SBA Loan Forgiveness Guidance – Good News!
Question # 40: Laid Off Employee Declines to Come Back When Offered to Rehire
To our clients and friends.
In a previous posting we discussed the complicated rules of the SBA PPP loan forgiveness process and the importance of the counting of employee full-time equivalents (FTE’s). Our message was that the amount of loan forgiveness, in part, was going to be determined by the FTE count during the important 8-week measuring period that starts at time of loan funding.
Since that posting, we have received numerous phone calls from clients that received their PPP loan but were struggling to get their employees to come back. Through no fault of their own, the additional $600 of weekly unemployment compensation created a conundrum. In many cases, the employees were making more on unemployment than they would if they came back at the same pay rate.
We were telling our clients that based on the current interpretation of the SBA guidance the amount of the loan that was not going to be forgiven was going to increase because of the FTE calculations.
Good News!!!
Here is the guidance we just received in “Question “40”:
Question # 40: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
Commentary
For many of our clients this is a significant change and important guidance. It is important that if you have a situation like this and as an employer, you must document your files to be able to take advantage of this change.
To illustrate the importance of the FTE calculations let us assume we have a “perfect” fact scenario and one that is not “so perfect”.
The 100% loan forgiveness can best be illustrated by the following:
- You received a PPP loan of $40,000.
- You paid $30,000 of qualified wages during the 8-week period.
- You had qualifying non-payroll costs of $10,000.
- Your average FTE count during the 8-week period was 7.
- Your average FTE count during the pre-funding period was 7.
Based on the above assumptions, and our present interpretations of the SBA guidance, we think the amount of loan that is forgiven will be $40,000 calculated as follows:
- Total qualified wages of $30,000 divided by .75 equals $40,000 (the maximum amount of non-payroll costs cannot exceed 25% of the total qualified loan).
- FTE ratio of 7/7 multiplied by $40,000 equals a maximum loan forgiveness of $40,000.
- Remaining loan is $0 ($40,000 less $40,000).
Now, let us look at the “imperfect scenario” that resembles more closely with what is happening in the business world and assuming the following facts:
- You received a PPP loan of $40,000.
- You paid $20,000 of qualified wages during the 8-week period.
- You had qualifying non-payroll costs of $15,000.
- Your average FTE count during the 8-week period was 4.
- Your average FTE count during the pre-funding period was 7.
Based on the above assumptions, and our present interpretations of the SBA guidance, we think the amount of loan that is forgiven will be $15,238 calculated as follows:
- ($40,000 less $15,238).
If we assume that you have offered two of your employees their job back (in writing) and they have declined, the revised calculation would be as follows:
- Total qualified wages of $20,000 divided by .75 equals $26,667 (the maximum amount of non-payroll costs cannot exceed 25% of the total qualified loan).
- FTE ratio of 6/7 multiplied by $26,667 equals a maximum loan forgiveness of $22,857.
- Remaining loan is $17,143 ($40,000 less $22,857).
This calculation is based on how we presently interpret the rules. There is a good chance that once the SBA issues further guidance on the forgiveness rules that the above calculation will change.
From
Amy, Linda, Rod, and the AHS team: Angela, Bethe, Bob, Jonel, Juli, Katie, Mary, Eric, Eileen, Phil, Rick, Spencer, Tracey, Chantel, Angie, Bobbi, Janet, John, Dave & Dan