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Valued Friends and Clients of WebsterRogers,
Since the PPP Loan Forgiveness Application was released on Friday, we have spent time going through the calculations. The 11-page document with instructions can seem a bit overwhelming at first, so we thought we’d walk you through our ideas on a good place to start relative to loan forgiveness. If you plan to ultimately pursue loan forgiveness and want ideas on what you can do now, two items we believe you should focus on first are:
- Determine if you will use the “Covered Period” or the “Alternative Payroll Covered Period” to calculate eligible payroll costs over the 8-weeks.
- Calculate your Full-Time Equivalencies (FTEs) and Payroll benchmarks that you will want to match during your covered period to avoid a forgiveness reduction (if you don’t qualify for the Safe Harbor).
In this email we will walk you through both of these.
“Covered Period” vs “Alternative Payroll Covered Period”
To create “administrative convenience” for borrowers with biweekly (or more frequent) payroll, the PPP loan forgiveness application provides an option for borrowers to use an "Alternative Payroll Covered Period.” This period begins on the first day of a borrower’s first pay period following the PPP Loan Disbursement Date, instead of having the first day of the 8-week covered payroll period occur in the middle of a pay period. Using the alternative period should help companies ensure that they have a full 8 weeks of payroll costs eligible for forgiveness per the rules in the application. We believe most businesses will want to adopt the “alternative payroll covered period” for calculating their payroll costs over the 8 weeks.
Important: If this Alternative Payroll Covered Period is used, it only applies to payroll costs. The 8-week covered period for qualified nonpayroll expenses still begins the date a borrower receives the funds.
Consideration: Payroll costs incurred but not paid during the Borrower’s last pay period of the 8-week covered period are eligible for forgiveness if paid on or before the next regular payroll date. Based on our reading of this, you cannot have two pay periods outside of the covered period to pay for salary or wages incurred during the 8-week covered period. Therefore, it is important for borrowers to consider now any “lag” in their payroll and whether or not all of the incurred pay during the 8-week covered period will be paid on the next regular payroll after the end of the 8 weeks. In the event there is a payroll lag between incurred and paid where incurred pay at the end of the 8 weeks would not normally be paid for two payroll periods after the covered period, a borrower should move any pay incurred during the covered period forward to the first pay period after the 8 weeks. Working with your payroll provider to address this is important.
Calculating Your Forgiveness Payroll and FTE Benchmarks
As a reminder, borrowers will have PPP loan forgiveness reduced if:
- “the salary or hourly wages of certain employees during the Covered Period or the Alternative Payroll Covered Period was less than during the period from January 1, 2020 to March 31, 2020.”*
- “average weekly number of FTE employees during the Covered Period or the Alternative Payroll Covered Period was less than during the Borrower’s chosen reference period.”*
*Note: there are Safe Harbors related to these reductions where, if the borrower qualifies, FTEs and wages can be restored to Feb. 15, 2020 levels to avoid any forgiveness reductions. These safe harbor situations and calculations are not addressed in this email.
Calculating Compensation Benchmarks for each Salary Employee
For salaried employees, the compensation benchmark is each employee’s annualized salary paid in Q1. Take the salary paid to each employee between January 1, 2020 and March 31, 2020 (Q1) and multiply times 4 to get the annualized salary.
Important: Salaried employees that received compensation at an annualized rate of more than $100,000 for any pay period in 2019 are excluded from this calculation. You do not need to run this calculation for those employees.
Example
Employee A is a salaried employee who was paid $14,000 between Jan. 1 and March 31, 2020.
Employee B is a salaried employee who was paid $9,500 between Jan. 1 and March 31, 2020.
Calculation:
Employee A $14,000 x 4 = $56,000
Salary Benchmark for Employee A is $56,000
Employee B $9,500 x 4 = $38,000
Salary Benchmark for Employee B is $38,000
Calculating Compensation Benchmarks for Each Hourly Employee
For hourly employees, the benchmark is the average hourly wage paid to each employee between January 1, 2020 and March 31, 2020 (Q1). A simple method to make this calculation is to take the total amount paid to each hourly employee during Q1 and divide by the total hours that employee worked during Q1.
Example
Employee C is an hourly employee who was paid $16,000 between Jan. 1 and March 31, 2020 and worked a total of 540 hours during that time period.
Employee D is an hourly employee who was paid $10,500 between Jan. 1 and March 31, 2020 and worked a total of 510 hours during that time period.
Calculation:
Employee C $16,000 ÷ 540 = $29.63
Hourly Wage Benchmark for Employee C is $29.63
Employee D $10,500 ÷ 510 = $20.59
Hourly Wage Benchmark for Employee D is $20.59
*Note: Compensation is cash compensation paid to the employee as gross wage, bonus, and commissions.
Calculating FTE Benchmark
The full-time equivalency (FTE) benchmark is your average weekly FTE during the period of either (1) February 15, 2019 to June 30, 2019, (2) January 1, 2020 to February 20, 2020, or (3) 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. The time period used is up to the Borrower. To make the calculation, determine the average number of hours paid per week for each employee during the selected time period. Divide these average hours paid by 40 and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method option was provided in the loan forgiveness application which allows a borrower to assign a 1.0 FTE for employees who are paid an average of 40 hours or more per week, and 0.5 FTE for employees who are paid fewer than an average of 40 hours per week during the selected period. Whether to use the simplified method or not is at the election of the Borrower. Once you have the FTE calculation for each employee, add them all up to get your FTE benchmark for the covered period.
Example (for this example we will use a selected period of January 1 – February 29, 2020)
Employee A was paid an average of 47 hours per week Jan 1 – Feb 29, 2020
Employee B was paid an average of 40 hours per week Jan 1 – Feb 29, 2020
Employee C was paid an average of 34 hours per week Jan 1 – Feb 29, 2020
Employee D was paid an average of 13 hours per week Jan 1 – Feb 29, 2020
Calculations:
Employee A 47 ÷ 40 = 1.175
Employee A Average FTE = 1.0
Employee B 40 ÷ 40 = 1.0
Employee B Average FTE = 1.0
Employee C 34 ÷ 40 = 0.85
Employee C Average FTE = 0.9
Employee D 13 ÷ 40 = 0.325
Employee D Average FTE = 0.3
FTE Benchmark = 1.0 + 1.0 + 0.9 + 0.3 = 3.2 FTE
The borrower’s total average FTE for the period is 3.2
Simplified Method (avg hours per week ≥ 40 = 1.0 FTE, avg hours per week < 40 = 0.5 FTE)
Employee A Average FTE = 1.0
Employee B Average FTE = 1.0
Employee C Average FTE = 0.5
Employee D Average FTE = 0.5
FTE Benchmark = 1.0 + 1.0 + 0.5 + 0.5 = 3.0 FTE
The borrower’s total average FTE for the period using the simplified method is 3.0
This table illustrates these calculations.
Since there are options for how these calculations are made, it may be best to run your benchmark calculations several ways to help you choose the best compensation period and FTE calculation method for your company.
Just to reiterate, the first step before calculating these benchmarks is to ensure that your payroll cycles coordinate with your covered period selection so that it includes a full 8 weeks of payroll eligible for forgiveness.
We will be following up with another email detailing the safe harbor options.
If you need assistance with your loan tracking or you would like to discuss your situation relative to PPP loan forgiveness, we are here to help. Reach out to your WR Partner or you relationship manager. You can also email our COVID-19 task force for assistance: This email address is being protected from spambots. You need JavaScript enabled to view it..
In case you missed any of our previous updates, you can find them all posted on the News Updates page of our website.
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