Maximizing PPP Loan Forgiveness with Offset Planning | Burns and Levinson LLP


The goal for those with Paycheck Protection Program (“PPP”) loans is to have the amount borrowed forgiven. Borrowers who are able to convert a PPP loan to a grant can cover lost income during the COVID-19 crisis. Meeting the requirements for forgiveness is key, but can be frustrated if the employer had to lay off or furlough staff. (For more information on PPP, see our various items about the topic).

The following are important aspects regarding loan forgiveness and strategies to maximize the amount forgiven.

75% rule. The general purpose of the PPP is to benefit both the employees of small businesses and to protect the businesses themselves. For a PPP loan to be forgiven, at least 75% of your income must be used for “payroll costs” within 8 weeks of loan origination. The other 25% can be applied to interest on mortgages in effect on February 15, 2020, rent under leases in effect before February 15, 2020, and utilities established before February 15, 2020.

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

This means, for example, that if an employee’s cash compensation exceeds an annualized amount of $100,000, the only portion of the PPP loan that applies to employee compensation and is eligible for forgiveness is capped at $8,333 per month. (or $100.00 per year) . However, that cap excludes the costs of group health and retirement benefits and state and local tax withholdings.

Maximizing loan forgiveness with benefits planning. Per SBA guidance, benefit costs for group health care, state payroll taxes, and employer-paid retirement contributions are added together and are not subject to the $100,000 annual limit. That’s why increasing certain benefit payments can help an employer meet PPP loan forgiveness requirements, especially if the employer laid off workers.

For example, the employer might consider increasing the employer’s copay for health benefits during the 8-week period from the start of the loan. You might also consider making a special one-time contribution to the retirement plan to help meet the requirement to use 75% of the loan for payroll costs. An employer that has laid off workers might also consider bonuses or hazard pay for current and rehired workers.

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

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

Maximizing loan forgiveness by number of employees. The SBA stated that it will not reduce a company’s PPP loan forgiveness if a furloughed worker rejects the employer’s job offer. To take advantage of this rule, the employer must have made a bona fide written offer of rehire to the laid off worker. If the worker rejects that offer, it must be documented by the borrower. Employees and employers should be aware that employees who decline reemployment offers may lose eligibility for continued unemployment compensation.

The SBA guidelines on PPP loans have been a moving target, greatly complicating planning.

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