Posted 3 years ago - by

Forgiveness of Payroll Protection Plan (PPP) Loans

Many employers have received funds under the PPP Loan program.  The loans are structured with two-year terms and an interest rate of 1% for all borrowers.  The loans can be completely or partially forgiven if the proceeds of the loan are used for payroll costs, covered rent, covered utilities, or covered mortgage interest, and the borrower meets certain minimum conditions.  Any amount of the loan not used for these specific purposes will not be forgiven.  Please note that final guidance has not been published, and employers should consult with their bank on the exact terms of loan forgiveness.

According to early interpretation, it appears the forgiveness amount will be calculated by comparing payroll costs and the number of employees in the eight-week period immediately following the funding of the loan with one of two possible baseline periods.  Employers may choose as a baseline period either 2/15/2019 to 6/30/2019 or the period of 1/1/2020 to 02/29/2020.

An employer must use at least 75% of the loan for payroll costs, or the dollar amount of forgiveness will be reduced by the amount of the shortfall.  The remaining 25% must be used for the other covered expenses.

In addition to using 75% of the loan for payroll costs, the employer must continue to pay at least 75% of each employee’s wages during the eight-week period.  If an employee receives less than 75% of their wages when compared to the wages received in Q1 of 2020, the loan forgiveness will be reduced by this amount.

Finally, the employer must also maintain the same headcount during the eight-week period.  This calculation is done by comparing the number of full-time equivalents (“FTE’s”) during the baseline period and the eight-week period.  The loan forgiveness will be proportionately reduced by the percentage decrease in FTE’s.

The current guidance also indicates that decreases in loan forgiveness can be avoided:

  1. If by June 30, 2020 the employer restores the employees to their same wage or salary that was in place as of February 15th
  2. If by June 30, 2020 the employer restores the employee headcount to the same headcount as of February 15, 2020

Note that an employer cannot count as part of their payroll during the eight-week period any amounts paid to employees under the Families First Coronavirus Response Act (“FFCRA”).  This includes payments of Emergency Sick Leave and Emergency Family Leave.

Employers may take advantage of the deferral of employer paid social security tax, but no new deferrals can be taken after a loan has been fully or partially forgiven.

The employer is not eligible to participate in the Employee Retention Credit payments if the employer has accepted a PPP loan.

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This article provides general information and shouldn’t be construed as legal or HR advice. Since employment laws may change over time and can vary by location and industry, please consult a lawyer or HR expert for advice specific to your business. You can also contact Payroll Systems to inquire about our HR support services.