PPP — How the FTE reduction really works…

Colin King, CPA, CFA
3 min readOct 20, 2020

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For starters — the SBA released a very helpful slide deck back in August which I’ll refer to frequently.

Calculating an FTE (full time equivalent)

If you run a small business and you know you had 5 employees going into the year and kept those same 5 employees throughout this period, then the topic of this post likely isn’t applicable.

For the rest of small businesses, we need to start by understanding how to calculate FTE. The SBA gives us 2 methods in determining this number:

FTE Calculation

FTE Safe Harbor — Avoiding reductions

FTE Reduction Worksheet

There has been some confusion on how the safe harbor around FTE counts work. You essentially have 3 options:

  1. You didn’t reduce FTE count at all between 1/1/20 and your Covered Period (i.e. 8-weeks or 24-weeks)
  2. You were unable to operate at the same level between 2/15/20 and your Covered Period compared with prior to 2/15/20 because Government restrictions made it difficult (i.e. a restaurant, movie theater, etc. where restrictions hindered business)
  3. You were able to restore your workforce to “normal” levels prior to 12/31/20

Let’s take a closer look at the third option as I think it leads to the most confusion…

Safe Harbor #2 — Restoring headcount by 12/31/20

Safe Harbor #2

First, this is NOT telling you that you can bring FTE count up to normal levels at any point between your Covered Period and 12/31/20 and you satisfy the safe harbor.

This is really a 2-step process:

  • First, calculate FTE between 2/15/20 and 4/26/20 (1)
  • Next, calculate FTE for the pay period of 2/15/20 (2)
  • If (2) is greater than (1), you qualify to use Safe Harbor #2

This is telling us that payroll needed to be higher on 2/15/20 and subsequently fell from that date up to 4/26/20. If your FTE count didn’t fall during this period, then you probably don’t need to worry about this section at all.

So we’ve established you can’t simply bring payroll up to the normal level at any point and qualify for Safe Harbor #2…

…But it does appear you can bring payroll up to the normal level at the time of either: 1) forgiveness application; or 2) 12/31/20.

Re-read step 4 from the image above:

“Enter the borrower’s total FTE as of the earlier of December 31, 2020, and the date this application is submitted.”

This reads as though you can simply bring your payroll level up to your previous FTE count for only one pay period as of your application date or 12/31/20.

Exceptions to FTE reduction

The final topic are the 6 items considered an exception to FTE reduction. It’s important to have good documentation around these exceptions if you’re planning on using them in the forgiveness process.

FTE Reduction Exceptions

Most of these center around attempting to hire back employees with your PPP funds and being unable to do so. Whether it was because people didn’t want to come back to work or you were unable to find quality workers.

Interestingly, if an employee voluntarily resigned (i.e. quit) or was fired for cause during the Covered Period, then they can be excluded from any FTE reduction.

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Colin King, CPA, CFA
Colin King, CPA, CFA

Written by Colin King, CPA, CFA

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CEO of Alpha Accounting. Investor, business owner, accountant looking to help small businesses save time and money.

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