Payroll Service Group Recommends Loan Forgiveness Options

April 27, 2020

The Honorable Steve Mnuchin
Secretary
U.S. Department of Treasury
1500 Pennsylvania Ave., N.W.
Washington, D.C. 20220

The Honorable Jovita Carranza
Administrator
Small Business Administration
409 3rd St SW
Washington, DC 20416

Re: PAYCHECK PROTECTION PROGRAM; SEC. 1106. LOAN FORGIVENESS

Dear Secretary Mnuchin and Administrator Carranza:

The nation's largest payroll service providers represented by the NPRC¹ have been working diligently to assist employers in documenting payroll costs in accordance with Sec. 1102 of the CARES Act; and are similarly working to help employers calculate and document related measures under Section 1106, Loan Forgiveness.

There are a number of critical decisions and variables that require guidance before programming can be completed. The appendix includes questions and recommendations that should be addressed to enable data collection and calculation of measures in accordance with the Act; e.g.,

• A “Covered Period” rule is needed to ensure consistent measurement of payroll

• Definition of Payroll Cost Elements and Exclusions

• Definition of Full-Time Equivalent Employee

• Forgiveness Reductions Based on the Number of Employees

• Forgiveness Reductions Based on Reduced Wages

We would welcome an opportunity to discuss this further if it would be helpful.

Sincerely,

Pete Isberg
National Payroll Reporting Consortium, Inc.
909 971-7670
Pete_Isberg@nprc-inc.org
Henrietta, NY

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Appendix: SEC. 1106 Loan Forgiveness Questions and Recommendations

1. A “Covered Period” rule is needed to ensure consistent measurement of payroll

It is necessary to define the “covered period” for the purpose of determining whether PPP loan forgiveness measures have been met. Generally, loan proceeds must be spent on payroll and other specified costs incurred during the eight-week “covered period” following loan funding.

• For Payroll Costs, the covered period should begin with the first payroll pay date² following receipt of the loan proceeds.

  • The covered period would end eight weeks after the first pay date included in the covered period.

  • Define “week” to be seven days and the eight-week covered period to be 56 days; i.e., the period would end after the 56^th day following the initial pay date included in the period.

  • This would result in eight weekly payrolls; four biweekly and four semi-monthly payrolls and two monthly payrolls.

• Why: The alternative is that the “covered period” could begin on any day of a week or pay period.

  • Substantial programming and major changes to payroll inputs on a per-day basis may otherwise be required to store earnings based on arbitrary beginning and ending dates. This may be essentially manual and therefore less subject to automated calculations and controls.

  • Beginning on an arbitrary date could result in inclusion of less than four semiweekly payrolls, or inclusion of only one monthly payroll, which would automatically result in an apparent wage reduction even if payroll costs were equal to prior levels.

  • Conversely, arbitrary dates could result in inclusion of five biweekly payrolls in the eight-week period, resulting in an apparent increase in payroll costs relative to the base period.

• Spending on costs other than payroll costs could be measured on a different eight-week covered period; e.g., beginning on the date of loan disbursement.

• This should be adopted immediately to permit PPP payroll data collection and analysis.

2. Definition of Payroll Cost Elements and Exclusions

• Clarify exclusion of compensation per employee of over $100,000 on a prorated basis

  • Provide examples to confirm and clarify how to apply this; e.g.,

    • Monthly wages of $10,000 for an employee, plus related benefit costs of $1,000

      • Result: Employee wages are limited to $8,333 for the month

      • The $1,000 benefits costs included separately (at employer level; i.e., not attributed to a specific employee)

    • An employee with seasonal wages of $50,000 in the eight-week period but the person only works 3 months per year

      • Result: include $8,333 for the month (plus any benefit costs)

  • Might it be necessary to include within payroll costs payments to non-employees, other than partnership³ payments, that are administered outside of payroll?

  • Clarify the exclusion for compensation to employees whose principal place of residence is outside of the United States for part of the year; e.g.:

    • A U.S. resident employee who moves outside the U.S. in the last week of the covered period

    • An employee who moves to the U.S. in the last half of the covered period.

    • An employee who lived outside the U.S. during the covered period but moves to the U.S. after the covered period but in 2020.

    • An U.S. resident employee who moves abroad after the covered period but in 2020.

  • Confirm that PPP loans granted after May 5, 2020 will not shorten the eight-week covered period. In other words, employers who receive a PPP loan in late May would still be able to incur payroll and other allowable costs for eight full weeks without affecting forgiveness results.

    • Sec. 1102(A) Definitions provide that: "(ii) the term 'covered loan' means a loan made under this paragraph during the covered period; "(iii) the term 'covered period' means the period beginning on February 15, 2020 and ending on June 30, 2020”
      

3. Definition of Full-Time Equivalent Employee

A. Full-time employee should be defined

• Sec 1106 of the CARES Act includes this reference:

  • (B) CALCULATION OF AVERAGE NUMBER OF EMPLOYEES. — For purposes of subparagraph (A), the average number of full-time equivalent employees shall be determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.

  • However, “full-time equivalent employee” is undefined in the Act.

• Similarly, Question # 36 of the PPP LOANS Frequently Asked Questions, added April 26, 2020, notes that “for purposes of loan forgiveness, the CARES Act uses the standard of “fulltime equivalent employees” to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions.” However, “full-time equivalent employees” is undefined in any guidance to date.

• The U.S. DOL FAQs provide the following, but this relates to the definition of full-time employee under the FFCRA:

  • What is a full-time employee under the Emergency Paid Sick Leave Act?

    • For purposes of the Emergency Paid Sick Leave Act, a full-time employee is an employee who is normally scheduled to work 40 or more hours per week⁴.

    • In contrast, the Emergency Family and Medical Leave Expansion Act does not distinguish between full- and part-time employees, but the number of hours an employee normally works each week will affect the amount of pay the employee is eligible to receive.

• Full-time equivalent employees are defined in Affordable Care Act regulations⁵, but these rules are extensive and unfamiliar to employers with less than 50 employees, and consequently are not recommended.

• We recommend 30 hours per week as an easily understood and observed standard.

  • Why: The actual value (i.e., 30 or 40) does not matter since it is the comparison of full-time equivalent employees during the respective periods that matters. Any measure consistently applied to both periods would produce the appropriate forgiveness reduction quotient.

B. Full-Time Equivalent Employee

• Use of existing SBA rules for calculating the number of employees (13 CFR 121.106) may result in overstated employee counts and may not effectively measure the impact of furloughs and layoffs on an employer's workforce.

  • The SBA definition includes all individuals employed on a full-time, part-time, or other basis, with no adjustment to determine full-time equivalent employees as required by the Act.

  • The SBA definition excludes volunteers but makes no adjustment for terminated employees, those on leave of absence and other inactive employees who may still technically be “on the payroll” although they were not paid during a pay period. Consequently, the SBA definition would not measure reductions in the number of full-time equivalent employees.

  Issue: Accurately calculating the Average Full Time Equivalent (FTE) count poses several challenges when hours are not tracked for each employee. It is common not to track regular (non-PTO) hours on certain employees. To simplify and provide a more consistent and readily available measure, we propose the following:

• Use a wage-based proxy to determine Full-Time Equivalent Employees when hours are not present (e.g., salaried/piecework). Hours are not always collected for certain types of employees.

  • Employees with missing hours would be deemed a Full-Time Equivalent Employee if earnings are over $290/week, which is the Federal Minimum wage x 40 [$7.25 x 40 = $290].

  • Employees earning less than $290/week would be considered a pro-rated FTE; e.g., an employee that earns $200/week would count as 0.69 of an FTE ($200/$290 = 0.69).

• For employees with actual hours present in the payroll system, use actual hours; i.e., 30 or 40 hours per week (defined by SBA/Treasury) would count as 1 FTE.

• Why: Any measure would work since it is not the measure, but the comparison of measured results from the two periods that will result in potential reduced forgiveness. Consequently, selecting a measure that is simple, consistent and able to be easily applied across all employee types and all time periods is paramount.

4. Forgiveness Reductions Based on the Number of Employees

• Confirm and verify the actual calculation of loan forgiveness reduction for reduced numbers of full-time equivalent employees.

  “(A) IN GENERAL. — The amount of loan forgiveness under this section shall be reduced by multiplying the forgiveness amount by the quotient obtained by dividing —

  (i) the average FTEs per month during the 8-week loan period; by (ii)(I) at the election of the borrower —

  (aa) average FTEs per month February 15, 2019 through June 30, 2019; or

  (bb) average FTEs per month January 1, 2020 - February 29, 2020”

  For example, assume a loan amount of $100,000. If an employer's average FTEs per month during the covered period is 9, and the average FTEs per month from February 15, 2019 through June 30, 2019 is 10, then the quotient would be 0.90 or 90%, and the forgivable portion of the loan would be $90,000.

• Clarify any distinction related to Seasonal Employers

  • Seasonal employers are to compare average FTEs per month during the “covered period” to February 15, 2019 through June 30, 2019

  • This seems to be the same as the regular calculation. Do seasonal employers have any other option?

• Clarify the effect of the reduction in loan forgiveness reflected in (5) EXEMPTION FOR RE-HIRES. —

  “(A) IN GENERAL. — In a circumstance described in subparagraph (B), the amount of loan forgiveness under this section shall be determined without regard to a reduction in the number of full-time equivalent employees of an eligible recipient or a reduction in the salary of 1 or more employees of the eligible recipient, as applicable, during the period beginning on February 15, 2020 and ending on the date that is 30 days after the date of enactment of this Act.

  (B) CIRCUMSTANCES. — A circumstance described in this subparagraph is a circumstance —

  • (i) in which —

  • (I) beginning February 15 – April 26, 2020, the number of FTEs is lower than the number actively employed on February 15, 2020,

  • But by June 30, 2020, the number of FTEs is at least the same as on 2/15/2020”

• For example, can an employer extend an offer of employment on June 30, 2020, and count the new employee in determining loan forgiveness?

  • Alternatively, must the employee have been actively working prior to July 1, 2020?

  • Alternatively, must the employee have received wages prior to July 1, 2020?

• Please confirm that there is no impact to the forgiveness determination if an employer meets the number of employees measure as of June 30, but reduces staff thereafter.

5. Forgiveness Reductions Based on Reduced Wages

• Loan forgiveness is reduced by the amount of any reduction in total wages of any employee during the covered period in excess of 25 percent of the total wages of the employee during the quarter ended March 31, 2020.

  • This implies comparison of wages paid or incurred during the eight-week period to wages paid during a 13-week period, which could result in apparent wage reduction exceeding 25%, all factors remaining constant.

  • We recommend comparison of average weekly wages paid during the eight-week period to average weekly wages paid during the 13-week base period.

• Clarify reduction in loan forgiveness in (5) EXEMPTION FOR RE-HIRES. —

  “(A) IN GENERAL. — In a circumstance described in subparagraph (B), the amount of loan forgiveness under this section shall be determined without regard to a

  reduction in the number of full-time equivalent employees of an eligible recipient or a reduction in the salary of 1 or more employees of the eligible recipient, as applicable, during the period beginning on February 15, 2020 and ending on the date that is 30 days after the date of enactment of this Act.

  (B) CIRCUMSTANCES. — A circumstance described in this subparagraph is a circumstance —

  • (ii) in which —

  • (I) during the period beginning on February 15, 2020 and ending on the date that is 30 days after the date of enactment of this Act, there is a reduction, as compared to February 15, 2020, in the salary or wages of 1 or more employees of the eligible recipient; and

  • (II) not later than June 30, 2020, the eligible employer has eliminated the reduction in the salary or wages of such employees.”

• How should wage reduction calculations handle terminated employees? For example, if someone worked January 1 through March 31 and changed jobs in April, their pay during the covered period would appear to have been reduced by well over 25% compared to the base period.

  • Reductions in number of employees are already separately measured.

  • Consequently, we recommend permitting employers to exclude from the wage level comparison measure employees that are not active employees through the entire covered period.

• Clarify how the following safe-harbor language should operate: “. . . but, by June 30, 2020, the wages of such employees is again equal to such wages as of February 15, there is no reduction in forgiveness.”

  • This section would seem to require specific comparison of each employee's wages paid from February 15 through April 26, 2020 to the employee's wages “as of February 15.”

    • It would be difficult to compare these two periods without guidance; for example, comparing average weekly wages paid during the eight-week period to the average weekly wage paid during the week that includes February 15 would produce meaningful results.

    • Absent guidance permitting comparison of average weekly wages paid during the respective periods, some employers might simply compare an employee's pay rate during the eight-week period to their pay rate for the quarter ended March 31, 2020 or February 15. This would ignore the critical impact of hours of service that an employee is scheduled to work. Pay rates may also be subject to manipulation.