PPP Forgiveness

As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.

When Congress passed the Coronavirus Aid Relief and Economic Security Act (also known as the CARES Act), relief for small businesses came in the form of the Paycheck Protection Program. The Paycheck Protection Program is a loan program administered by the U.S. Small Business Administration that was designed to help business owners keep their employees on payroll during the COVID-19 pandemic and corresponding economic slowdown. The Paycheck Protection Program initially oversaw $350 billion in small business loans, but when applications opened, those loan funds were completely depleted in less than two weeks, which spurred Congress to pass additional legislation, replenishing the lending program with $310 billion for PPP loans. Arguably the biggest reason the Paycheck Protection Program has been so popular with small business owners is that, unlike other disaster lending options (like the Main Street Lending Program or EIDL loans), up to 100% of the loan amount is eligible for loan forgiveness, so long as the loan proceeds are used to cover payroll costs (including sick leave, retirement benefits, health care costs like health insurance, and payroll expenses) and approved non-payroll costs (including mortgage interest and mortgage obligation, rent, and utility payments) during the covered period—which originally was the eight-week period following loan origination, but has since been extended to 24 weeks. Again, the point of PPP loans was to get small businesses the funding they needed to keep their employees on payroll—and originally, business owners were only eligible for loan forgiveness if they maintained employee headcount; if they didn’t maintain the same number of employees as the company employed pre-COVID, the amount eligible for PPP loan forgiveness would be proportionately reduced.

The Paycheck Protection Program Flexibility Act and exemptions to loan forgiveness reductions

But when the Paycheck Protection Program Flexibility Act (PPPFA), it included a number of exemptions to loan forgiveness reductions. Now, business owners will not face loan forgiveness reductions if their employees voluntarily resign, don’t accept a good faith rehiring offer, or are fired/let go with cause. If you’re one of the millions of small businesses that received a loan through the Paycheck Protection Program, you want to make sure you’re meeting the necessary requirements for loan forgiveness. But what, exactly, is the process for qualifying for loan forgiveness if you’ve had employees resign or let go for a justifiable cause?

Loan forgiveness calculation

Before we jump into the best practices for getting your PPP funds forgiven, let’s quickly cover how loan forgiveness is calculated. In order to calculate loan forgiveness amount and eligibility, you’ll need to determine your employees’ full-time equivalency (or FTE). There are two loan forgiveness calculations you can use to determine FTE. You can either take the average number of hours paid each week, divide by 40, and round to the nearest tenth (Hours paid each week / 40 = FTE) or you can assign full time employees that work 40 hours or more per week an FTE of 1.0 (FTEs can’t exceed 1.0 for an individual employee, even if they work more than 40 hours per weekly pay period) and employees who work less than 40 hours per week an FTE of 0.5. These calculations are used on your PPP Loan Forgiveness Application to prove that you maintained FTE employee levels after receiving a PPP loan (you can use either calculation on the loan application, as long as you remain consistent). But, as mentioned, there are now exemptions that allow you to show a lower FTE count if you had employees leave, refuse a good faith offer, or terminated for just cause. So, the question is, how do you qualify for those exemptions? What are the best practices to ensure you qualify for full loan forgiveness, even if you’ve had to reduce headcount due to qualified employee resignations or terminations (or you had an employee reject a rehire offer after a layoff or furlough)?

Document the resignation, termination, or offer decline

 If you’ve had to terminate an employee with just cause or had an employee quit, it’s important that you document the entire process. Part of the loan forgiveness eligibility criteria is that everything is documented. If you fired an employee, you’ll need documentation that explains why the employee was terminated. You’ll also want to keep supporting documentation that supports the fact that the termination was made for a specific cause (for example, if you fired an employee because they continually failed to show up for their scheduled shifts, you’ll want to keep records of relevant shift schedules and time cards).

Report rejected offers to the state unemployment office

If you made an offer to rehire laid off or furloughed employees and that offer was rejected, you’ll need to document your efforts to rehire and restore hours—but there’s also an additional step you’ll need to take in order to qualify for the loan forgiveness exemption. If you have an employee reject an offer for rehire, you’ll need to report that rejection to the state unemployment office. Depending on the circumstances, rejecting an offer of employment may impact the former employee’s eligibility for unemployment compensation—and, as an employer, it’s your responsibility to keep the unemployment office informed.

Look for replacements—and be able to prove it

If you have employees who reject an offer to return to their jobs, you don’t automatically qualify for loan forgiveness. Instead, you’ll need to show that you actively searched for workers to replace those employees. When applying for PPP loan forgiveness, be prepared to provide documentation that proves you did your due diligence in hiring new people to restore your pre-coronavirus pandemic headcount. Otherwise, you may run into issues qualifying for loan forgiveness—and your total forgivable amount may be reduced.

Stay informed on how to qualify for PPP loan forgiveness

The Paycheck Protection Program is a brand new lending initiative—and, as such, there are still a lot of question marks as to how to qualify for loan forgiveness. While these are the current eligibility requirements for loan forgiveness, those requirements may change moving forward. For the most up-to-date additional information, be sure to check the SBA’s website.

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