We continue to receive guidance from the SBA and Treasury Department meant to clarify Paycheck Protection Program (PPP) Loan Forgiveness. Let’s look at the FTE information.
Marathon Bible College (MBC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii). They are required to file Form 990 annually.
MBC’s Controller called to ask about the FTE (Full-Time Equivalent) employees calculations with regard to the PPP Loan Forgiveness process.
“Okay, I understand that if we have a reduction in FTE of a certain percentage between the selected “reference period” and our “covered period,” that it will mean a corresponding percentage decrease in our PPP loan forgiveness. Also, I understand that “full-time equivalent employee” means an employee who works 40 hours or more per week and that employees who work less than 40 hours are calculated as proportions of a single full-time equivalent employee – and then all employees are aggregated. But, how should we calculate our full-time equivalent (FTE) employees?”
“Interesting that you should ask that. It’s fairly convoluted. As you said, MBC is required to document your average number of FTE employees during your covered period (or alternative payroll covered period) and your selected reference period. The CARES Act – nor the SBA guidance – contains a definition of full-time equivalent (FTE). The 30-hour week utilized by the ACA is not a valid methodology. An employee working 48 hours a week would be assigned an ‘FTE value’ of 1.0. Those who average fewer than 40 hours per week would have an ‘FTE value’ based on their average weekly hours over 40 (i.e. employee working 24 hours per week would have an ‘FTE value’ of .6 – 24/40). Or, you may use the ‘administrative convenience option’ whereby MBC would assign an ‘FTE value’ of 1.0 to all employees who average 40 hours or more and a 0.5 ‘FTE value’ for all part-time folks.”
“So it’s not as simple as adding up all of your payroll hours and dividing by the total number of employees?”
“Nope. Per Treasury, ‘Borrowers may select only one of these two methods, and must apply that method
consistently to all of their part-time employees for the covered period or the alternative payroll covered period and the selected reference period.’”
From the SBA and Treasury’s “Paycheck Protection Program – Requirements – Loan Forgiveness” document (dated 5/22/20):
How should a borrower calculate its number of full-time equivalent (FTE) employees?
Borrowers seeking forgiveness must document their average number of FTE employees during the covered period (or the alternative payroll covered period) and their selected reference period. For purposes of this calculation, borrowers must divide the average number of hours paid for each employee per week by 40, capping this quotient at 1.0.
For example, an employee who was paid 48 hours per week during the covered period would be considered to be an FTE employee of 1.0.
For employees who were paid for less than 40 hours per week, borrowers may choose to calculate the full-time equivalency in one of two ways. First, the borrower may calculate the average number of hours a part-time employee was paid per week during the covered period. For example, if an employee was paid for 30 hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.75.
Similarly, if an employee was paid for ten hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.25. Second, for administrative convenience, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee. The Administrator recognizes that not all borrowers maintain hours-worked data, and has decided to afford such borrowers this flexibility in calculating the full-time equivalency of their part-time employees.
Borrowers may select only one of these two methods, and must apply that method consistently to all of their part-time employees for the covered period or the alternative payroll covered period and the selected reference period. In either case, the borrower shall provide the aggregate total of FTE employees for both the selected reference period and the covered period or the alternative payroll covered period, by adding together all of the employee-level FTE employee calculations. The borrower must then divide the average FTE employees during the covered period or the alternative payroll covered period by the average FTE employees during the selected reference period, resulting in the reduction quotient.
The Administrator, in consultation with the Secretary, determined that because the Act does not define the term FTE employee, this approach to measurement of FTE is a reasonable and appropriate exercise of the Administrator’s rulemaking authority, as it balances the need for a reasonable measurement of FTE employee headcount with the need to limit borrower compliance burdens and ensure administrative feasibility.
- There is not much that is simple in the PPP forgiveness arena – and it keeps getting “tweaked!”
- In dealing with “PPP FTE,” you need to look at 1) selecting a reference period, 2) using your covered period (or “alternative payroll covered period”), 3) methodology for calculating “full-time equivalent employees (percentage of 40 hours or administrative convenience 1.0/0.5 methodology).
- Employees who work 40 hours per week should not be assigned a value higher than 1.0.
- Employees who work less than 40 hours per week may be entered into the aggregation/calculation using the percentage of average hours worked over 40 hours (i.e. 24 hours would be 25/40 = .6) or (under the administrative convenience option) .5 hours. And, you must use a consistent methodology.
Specific questions? Email Dave Moja
The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.
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