With many businesses considering how and when to reopen or resume operations, a major barrier to Paycheck Protection Program (PPP) loan forgiveness has been addressed in new guidance released Sunday, May 3, 2020, by the U.S. Treasury and Small Business Administration. In an updated program FAQ, Treasury and SBA clarify that loan forgiveness will not be reduced for business owners who make a good faith effort to rehire employees at prior wage and hour levels.
The clarification of this so-called full-time equivalent (FTE) haircut test is a significant win for employers struggling to recall a workforce that may be unwilling or unable to return to work due to illness, lack of child care, etc. This new FAQ, which signals more guidance to come in a new interim final rule, allows employers to pause and consider their workforce more strategically, instead of making hasty hires to meet headcount requirements of loan forgiveness.
FTE haircut, explained
When used for specified payroll, mortgage interest, rent and utilities payments over the eight weeks after disbursement, PPP loans are eligible for tax-free forgiveness. Seventy-five percent of either the loan amount or forgiveness amount (currently conflicting guidance at the time of this writing) must be spent on payroll costs.
Under the original guidance from Treasury and SBA, after an employer calculates its spending over the eight-week period, the FTE haircut was applied. This meant comparing the average full-time equivalent employees (FTEs) during the eight-week period to the average FTEs from February 15, 2019 through June 30, 2019, or January 1, 2020 through February 29, 2020, depending on seasonality.
Depending on the size of the workforce, this calculation could have had a serious impact on forgiveness calculations. For example, if a company with an eight-person workforce failed to recall two of its employees that would equal a 25 percent reduction in forgiveness.
How to make good faith rehiring effort
According to the new FAQ, employee refusal of a good faith written offer of the same position, hours and pay will not be held against the employer with respect to loan forgiveness reduction. RKL has long advised employers to maintain a paper trail of outreach to document an employee’s acceptance or refusal to return to work. Having an official recall letter and response in writing on file allows employers to revise forgiveness calculations and adjust the FTE haircut to exclude individuals who declined the offer.
It is important to note that PPP guidelines never dictated specific staffing plans or work assignments as a result of payroll retention. In other words, it is between the employer and employee to figure out a suitable arrangement. For some companies, this means bringing the team back to resume operations, while other employers may keep its workers on payroll but not call them back to work just yet. This speaks to the original intent of PPP, which sought to keep employees on payroll, reduce the burden on state unemployment compensation programs and prevent unprecedented unemployment data.
RKL has been helping employers calculate and predict loan forgiveness through its Loan Forgiveness and Cash Flow Forecast. This approach means we’re able to go back and add new data as it relates to good faith recall efforts and produce an updated forecast. Have questions about sending recall letters or recalculating forgiveness? Contact your RKL advisor or reach out using the form below.