On Friday, June 5, the PPP Flexibility Act (“PPPFA”) was signed, which amends the CARES Act and helps small businesses with additional options for spending and seeking forgiveness of their Paycheck Protection Program loans. Rather than write a whole new post on the changes under the PPPFA, including my rants about how late this legislation arrived to help my clients who borrowed PPP money in early April, I’ve just edited my May 27 post to incorporate the changes.
Two weeks ago, the Small Business Administration posted interim rules and the application for employers to complete when seeking forgiveness of their Paycheck Protection Program (“PPP”) loan. This guidance provided employers with many of the answers we have been waiting for since the CARES Act was passed in March. But then the PPPFA was passed and much of that guidance is already obsolete.
But here are the current forgiveness tips based on blending what the PPPFA states and the guidance issued by the SBA two weeks ago. I summarize these for you with the disclaimer that these could change as the SBA issues new interim rules and a new application for PPPFA forgiveness.
- Application: Your forgiveness application can be filed after December 31, 2020 with your lender. This is good news, because the same banker who helped you get your loan application and supporting documents together will be helping you correctly complete your forgiveness application and document your PPP loan expenditures. However, you don’t have to wait until December 31 to apply for forgiveness. Strategically you should apply for forgiveness whenever you believe you can meet all the criteria and maximize the amount to be forgiven.
- New Loan Repayment Terms: Your first payment of PPP loan principle, interest and fees is now deferred until the date when the SBA pays the forgiveness amount to your lender. If you have not sought forgiveness within 10 months after your 24-week covered period ends, then your payments will come due at that time. For example, if you borrowed PPP funds on April 6, your 24-week covered period to spend the funds expires on September 20. Then you have 10 months (until July 20, 2021), to seek forgiveness before any payment is due. Additionally, Congress did not like that the SBA had unilaterally shortened the loan repayment time from ten years to two years, so they compromised at a minimum of five years to repay any part of the loan that is not forgiven. The interest rate remains 1% per annum. So, the promissory note that you signed is incorrect, and your bank may expect you to sign a new one if your loan is not completely forgiven and you want to stretch your payments over 5 years.
- Covered Period: Your payroll calculations can be made over the 24-week “covered period”, which runs for 168 days starting with the date your loan funds were deposited in your account, or you can choose the “Alternative Payroll Covered Period”, which allows you to shift that covered period by a week to better line up with your weekly or biweekly payroll (but doesn’t apply if you pay semi-monthly or monthly). If you received your PPP loan before the PPPFA was passed on June 5, you can also stick to the original 8-week covered period if that is more advantageous for you.
- Compensation: If your employees earn pay during the last pay period of your 24-week covered period, but the paycheck won’t go out until after your covered period expires, you can still seek forgiveness for that compensation amount that was incurred during the PPP covered period. So it appears that the employee’s pay can be incurred (earned on each day worked) or paid, either one, during the covered period or alternative payroll covered period and be forgiven, as long as you are not double-dipping.
- Bonuses and hazard pay can be utilized to spend your PPP funds here at the last minute, but no employee can earn cash compensation (salary, wages, bonuses, tips, commission) during the covered period of more than $100,000 on an annualized basis.
- What you can spend the money on: The rule that 75% of your PPP funds must be spent on employee compensation, retirement contributions, group health care premiums and state taxes has been changed. You will now be eligible for forgiveness if you spend at least 60% of your PPP proceeds on payroll. The other 40% of your loan proceeds can be used for rent, mortgage interest, and utilities.
- FTE Reduction: Your loan forgiveness will be reduced if your “average weekly full-time equivalent employees” (“FTEs”) decreased during the PPP covered period as compared to your average weekly FTEs during one of three reference periods, but the good news is that you as the borrower of the PPP funds gets to choose which comparison period works best for you:
- February 15, 2019 to June 30, 2019; or
- January 1, 2020 to February 29, 2020; or
- In the case of seasonal employers, either of the preceding periods or any 12-week consecutive period between May 1, 2019 and September 15, 2019.
- FTEs are measured on a 40-hour workweek (1 FTE = 40 hours), but in some very good news for employers who use lots of part-time help, employers can use a “simplified method”, which says that any employee working less than 40 hours can be counted as one-half FTE, regardless of hours worked. So a fast food employee who average 18 hours per week will still be counted as a 20-hour per week employee. On the other hand, if you have a lot of people working 30 hours per week, the traditional method of counting FTEs by adding all of your part-time employees’ hours worked each week and dividing by 40 may be more advantageous for you.
- Salary/Hourly Wage Reduction: The other part of the forgiveness formula, the wage reduction part, was not aggregated like we hoped. You will be responsible for calculating whether the salary or hourly wages of each employee, by name, during the Covered Period or the Alternative Payroll Covered Period was less during Q1 of 2020. This calculation will compare each employee’s average annual salary or hourly wage during those two periods. If the employee’s average annual salary or hourly wage was reduced by more than 25%, you may lose some of your loan forgiveness unless you qualify for a safe harbor.
- Safe Harbors: There are some safe harbors you should be aware of and you may need to take advantage of to maximize your loan forgiveness:
- If you reduced your FTE number between February 15, 2020 and April 26, 2020, you can restore it by December 31, 2020 to the level that you had during the pay period that included February 15, 2020. This will allow you to claim full forgiveness of the loan without worrying about the FTE Reduction number.
- If any employee has voluntarily resigned, been fired for cause, or voluntarily requested a reduction in hours, that person will not be counted against the employer FTE headcount. Make sure you have written documentation of the reason that each employee no longer works for you.
- If an employee is provided with a good-faith written offer of reemployment before the end of the 24-week covered period or alternate payroll covered period and refuses to return to work after a layoff or furlough, then that employee will not count against the employer’s forgiveness (but it requires that you as the employer report the refusal to return to work to the state unemployment agency). This requires you as an employer to make a written reemployment offer before your PPP period runs out. Keep documentation of the employee’s refusal to return to work.
- In the PPPFA, you’ve also been granted two additional excuses for not achieving the same FTE numbers by December 31, 2020, that you had on February 15, 2020. First, if you can show that your business was unable to rehire the individuals who were your employees on February 15, 2020 and an inability to hire similarly-qualified employees for unfilled positions on or before December 31, 2020, then you can still seek full forgiveness of your loan. Or, second, if you are able to document an inability to return your business to the same level of business activity as you were operating at before February 15, 2020 because you had to comply with requirements or guidance issued by the CDC, OSHA or the secretary of Health and Human Services relating to sanitation, social distancing or other safety requirements during the period of March 1 to December 31, 2020, then you don’t have to be back up to 100% of your prior FTE numbers to seek full forgiveness of your loan.
- For the Salary/Hourly Wage Reduction forgiveness component, if you made a wage cut between February 15, 2020 and April 26, 2020, you will be forgiven if you can restore each employee by December 31, 2020, to 100% (not 75%) of the average annual salary or hourly wage that he/she was making on February 15, 2020. If you cut wages after April 26, 2020, you are not eligible for this safe harbor. The good news if you qualify for this safe harbor is that it does not appear that you have to repay the employee who received a pay cut (or lay off, leave of absence, furlough, etc.) every penny that employee would have made during the crisis, but only rehire that employee by December 31 and restore his/her wage rate to what it was on February 15, 2020.
- If you are losing PPP loan forgiveness for an employee under one reduction, you won’t lose PPP loan forgiveness for that same employee under the other reduction. In other words, when calculating the FTE Reduction, if a particular employee is counted as a 0 FTE during your 24-week covered period because you had no work for that employee, you won’t also lose out on more loan forgiveness for that person’s missing compensation under the Salary/Hourly Wage Reduction.
Once you submit your completed loan forgiveness application and all the necessary documentation, your bank is supposed to give you a decision on forgiveness within 60 days. However, the SBA reserves the right to audit your application regardless of amount borrowed (seemingly contradicting an FAQ it just released on May 13, 2020) and if it deems it ineligible, you’ll have to provide more documentation and/or file an appeal.
Here was my warning in the original post on May 27: “Meanwhile, don’t get completely comfortable with any of this. There are multiple bills pending in the U.S. Congress to amend the CARES Act that could change all of this even at this late date. For example, the “covered period” may be expanded to 16 or even 24 weeks. The end date for rehiring employees and ending the PPP program may be extended from June 30, 2020 to December 31, 2020. The House also wants to override the unilateral regulation inserted by the Treasury department (which was not in the CARES Act passed by Congress) that the money must be spent 75% on payroll, since many businesses that were closed down still had rent and utilities, but no payroll during the COVID-19 shutdown.” All of these changes were made in the PPPFA.
Note that the SBA has issued no new guidance expanding on the forgiveness details since the passage of the PPPFA on June 5, so we still may see many tweaks to these forgiveness procedures. At the very least, the extension of the covered period should mean that borrowers have more time to apply those as-yet-unwritten procedures, assuming that the SBA acts relatively quickly to issue that guidance (big assumption, I know). But just be careful: all of the articles and guides to PPP forgiveness that were published before June 5, including the PPP forgiveness application, are already out-of-date and not particularly helpful.