Understanding the PPP loan forgiveness process

When the economy faltered because of the COVID-19 crisis, Congress passed the Paycheck Protection Program (PPP) to boost businesses struggling to keep employees on the payroll as business volume declined. The program’s intent was to not just help businesses survive in the short term, but to keep people employed, so the program has several caveats about how loan funds are used.

To better understand how loan forgiveness works, Medical Economics spoke with Mark Schmidt, CEO of Fund-Ex Solutions Group, a lender that has issued more than $175 million in PPP loans to small businesses.

The transcript has been edited for length and clarity, and because of changes made to the law after the interview, some notations about those changes have been made.

Medical Economics: For those practices who received a PPP loan, how does the forgiveness application process work?

Mark Schmidt: In essence, it's an application process just like the loan application. Each borrower will fill out the application and submit that to their lender after the eight week period. [Note: Congress extended this to 24 weeks after the interview.] The lender then reviews the application and all the documents that were submitted. The lender has 60 days with which to make a decision and relay that decision to the Small Business Administration (SBA). The SBA then has 90 days to review that and then notifies the lender, the lender goes back to the borrower and lets them know whether or not they've been approved for forgiveness. My hope is it doesn't take that long. It shouldn't take the full 60 days at most funders, and I like to think that the SBA will move more quickly than the 90 days that they're allowed under the law, especially for the smaller loans.

ME: Is there a way to maximize the amount of forgiveness that you receive as a practice?

Schmidt: Pull out the regulations that were issued, read those, and understand them to the extent you can. Keep very good records, both for the eight [or 24] week payroll period and the reference period. And then the third thing is get help if you need it. A lot of our borrowers out there will already have an someone on their own staff or an accountant that helps them with taxes or otherwise, and that’s probably a good place to start. Again, it's a not a simple process. It looks a lot like an IRS form and a rather complicated one at that. It includes an application form, a Schedule A, and it includes a worksheet. There's a lot of math involved. There's a lot of technicalities involved and again, it’s not a simple process.

ME: When looking at total-employee calculations, how do you calculate part time employees? How do they factor into all this?

Schmidt: Their forgiveness amount is based on the amount you spend during the eight [now 24] week period for certain eligible expenses, but that amount of eligible forgiveness is then reduced if you ever reduced your full-time equivalents (FTE). Congress put in this little provision that says if you happen to reduce your FTEs during this eight [or 24] week period after you get the loan, compared to the previous reference period, then you don’t get full forgiveness; in fact, it's a percentage reduction. If you have reduced your FTEs by half, you only get half of the forgiveness. So the question arises, “How do I count my part-time employees?” and they basically made it pretty simple. It’s based on a 40-hour week. So anybody who works 40 or more hours counts as one FT. Anybody who works less than 40 hours, you can do one of two ways. You can either take each individual employee and calculate their FTE based on their hours, so for 20 hours, you have half of an FTE. If you work 30 hours, you're .75 etc. Now, for companies that have a lot of part time employees, they gave you another simplified option. Instead of going through the math on all of them, you can just count them all as half. You have to be consistent. If you do the math on some of them, you have to do the math on all of them.

ME: What about somebody that's on FMLA leave? Do they count toward the total? And what if they started FMLA after the loan application? How does all that work?

Schmidt: Interestingly, SBA didn't specifically address FMLA in the FT calculation. But they did a couple things that make me think it's very safe to include those individuals. Number one, FMLA payments are included in the payroll definition. Second of all, they added a provision that if an employee is voluntarily reduced in hours or has resigned or refused a rehire offer, you don't have to reduce your FTE for that reason. I think it's safe to assume that somebody that is on Family Medical Leave Act is voluntarily reducing their hours. And keep in mind, a lot of times you're continuing to employ and pay them. So they're on paid leave, that clearly counts.

ME: In the forgiveness forms, there's a lot of mentions about calculating the payroll period. What does that refer to and how do you do that?

Schmidt: That's a key factor. Your PPP loan was based on, for most part, 2019 data. You took 2019 payroll data and determined what two and a half months of payroll was for 2019. And then you roll forward to the loan. So from the day you get the loan, and that's the day you get the money, the repayment period starts with one exception. But what's critical is money that is potentially eligible to be forgiven is the money that is spent during that eight [or 24] week period. The eight [or 24] week period starts the day you get the money. The reason this period is critical is because that's the period of time within which that you must spend the PPP funds on eligible expenses: payroll, rent, mortgage interest, utilities. Those four things spent during that period is what you need to keep track of, and we need to keep very good records.

The SBA threw a couple curveballs at us here. For starters, a week starts the day you get the money, but they've given us an option. They said if you prefer, regardless of when you got the money, if you want the eight [or 24] week calculation period to start on the first day of the next pay period, you can choose that. And they've also thrown in one other little kicker that I think is important. It's not just the money you spend during the period, you add to that expenses that were incurred during the eight [or 24] week period. In other words, if your period ends on Monday and your payday is Friday, you can count those four days or whatever number of days that you haven't paid your employees yet. So they've earned the money, but you just haven't paid it yet. That's what they mean by incurred, and you can count that in the forgiveness calculation as long as you do pay it on the next regular payday.

In the salaries and wages category, what you pay your employees matters. If you have reduced either one of those two factors, compared with a reference period from either last year or this year, then your forgiveness is reduced. It gets a little complicated, but in essence, if you've reduced your FTEs, you have to reduce your forgiveness amount by the percentage FTE reduction. If you reduce salaries for anybody during this loan period, compared to a reference period, that's a straight dollar amount reduction in the amount of forgiveness.

ME: Is every employee salary eligible for loan forgiveness, including highly paid physicians?

Schmidt: The short answer is yes, but with limitations. The law puts a cap on salaries at $100,000 for both  calculating the loan amount and for the forgiveness amount.

ME: If the program is renewed, what do practice leaders need to keep in mind that to maximize their forgiveness rate?

Schmidt: First of all, I think the odds of the program being renewed, at least with additional money, is actually declining. And the reason for that is the second round of money hasn't disappeared nearly as fast as people thought it would. If you'll recall, the first $350 billion was loaned out within a matter of days; I think it was just over a week. So when the second round of $310 billion was put up, there was a question how long it would last and it has lasted a number of weeks now. So it's less likely that they'll add more money in the program.

ME: Do you have any theories as to why the there's less interest in a second round? Is it just too much of a unknown business environment to be taking on additional loans?

Schmidt: I think that's a lot of it, and there are also questions around the program itself. If you'll remember early on, especially after that first round, the maximum loan was $10 million. And there were a number of borrowers that took out the large loans, where questions arose about whether they really needed it. Some of them had access to capital markets, some of them had other sources of liquidity. And even though one could clearly argue they were eligible under the terms of the law, there was pushback, and a lot of questions arose about did we really intend for certain borrowers to have this and they started adding more red tape, if you will, around the forgiveness process.
We now see a 10 page-application form for forgiveness that is very complicated. Add to that the requirement to spend most of the money on payroll, and I think this is probably the biggest piece, a lot of practices and businesses are just shut down. The employees are on furlough. Borrowers looked at this and said, look, I don't have a way to spend the money right now. Why would I want to borrow the money and then have to try and spend it in eight weeks? It won't be forgiven. I don't need more debt. But it's still a little bit of a surprise if you stop and think about the fact that according to the SBA, a large percentage of small businesses have not applied. Now that might sound like good news for the economy, but I hope it doesn't mean that people who need it and qualify for it are afraid to apply, because it's a good program if you follow the rules.

Recent changes to the PPP law:
• Borrowers can choose to extend the original eight-week period to 24.
• Payroll expenditure requirements drop from 75% of payroll to 60%.
• Borrowers can use the full 24 weeks to restore workforce levels and wages to pre-pandemic levels by Dec. 31-an extension from the original June 30.
• Two new exceptions to achieve full loan forgiveness: The inability to find qualified employees or were unable to restore business operations to prior levels because of COVID-19 operating restrictions.
• Borrowers now have five years to repay the loan instead of two, but the interest rate remains at 1%.
• Delayed payment of payroll taxes is now permitted.