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PPP Loan Forgiveness: Some Answers, Many Questions

Much has happened in the three-plus weeks since the Coronavirus Aid, Relief, and Economic Securities (CARES) Act was enacted on March 27, 2020.  The $349 billion dollars appropriated to the newly created Paycheck Protection Program (PPP) has been exhausted.  The Small Business Administration (SBA), the Federal agency administering the PPP, reports they have made over 1.6 million loans through nearly five thousand lenders with “net approved dollars” (net of fees paid to the originating lenders) of $342.3 billion dollars.  As of this writing, the Senate has approved legislation providing another $320 billion for the PPP and the House is expected to approve.  The President has indicated he supports the additional funding.

Many of these lenders have now disbursed funds to borrowers, triggering the eight week “Covered Period” for loan forgiveness purposes.  The cornerstone of the PPP, the loan-forgiveness provisions of the PPP provide that amounts expended for payroll costs, rent, mortgage interest, and utilities (“Eligible Expenses”) during this Covered Period are potentially forgiven.  Unfortunately, many questions remain unanswered at a time when employers need to make important decisions about their workforce and the use of the PPP funds to ensure forgiveness.

The CARES Act mandates the SBA to issue guidance on the loan-forgiveness provisions of the PPP within thirty days after enactment, or April 26, 2020.  Hopefully, this guidance will address some or all the following questions perplexing employers and their advisors:

  1. What are “costs incurred and payments made” during the Covered Period? 

Section 1106 of the CARES Act provides that a borrower is eligible for forgiveness of indebtedness on a PPP loan in an amount equal to the sum of permissible “costs incurred and payments made” during the covered period.  The phrase “costs incurred and payments made” is susceptible to at least two plausible interpretations: (a) that a cost must be both incurred and made during the covered period to be eligible for forgiveness; or (b) that a cost must either be incurred or made during the covered period to be eligible for forgiveness.  Employers need clarity on this basic provision. 

  1. What does “full-time equivalent employee” mean? 

The forgiveness provisions are not absolute; even after you decipher which “costs incurred and payments made” are eligible for forgiveness, the sum of the Eligible Expenses incurred and made during the covered period (the “Base Forgiveness Amount)” is subject to reduction or elimination based on the employer’s headcount during the covered period measured against one of two prior periods.  Specifically:

The Base Loan Forgiveness Amount is reduced by multiplying it by the following fraction:

  • The numerator of which is the average number of full-time equivalent employees per month employed by the borrower during the covered period (neither the CARES Act nor any subsequent guidance to date defines “full-time equivalent employees”)

  • The denominator of which is, at the election of the eligible recipient, either

    • the average number of full-time equivalent employees per month employed by the borrower during the period beginning February 15, 2019, through June 30, 2019, or

  • the average number of full-time equivalent employees per month employed by the borrower in January and February 2020.

For example, if an employer had 50 full-time equivalent employees during the covered period and employed 100 employees during both the period between January 1, 2020, and February 29, 2020, and during the period beginning on February 15, 2019, and ending on June 30, 2019, the Base Loan Forgiveness Amount would be multiplied by 50/100 or one-half and therefore reduced by 50%.

Unfortunately, there is no definition of full-time equivalent employees in the statute or in the other guidance issued to date.  While the typical calculation of full-time equivalent (FTE) is an employee’s scheduled paid hours divided by the employer’s hours for a full-time workweek, the rules of the Small Business Administration typically treat all employees (full time, part-time, temporary or employed on any other basis) equally.  And guidance is needed regarding the treatment of the following employees in this fraction:

  • furloughed employees

  • employees on workshare programs

  • employees on reduced schedules

  • former employees receiving severance

  • employees who voluntarily terminated

  • employees who were terminated for cause

  • employees on paid leave

Seemingly, to the extent employees or former employees are being paid amounts that qualify as payroll costs, such employees should be counted in the numerator of the reduction fraction; however, absent affirmative guidance we cannot say for sure.

Further, the provisions allowing an employer to “cure” any reductions to the Base Loan Forgiveness Amount for reductions in employees or wages between February 15, 2020, and April 26, 2020, (meaning the entire Base Loan Forgiveness Amount is forgiven) by restoring staffing levels to prior levels no later than June 30, 2020, are similarly tied to full-time equivalent employees.  As employers are facing these decisions now, prompt and clear guidance is needed. 

  1. How do employers persuade employees making more money on unemployment to return to “work” and make less money? 

As we can see from the prior question, employers need to bring staffing up to prior levels to achieve maximum loan forgiveness.  Many employers, however, had furloughed or laid off employees at the beginning of the COVID-19 pandemic.  When they receive the PPP loan proceeds and the Covered Period begins, however, many businesses remain shuttered.  Such employers will, therefore, have to pay their employees not to work.  Because of the enhanced unemployment provisions in the CARES Act, many of these employees are currently making more money not to work than they were making pre-pandemic.  Many employers are having difficulty convincing these employees to give up their lucrative unemployment benefits and are looking for ways to incentivize them to do so.

  1. Do bonuses or increases in compensation count as payroll costs? 

Both the amount of a PPP loan and the loan forgiveness provisions are based in principal part upon the employer’s “payroll costs.”  As defined in the CARES Act, payroll costs include “the sum of payments of any compensation with respect to employees that is salary, wage, commission, or similar compensation.”

Many employers are considering paying furloughed employees a bonus or increasing salary levels to incentivize them to forego their lucrative unemployment benefits and return to employment during the period between the start of the Covered Period and the time the employer’s business becomes operational again.  It is unclear, however, whether such payments will be considered payroll costs eligible for forgiveness.  While bonus payments are arguably “similar compensation,” different interpretations are similarly plausible as the absence of the term “bonus” in the payroll costs definition appears to be an intentional omission (Section 4116 of the CARES Act specifically references bonuses).  We also note that the employee retention tax credit provisions in the CARES Act (which provide a credit against employment taxes for qualified wages paid to employees) limits wages for purposes of the credit to the amount such employee would have been paid for working an equivalent duration during the immediately preceding 30 days.  SBA might take a similar approach and limit wage payroll costs to the average wages paid to the employee in a past measurement period.

  1. What about partnerships and LLCs? 

The availability of PPP loans to partnerships and LLCs and applying the loan forgiveness provisions to such entities has generated confusion from the outset.  Many believed that partners and members of an LLC could take out loans as self-employed individuals.  Subsequent guidance issued by SBA confirms that loans by partners are not permissible, and a partnership and its partners (and an LLC filing taxes as a partnership) are limited to one PPP loan.

Many questions remain, however.  For example, the SBA guidance states that “the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.”  Does this mean that a partnership with several active general partners, each of which has more than $100,000 in self-employment income, is limited to $100,000 in the aggregate?  Similar questions remain regarding loan forgiveness.

  1. Can an employer deduct payments that are eligible for forgiveness? 

When the CARES Act was enacted, the PPP loans seemed too good to be true.  The PPP provides forgiveness of the loan to the extent spent on Eligible Expenses and provides that forgiveness amounts are not taxable to the borrower for federal income tax purposes (but not necessarily for state and local income tax purposes).  The statute is not clear as to whether the borrower may also deduct these payments for Federal income tax purposes.  Generally, Section 265 of the Internal Revenue Code would preclude a deduction of the expenses due to the tax-exempt nature of the income, but clarity in future guidance would be welcome.

Response to the PPP has been overwhelmingly popular; the initial appropriation was exhausted promptly, and future appropriations are also expected to be disbursed quickly.  These loans offer a lifeline to many employers.  To achieve this intended purpose, however, employers need definitive guidance on the questions discussed above, among others.  Hopefully, the anticipated SBA guidance will provide some badly needed clarity.

Jackson Lewis P.C. © 2020National Law Review, Volume X, Number 113

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About this Author

Melissa Ostrower, Employee Benefits Attorney, Jackson Lewis Law Firm, qualified retirement plans
Principal

Melissa Ostrower is a Principal in the New York City, New York, office of Jackson Lewis P.C. She counsels clients in a broad range of employee benefit matters, including general compliance and administration of qualified retirement plans and nonqualified retirement plans.

Ms. Ostrower assists clients with welfare plan issues involving cafeteria plans, health plans, flexible spending accounts, COBRA and the Affordable Care Act. She regularly speaks on all benefits issues including federal health care reform, fiduciary...

(212) 545-4000
Robert R. Perry, Jackson Lewis P.C., labor, employment, benefits, lawyer
Principal

Robert R. Perry is a Principal in the New York City, New York, office of Jackson Lewis P.C. He has more than 20 years of experience in the area of employee benefits law.

Mr. Perry’s practice includes counseling clients on all aspects of employee benefits and executive compensation. Mr. Perry also advocates on behalf of clients in benefits-related disputes, as well as in administrative proceedings before the Internal Revenue Service, the United States Department of Labor and the Pension Benefit Guaranty Corporation.

212-545-4000