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PPP Loan Forgiveness: Focus on the FTE Safe Harbor Provision




On Friday evening the SBA released its loan forgiveness application form. Although each lender will have its own forgiveness application, it is safe to assume it will mirror the SBA's application form.


One of the larger pieces of guidance taken from the forgiveness application is how a company should be calculating Full-Time Equivalent employees. The application defines a Full-Time Equivalent employee as an employee that works, on average, 40 hours per week or more. If they average over 40 hours per week they will still only be counted as 1 FTE. Unfortunately, due to an SBA definition from 2010 and the IRS legal definition of FTEs, many companies were using the 30 hour per week standard to calculate their FTEs. This means that the majority of companies have different benchmarks than they originally thought. This is a disturbing development after most companies are 3-4 weeks into their 8-week "covered period".


For some companies, this won't have any true effect. To demonstrate how it may affect a company, let's look at an example: Company X had 2 employees who on February 15, 2020, averaged 45 hours per week, thus giving Company X an FTE goal of 2 under both the 30-hour and 40-hour model. Then for the first 3 weeks of Company X's 8-week "covered period," the company gave the two employees 35 hours per week to ensure that they were both qualified FTEs. However, under the new guidance that mandates an FTE as an employee who works an average of 40 hours or more, Company X would no longer meet its 2 FTE benchmark.


This is why it is imperative that each PPP participant understands the FTE Reduction Safe Harbor provision in the forgiveness application. It allows for a company not to take any forgiveness reduction under the following circumstances: (1) there is a reduction in FTEs from February 15, 2020, through April 26, 2020; and (2) the FTE count is brought back to the level it was on February 15, 2020, by June 30, 2020.


So, to use the same example as above, Company X would need to reach the 2 FTE count by having their 2 employees work 40 or more hours. Of course, in this example, it would be easy for Company X to meet the safe harbor provision. However, when you think about this happening to a larger company on a much greater scale it could be much more involved.

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