(Originally published 04/02/2020, revised 04/03/2020)
Thousands of articles are circulating on the new Paycheque Protection Program under the CARES law promulgated on March 27. Getting a general idea of how this program works is a good thing. But if you have any math questions, this article is for you.
The following is a slightly simplified explanation of how to calculate loan amount and forgiveness amount. The exact figures will differ slightly due to the details of the program (some of which have not yet been defined in the rules and guidelines). But for your business planning purposes, it can be pretty close.
LOAN AMOUNT: Take your total salary costs for 2019 – salaries, wages, commissions, bonuses, severance pay, etc. – but subtract the portion of any employee’s salary exceeding $ 100,000 per year (annualized). Add up the amounts paid by the company for 2019 group health care guarantees, including insurance premiums. Add the retirement benefits paid in 2019. Add the company payments of state payroll taxes, including unemployment taxes. Then divide by 12 and multiply the resulting average wage cost calculation by 2½. It is an approximation of how much the business can borrow.
USE OF LOAN PROCEEDS: Once your loan is funded, the amount you spend over the course of the next eight weeks on some costs is the amount that can potentially be waived. So ask your bank to open a new account, deposit 100% of the loan proceeds into this account, and then use this money over the period eight week period, first, to cover your salary costs (always without counting the part exceeding the annualized limit of $ 100,000), and to pay your rent and utilities. Be sure to spend all of the loan proceeds over approved costs within eight week period if you can. If you no longer have approved costs (for example because your payroll has gone down), don’t worry. . . you can continue to use the product for approved costs until the primary amount is consumed. . . at worst, you have a low interest loan. . . count your blessings!
PARDONABLE AMOUNT: This is a three-step process (downsizing, reducing wages, rehiring). The first step is to multiply your total loan amount by the following fraction:
Numerator: average number of full-time equivalent employees per month employed by the company during the eight week period; split by:
Denominator: the inferior of (i) the average number of full-time equivalent employees per month employed by the company during the period of February 15, 2019 until June 30, 2019 Where (ii) the average number of full-time equivalent employees per month employed by the eligible beneficiary during the period of January 1 2020 until February 29 2020.
The second step requires you to further subtract a dollar amount calculated as follows: (i) identify all “people under 100” [defined below] who are still employed during the eight week period, (ii) for each person under 100 years of age, take that person’s salary / rate of pay during the eight week period and compare it to that person’s salary / rate of pay for Q1 2020; (iii) if the current salary / rate of pay has not dropped by more than 25% of the first quarter salary / rate of pay, then that is fine; (iv) for any person under 100 whose current salary / rate of pay has decreased by more than 25%, calculate (x) the amount of salary / wages the employee would have received for the eight week period at 75% of the Q1 rate and subtract (y) the amount the employee actually received for the eight week period; (v) add up all reduction amounts of more than 25% for all persons under 100 persons still employed during the period eight week period. This overall dollar amount further decreases the loan amount that is repayable. People “under 100” are a subset of current employees, consisting only of those whose salaries / rates of pay have not exceeded $ 100,000 per year at any time in 2019. Thus, the calculation of the pay cut will completely exclude any current employee who has earned more. $ 100,000 in 2019. But the calculation also excludes any current employee who in 2019 was on a variable compensation plan (overheads, commissions, etc.) and who earned more than $ 8,333 in a month.
The third step allows a company to “fix” the reductions for the first or second step, as follows:
The first stage reduction (workforce) can be avoided if, by June 30, 2020, your total FTE workforce has been restored to the same level as on February 15, 2020; and or
The second stage reduction (wages) can be avoided if, by June 30, 2020, you have returned people under 100 to the same salary / wages they were earning on February 15, 2020.
The third step, obviously, is an incentive to use the loan proceeds to restore staffing and salary levels. If you do both, the total loan amount can still be forgiven. If you do either, then either reduction is ignored. As with the horseshoes, however, closing is not enough – there is no pro-rated relief to restore almost all staff or almost all wages / salaries.
This “simplified” explanation hides other complexities: calculation of the average monthly wage bill for the past year, seasonal employers, workforce reductions during the year. eight week period, tip employees, etc. But for most businesses, that should give you a pretty good idea of math as we currently understand it.