FTE Calculation and Its Affect on PPP Forgiveness
Filed under:Affordable Housing, Construction, Dental, Family Business, Healthcare, Nonprofit, Private Companies, Small Business Services, Tax Advisory: U.S. Federal
If you have received funds under the Paycheck Protection Program (PPP), you need to know the importance of Full-Time Equivalent (FTE) employees with regard to your loan forgiveness.
The borrower’s count of FTE employees during their covered period is divided by the FTE count from the selected base period. The borrower is able to choose the base period that is most beneficial; either 02/19/19 through 06/30/19 or 01/01/20 through 02/29/20. This ratio is referred to as the FTE reduction quotient. The FTE reduction quotient is multiplied by the total PPP loan amount to arrive at your maximum forgiveness amount.
There are two eligible methods for calculating your FTEs during the covered and base period:
- Each employee that works a 40-hour work or more a week will be counted as 1.0 FTE, whereas employees who work fewer than 40-hours are divided by 40 to calculate their FTE (i.e. 16 hours a week would be 0.4 FTE (16 divided by 40)).
- Borrowers can utilize the simplified method and count any employees working 40 hours per week or more as 1.0 FTE and any employees working less than 40 hours as 0.5 FTE.
The PPP application provides several exceptions in regard to counting FTEs during the covered period, namely, if any employee rejects a written good-faith re-hire offer, or if an employee was fired during the covered period for cause, voluntarily resigned, or voluntarily requested a reduction of their hours. Any FTE reductions resulting from these cases do not reduce loan forgiveness.
The forgiveness application also implements an FTE Reduction Safe Harbor. This allows the covered period FTE count to be measured at 12/31/20 and compared to the base FTE count of the pay period that includes 02/15/20. If your FTEs at 12/31/20 meet or exceed your FTE count at 02/15/20 then your maximum loan forgiveness amount will not be reduced.
There is an additional “bail out” introduced in the PPP Flexibility Act (passed on 6/4/20). Loan forgiveness will not be reduced if the borrower can show documentation for one of the following:
- The employers could not find a qualified employee to hire. This is a big “win” for employers in specialized industries like healthcare or other professional employees.
- The employer could not restore business to a comparable level of activity because of social distancing or other Federal health guidance.
If you have questions or concerns about how this will affect you and your situation, then you should consult with your tax adviser.