of the funds. In effect, the loan converts to a government grant to the extent that the loan is forgiven.
The determination of the loan forgiveness amount is complicated because reductions are imposed to the extent of certain salary reductions and/or to the extent that there is a reduction in the number of “full time equivalent” employees on payroll.
On May 15th the SBA issued much anticipated guidance regarding how loan forgiveness will be calculated in the form of a Loan Forgiveness Application. The Application can be found here.
Below are some of the issues clarified by the Loan Forgiveness Application and instructions.
Borrower may choose the “reference period” for determining the number of full-time equivalency (FTE) employees.
For purposes of determining the baseline number of full-time-equivalent employees (used to determine whether there has been a reduction in the borrower’s workforce), the form allows the borrower to choose one of the following “reference periods”:
- February 15, 2019 to June 30, 2019
- January 1, 2020 to February 29, 2020
- In the case of seasonal employers, either of the preceding periods or a consecutive twelve-week period between May 1, 2019 and September 15, 2019.
Clarification regarding the “covered period” to be used to calculate how funds are used.
The analysis of how loan proceeds are used will be based upon the “covered period”, which is the eight-week (56-day) period commencing with the PPP loan disbursement date.
The application provides the following example: if the Borrower received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, June 14.
Option to use an “alternative payroll covered period”.
Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”).
The following example is provided: if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20. The Alternative Payroll Covered Period is used for purposes of calculating payroll costs, but should not be used for calculating non-payroll costs.
Consider payroll costs paid and payroll costs incurred during the Covered Period or the Alternative Payroll Covered period.
The instructions provide that borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the Covered Period or Alternative Payroll Covered Period. Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned.
It provides further that payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period or Alternative Payroll Covered Period are eligible for forgiveness if paid on or before the next regular payroll date. However, with respect to “non-cash compensation payroll costs” (employer contributions for employee health insurance, employer contributions to employee retirement plans and employer state and local taxes assessed on employees), the calculation only allows for such expenses that are “paid” during the Covered Period or Alternative Covered Period. This is a point which may require further clarification.
Calculating Full Time Employee Equivalent.
The application provides that one FTE credit is allowed for each employee who works an average work week of 40 hours or more. An employee working an average work week of less than 40 hours will be credited a fractional portion of one FTE. However, the application allows borrowers to use a simplified method to calculate the FTE, by allocating 1 FTE per employee working an average work week of 40 hours or more and .5 FTEs for any employee who works an average work week that is shorter.
FTE Reduction Exceptions.
The application provides that the borrower will not be penalized for FTE reductions with respect to employees who, during the Covered Period or Alternative Payroll Covered Period, refuse to return to work, are fired for cause, voluntarily resign, or voluntarily request and receive a reduction in hours. In the case of an employee who refuses to return, the borrower must be prepared to show that borrower made a good-faith written offer to rehire the employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee.
We expect additional details soon, and we’ll update our COVID-19 Legal Assistance Practice page with the latest information. To stay updated, sign up for our mailing lists.
For any assistance or questions, contact us.
Morris Sabbagh is a partner in Vishnick McGovern Milizio’s Tax, Trusts & Estates, Elder Law, and COVID-19 Legal Assistance Practices. He can be reached at msabbagh@vmmlegal.com and 516.437.4385 x120
