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Call to Action: Deadline to Meet PPP Safe Harbors Approaches

By Brandon J. Leal, Esq.

Perhaps the greatest appeal of the Paycheck Protection Program ("PPP") is that any loan received through the program is potentially 100% forgivable.  However, in order to achieve 100% forgiveness borrowers must navigate a complicated and ever changing web of rules and regulations from the Small Business Administration ("SBA") and Internal Revenue Service ("IRS").  In order to help borrowers achieve 100% forgiveness, the SBA and IRS have provided some important safe harbors.  The December 31 deadline to qualify for two of these important safe harbors is fast approaching.

As its name suggests, a primary focus of PPP is to enable and encourage borrowers to keep employees on payroll throughout the pandemic.  Therefore, in addition to the requirement that borrowers use PPP funds only for specific expenses, primarily payroll, the PPP forgiveness rules also require that borrowers maintain pre-pandemic levels of full-time equivalent ("FTE") employees and prohibits borrowers from reducing salary or hourly wages paid to employees who earn less than $100,000.00 annually by more than 25%.

Therefore, if a PPP borrower has experienced a reduction in its number of FTEs or was forced to reduce salary or hourly wages, that borrower faces the potential that at least part of its PPP loan will NOT be forgiven.  However, the SBA and IRS have provided some safe harbors to help borrowers qualify for forgiveness despite these reductions, so long as certain criteria are met.

FTE Reduction Safe Harbor 1

If a borrower was required to fully or partially cease operations due to compliance with guidelines issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, these reductions in FTEs will not be held against the borrower.

FTE Reduction Safe Harbor 2

Some borrowers have experienced difficulties when trying to call employees back to work after being forced to institute furloughs.  Therefore, the SBA and IRS have provided a safe harbor that allows borrowers to restore their FTE levels over time.  This safe harbor exempts borrowers from reductions to their forgiveness amount so long as the borrower meets two criteria:

  1. The borrower's FTE levels were reduced beginning February 15, 2020 and ending April 26, 2020; and
  2. The borrower restored its FTEs to the level that existed during the pay period that includes February 15, 2020 no later than December 31, 2020.

This deadline is fast approaching.  If they have not already done so, borrowers must act immediately to restore their FTE levels before it is too late.  Fortunately, if borrowers are unable to completely restore their FTE levels, the SBA and IRS have provided certain exceptions that allow borrowers to exclude certain FTEs from the calculation.

If a borrower has made a good-faith, written offer to rehire an employee or restore reduced hours to an employee and that offer was rejected, the borrower may be able to exclude said employee from its FTE calculation so long as all of the requirements of the exception are met.  Furthermore, if a borrower fired an employee for cause, if an employee voluntarily resigned, or if an employee requested and received a reduction in hours, the employee may be excluded from the borrower's FTE calculations, so long as all the requirements of the exception are met.

Wage Reduction Safe Harbor

Finally, the SBA and IRS have provided a safe harbor for borrowers that were forced to reduce salary or hourly wages for employees who earn less than $100,000 annually.  If a borrower reduced wages below the average annual wage or salary that existed as of February 15, 2020, the borrower has until December 31, 2020 to restore wages to the level that existed on February 15, 2020.

Borrowers are almost out of time to take advantage of these safe harbors.  In order to optimize PPP forgiveness, borrowers that have not already done so should contact their financial and legal advisors to ensure compliance with the forgiveness rules.


This article provides an overview and summary of the matters described therein. It is not intended to be and should not be construed as legal advice on the particular subject.

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