The Paycheck Protection Program (PPP) was introduced to help small businesses like yours keep their workforce employed during the COVID-19 crisis. One of the pivotal elements of this program is the headcount rule, which directly influences the extent of loan forgiveness a business can receive.

What is the Headcount Rule?

The headcount rule requires that PPP loan recipients maintain the number of employees on their payroll as compared to pre-pandemic levels in order to qualify for full loan forgiveness. This rule is designed to encourage employers to retain their employees, even in times of economic downturn.

How is Headcount Measured?

The measurement of headcount involves a comparison of your average full-time equivalent (FTE) employees during the covered period of your loan with a chosen reference period (either February 15, 2019, to June 30, 2019; January 1, 2020, to February 29, 2020; or a consecutive 12-week period between May 1, 2019, and September 15, 2019, for seasonal employers). This comparison determines how much of your loan can be forgiven.

Strategies to Maintain Your Headcount

1. Rehiring Quickly: If you had to lay off employees due to economic pressures, rehiring them during the covered period can help you meet the headcount requirement.
2. Job Offers and Refusals: Document any job offers and rejections. If an employee declines to come back, it can exempt you from the reduction in forgiveness, provided the offer and rejection are well-documented.
3. Work Hours and Wage Maintenance: Maintaining wages and hours is just as crucial. If you reduce an employee's hours, consider hiring part-time employees or giving more hours to existing part-timers to keep your FTE numbers stable.

The Impact of Not Meeting the Headcount Rule

Failing to meet the headcount requirement can lead to a reduction in the forgivable amount of your PPP loan. The reduction is proportional to the percentage decrease in FTE employees, unless mitigated by rehires or job offer refusals as noted above.

Case Studies and Examples

Example 1: A business owner had 10 FTEs during the reference period but reduced the workforce to 8 FTEs during the covered period. Assuming no rehires or valid job offer refusals, their potential forgiveness could be reduced by 20%.

Example 2: Another business maintained 9 out of 10 FTEs but made valid job offers to the employees who did not return. Documenting these offers correctly, they maintained their eligibility for full forgiveness.

Navigating Exceptions and Safe Harbors

The PPP includes provisions for exceptions and safe harbors that can protect borrowers from forgiveness reduction if they can't return to full headcount. Understanding these can be critical:

• Safe Harbor for Rehiring: Borrowers are allowed to exclude reductions in FTE employee levels that occur from February 15, 2020, to April 26, 2020, if they are restored by December 31, 2020 (or for PPP loans made after December 27, 2020, by the last day of the loan’s covered period).
• Exemption for Employees Who Reject Offers: Employees who reject good faith re-employment offers cannot be counted against you in the FTE calculation.

Mastering the details of the headcount rule is essential for maximizing PPP loan forgiveness. By strategically managing your workforce and staying informed of the latest federal guidelines, you can enhance your chances of having the full loan amount forgiven. Implementing the strategies mentioned above will not only help stabilize your business but also position it for recovery and growth post-pandemic.