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Maximizing PPP Loan Forgiveness with Compensation Planning

May 6, 2020

The goal for those with Paycheck Protection Program (“PPP”) loans is to have the amount borrowed forgiven. Borrowers that can turn a PPP loan into a grant can defray lost revenues during the COVID-19 crisis. Meeting the requirements for forgiveness is key, but can be thwarted if the employer had to lay off or furlough staff. (For more information on the PPP, browse our various articles on the subject).

The following are important aspects regarding loan forgiveness and strategies for maximizing the amount forgiven.

75% Rule. The general purpose of the PPP is to benefit both the employees of small businesses and protect the businesses themselves. To have a PPP loan forgiven, at least 75 % of its proceeds must be used for “payroll costs” during the 8 weeks from loan origination. The other 25% may be applied toward interest on mortgages in place on February 15, 2020, rent under a leases in place before February 15, 2020, and utilities for service set up by February 15, 2020.

Cap on Cash Compensation. Under the Small Business Administration (“SBA”) guidelines, PPP loans cover cash compensation, including commissions, housing stipends tips, housing allowances and paid leave (except for Families First COVID-19 paid leave) up to an annualized cap of $100,000.

This means, for example, that if an employee’s cash compensation is over an annualized amount of $100,000, the only part of the PPP loan applied toward the employee’s compensation and eligible for forgiveness is capped at $8,333 per month (or $100,00 per year). However, that cap excludes costs for group health and retirement benefits and state and local withholding taxes.

Maximizing Loan Forgiveness with Benefits Planning. Under SBA guidance, benefits costs for group health care, state payroll taxes, and employer-paid retirement contributions are in addition to, and not subject to the annualized $100,000 cap. That’s why increasing certain benefit payments can help an employer meet the PPP loan forgiveness requirements, especially if the employer laid off workers.

For example, the employer might consider increasing the employer copay for health benefits during the 8 week period from loan origination. It might also consider making a special one-time contribution to the retirement plan to help meet the requirement of using 75% of the loan for payroll costs. An employer that has furloughed workers might also consider bonuses or hazard pay for current and re-hired workers.

Reduction in the Forgiveness. The amount of forgiveness is reduced if either (a) pay for any employee who earned under $100,000 in 2019 is cut by more than 25%, or (b) the average number of full- time equivalent employees is reduced during the 8-week period, excluding furloughed workers who refuse reemployment in writing.

If less than 75% of the PPP loan proceeds is used for payroll costs, the loan will not be forgiven.

Maximizing Loan Forgiveness by Employee Count. The SBA stated that it will not reduce a company’s PPP loan forgiveness if a furloughed worker refuses the employer’s job offer. To take advantage of this rule, the employer must have made a good faith written offer of rehire to the furloughed worker. If the worker rejects that offer, it must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

The SBA guidelines on PPP loans have been a moving target, which greatly complicates planning. Burns & Levinson expects more changes to come, and we will continue to monitor the evolving guidance.

About the Author: Evelyn Haralampu

Evelyn Haralampu is a partner at Burns & Levinson. She specializes in assisting businesses, executives, and non-profit and governmental organizations in designing employee benefits programs and executive compensation to help clients meet their objectives, while saving and deferring costs through tax efficiencies. Evelyn has served on the ABA’s Subcommittee on Government Submissions, recommending regulatory policies to the IRS, and is a member of the Tax Council of the Massachusetts Bar Association, which influences the development of tax legislation in the Commonwealth. She can be reached at eharalampu@burnslev.com or 617.345.3351.