Each week we will provide a detailed explanation of computations included on the SBA prepared PPP loan forgiveness application. This week we will review how to calculate the number of full-time equivalent employees (FTEs) for the covered period (or alternative payroll period, if elected) and how to compare it to the base period(s) to determine a potential loan forgiveness reduction.
To determine the average FTEs for the 8-week covered period (or the alternative payroll covered period, if elected) we must look at each qualifying employee per pay period. Any employees working at least 40 hours per week are counted as 1.0 FTE. For any employee working less than 40 hours per week, you are given two options to calculate their full-time equivalency.
Option # 1 – Determine the number of hours the employee worked per week and divide by 40, rounding to the nearest tenth.
Option # 2 – For each employee who worked less than 40 hours per week, they are automatically assigned a full-time equivalency of 0.5. This is the simplified approach which allows you to skip the math, but it could result in a lower FTE amount than if you choose the manual calculation provided in the previous option.
Now that you understand how to calculate the average number of FTEs for the PPP loan forgiveness application, we next need to discuss why this is so important.
The amount of loan forgiveness may be reduced if the borrower reduces headcount during the covered period. However, the reduction may be ignored if a safe harbor is satisfied.
The loan forgiveness will be reduced if the average number of full-time equivalent employees (FTEs) during the covered period is less than the average number of FTEs for either of the following base periods:
- The period beginning on February 15, 2019 through June 30, 2019 or
- The period beginning on January 1, 2020 and ending on February 29, 2020
FTEs are computed the same for the two base periods as it was for the covered period previously discussed. It is important to know that you can select which base period above you want to compare against the covered period so choose whichever period is beneficial to you.
The good news is a borrower may ignore a potential reduction based on a reduced FTE count if a safe harbor is met. The borrower is exempt from the loan forgiveness reduction based on FTEs if both of the following conditions are met:
- Borrower reduced its FTEs in the period beginning February 15, 2020 and ending April 26, 2020
- Borrower restored its FTE employee levels by no later than June 30, 2020 to its FTE employees levels in the pay period that included February 15, 2020.
Reach out to our team if you have any questions on how to calculate FTEs for your business. Stay tuned for future topics on the PPP loan forgiveness application.