On June 3, 2020, Congress passed the Paycheck Protection Program (PPP) Flexibility Act which provided much needed relief to many businesses that were trying to qualify for full forgiveness of their SBA PPP Loan within the 8 week covered period. This bill changed the Covered Period from 8 weeks to 24 weeks which will provide companies with more time to spend their PPP loan. But there were also other changes that were made to PPP program that we will cover in this article including:
- Covered Period extended to 24 weeks
- Non-payroll cost increased from 25% to 40% of the loan amount
- Max Employee Comp may increase from $15,385 to $46,153
- Companies will have until December 31st to restore FTE’s (full time equivalents)
- Additional safe harbors for FTE calculation
- Companies can defer employer payroll taxes in addition to the PPP loan
- Loan duration extended from 2 years to 5 years
- New questions that the PPP Flexibility Act creates
New 24 Week Covered Period
This is probably the most important change that was made to the Paycheck Protection Program. Companies will now have a 24 week covered period to spend their PPP loan Instead of the original 8 week period and qualify for full forgiveness of the loan amount. Since the SBA PPP Loans were calculated based on 10 weeks of payroll, companies were finding it challenging to spend the full loan amount within an 8 week period. The new bill did not change the definition of qualified expenses. They are still:
- Employee health insurance
- Employer contributions to retirement plans
- Mortgage interest
- Rent payments
But a lot of small businesses didn’t have enough “non-payroll costs” within the 8 week period to reach the full amount of their PPP loan. Also, many companies weren’t able to hire their employees back until a few weeks into their Covered Period, so they did not have 8 weeks worth of payroll for many of their employees.
Changing the Covered Period to 24 weeks will make qualifying for full forgiveness of the PPP loan very easy for many companies. They now have a loan that was calculated based on 10 weeks of payroll but have 24 week of payroll to spend it on. While there are still grey areas regarding some of the non-payroll costs associated with the PPP, the change to a 24 week Covered Period for most employers, will make them irrelevant because most employers will be able to spend the full loan amount on straight payroll costs.
24 Week Covered Period Is Optional
The new PPP Flexibility Act does not require companies that received PPP loans to adopt a 24 week Covered Period. If the company received their PPP loan prior to the signing of the new PPP Flexibility Act, they can elect to continue to use their original 8 week Covered Period. This is a favorable option for companies that have already spent their full PPP loan and have not had a reduction in employee headcount or reduced wages.
However, companies that have spent the full PPP loan amount but have experienced a reduction in employee headcount or reduced wages, may want to consider adhering to the new 24 week covered period because it will provide them with more time to bring employees back and make the company eligible for full forgiveness of the loan.
Ability To Apply For Forgiveness Early
This raises a question that we will hopefully get guidance on from the SBA or Treasury soon. If a company is 15 weeks into their 24 week covered period, they have already spent the full PPP loan amount on qualified expenses, and they have restored FTE’s and wages, can they apply for forgiveness prior to the end of their 24 week period or do they have to wait?
We don’t know the answer to this one yet but a lot of companies are going to be asking this question. It seems like adding the ability to apply early for forgiveness would benefit both the borrower and the banks. The banks do not want to be servicing a 1% loan any longer than they have to. But allowing this also creates some issues. All of the forgiveness calculations are based on a set Covered Period, if you have some companies applying for forgiveness after 12 weeks, others at 18 weeks, and some at 24 weeks, it could definitely complicate the forgiveness calculations.
Non-Payroll Costs Increased from 25% to 40%
Prior to the passing of the PPP Flexibility Act, companies were required to spend at least 75% of the PPP loan amount on payroll cost in order to qualify for full forgiveness. The new bill changed that. Now companies only need to spend a minimum of 60% of the PPP loan amount on payroll costs to be eligible for full forgiveness. But arguably, not that many companies will need this now since they have 24 weeks of payroll costs to work with; but it adds some additional flexibility.
The 60% Cliff
While Congress may have loosened their restrictions on the minimum amount that needs to be used toward payroll costs it seems like it comes with a cliff. While the old rules carried a 75% payroll cost threshold, it was assumed that for companies that fell short of the threshold, they would still qualify for partial forgiveness of the PPP loan amount. Under this new 60% payroll threshold, as of today, it seems that if companies are unable to meet the 60% threshold, that none of the loan will qualify for forgiveness. This will be an important feature to pay attention to for businesses like restaurants and bars that have been completely shut down and are only now starting to hire back employees. Even with 24 weeks to work with, companies need to be aware of this possible 60% “all or none” forgiveness threshold that now seems to exist. Again, hopefully this is something that they will address in future guidance.
Max Employee Comp $15,385 to $46,153
The PPP Flexibility Act did not change the $100,000 annual compensation limit for employees and owners. However, under the old 8 week covered period, each employee was limited to $15,385 in compensation during the covered period.
$100,000 / 52 weeks x 8 weeks = $15,385
Now that companies have a 24 week Covered Period, it would seem that the maximum compensation for each employee would naturally increase from $15,385 to $46,153.
$100 / 52 weeks x 24 weeks = $46,153
This has not been 100% confirmed yet but it will hopefully be addressed in the future guidance.
You Cannot Increase Your PPP Loan Amount
This potential increase in the per employee compensation amount raises the question from employers, “Can I go back and ask for more money from the SBA for my PPP loan?” The short answer to that is “no”. The PPP Flexibility Act did not change the calculation of the PPP loan amount, just other features of the program. They also specifically stated in the new bill, that the ability to apply for a PPP loan would not extend beyond June 30th. As of today, there is a still about $100 Billion dollars allocated to the PPP loan program that is available to companies that have not yet applied for a PPP loan.
For companies that would have qualified for the PPP loan but originally opted not to take it because they were completely shut down and doubted their ability to meet the 75% threshold of payroll within the 8 week Covered Period, this 24 week extension may now change their minds.
FTE Rehired Date Extended to December 31, 2020
They also provided companies with a lot more time to bring back employees to avoid being penalized on the forgiveness amount of their loan. Many companies are just now starting to open up but are by no means back to 100% of their staff and that was hurting them during the loan forgiveness process. Under the old rules, the FTE (full time equivalent) calculation was based on the last day of the borrower’s 8 week covered period but there was a safe harbor that stated as long as the employee headcount and wages were restored by June 30th, no FTE penalty would be assessed.
Under the new PPP Flexibility Act, with a 24 week Covered Period, Employers will have more time to bring back employees and restore wages to their pre COVID-19 levels. The new act also extended the safe harbor FTE provision from June 30th to December 31, 2020, so companies will have until the end of the year to restore their employee headcount and wages to their February 15, 2020 level in order to avoid FTE penalties during the forgiveness process.
Additional FTE Safe Harbors
The new bill enhanced some of the FTE safe harbor provisions. These safe harbors were in place to protect companies that had a reduction in their FTE’s but restored them by a specific date and based the calculations on alternative comparison periods. The new PPP Flexibility Act added to this list of FTE safe harbors which will now include:
- There was an inability to rehire individuals who were employees of the eligible recipient on February 15th,
- There was an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or
- There was an inability to return to the same level of business activity as such business was operating at before February 15th due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Center for Disease Control and Prevention, or the Occupational Safety and Health Administration During the period beginning March 2020 and ending December 2020.
To further clarify this new safe harbor language, if you are a restaurant owner and for the remainder of the year you are required to operate at a limited capacity due to restrictions set forth by these public health organizations, you can access these safe harbors, and your loan forgiveness amount will not be reduced due to the inability to restore your FTE headcount.
Companies Can Defer Employer Payroll Taxes & Get PPP Forgiveness
One of the relief provisions within the CARES Act was providing companies with the option to defer their employer’s 6.2% share of Social Security Taxes until 2021 and 2022. This provision allowed companies to avoid having to pay those taxes now and they had to repay those amounts 50% in 2021 and 50% in 2022. The taxes are still due but the payments are delayed so it’s essentially an interest free loan for companies.
Under the old PPP provisions, companies were able to elect this up until the point that they receive forgiveness of their PPP loan. Once the loan was forgiven, they were no longer able to defer these employer taxes. The PPP Flexibility Act changed this. Now companies will be able to have their PPP loan completely forgiven and will also be able to continue to defer the employer’s share of the FICA taxes until 2021 and 2022.
Loan Duration Extended from 2 Years to 5 Years
For companies that do not receive full forgiveness of their PPP loan, it then operates as a traditional SBA loan subject to the term of the loan. Originally the PPP loans were amortized for 2 years and carried a 1% interest rate. With only a 2 year amortization, once the 6 month deferment to payments was up, companies could have had sizable loan payments given the short duration of the amortization schedule. The PPP Flexibility Act now allows those loans to be amortized over 5 years.
But we need guidance on this feature. It seems like all PPP loans issued after the passage of this Flexibility Act will adhere to the 5 year amortization schedule, but for PPP loans issued prior to the passing of this bill is it an optional provision on the part of the banks? They will hopefully address this in the Q&A document. If borrowers have to negotiate with their bank to extend the duration of their loan, they could have a tough time doing so because again, the banks do not want to be servicing loans with a 1% interest rate for 5 years. The banks want those loans forgiven as soon as possible so they can get reimbursed by the SBA and then make new loans at higher interest rates.
Extension of Loan Payments
The original Paycheck Protection Program allowed borrowers to defer loan payments for a 6 month period. This in most cases would prevent companies from ever having to make a payment on their PPP loan before it was forgiven. With the new 24 week Covered Period (6 months), they extended the payment deferral for these PPP Loans to “the date the lender receives the forgiveness amount from the SBA”, which in many cases will now be longer than the 6 month period.
This Creates New Questions
The other positive of this PPP Covered Period extension is it gives the SBA and Treasury more time to issue much needed guidance on some of these grey areas that exist within the PPP program. We already covered a number of these unanswered questions earlier in the article but there is a big one that remains unanswered. With the Covered Period being extended to 24 weeks, most companies will reach the end of their covered period in October and November, and the forgiveness process could take over 60 days bringing the actual forgiveness event in 2021. Since, as of right now, companies cannot take a deduction for expenses paid with the forgiven PPP loan, accountants will be challenged on how to account for those expenses if forgiveness is still pending. Which is probably something that needs to be addressed as some point in the Q&A.
New Forgiveness Application
The first version of the SBA PPP Forgiveness Application was released a few weeks ago but given these changes to the PPP Program, I would be greatly surprised if they don’t go back and create a revised Forgiveness Application. Hopefully, the next application is a lot shorter than 11 pages and it should be. Since many companies will be able to satisfy the full PPP loan amount with just payroll cost for their employees, it seems like that should be an option on a single page, certifying the amount that was spent on straight payroll, that employee headcount and wages have been restored by a given date, in turn making the forgiveness process much easier for everyone. After all of the madness that everyone has been through with this everchanging PPP program, a one-page PPP forgiveness application would be a welcomed gift for business owners, bankers, and financial professionals.
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.