The New Paycheck Protection Program Flexibility Act Helps a Lot of Borrowers. But Does It …

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Jun 15, 2020
This article is part of a series called COVID-19 Coverage.

Prior to June 5, borrowers of Paycheck Protection Program (PPP) loans felt (or should have felt) a sense of urgency about those loans. It was recently suggested that the time was “now” to run your numbers to determine what portion of your PPP loan was in jeopardy of not being forgiven by the Small Business Administration (SBA). The reason for our concern was that, under guidance provided by the SBA, 75% of your PPP loan had to be spent on payroll during the eight-week period following the funding of the loan in order for it to be forgivable. The various restrictions imposed by the SBA made it difficult for most borrowers to be eligible for forgiveness of their entire loan amounts.

On June 5, however, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (PPPFA), which contains provisions that make it much more likely that your potentially forgivable costs will be equal to or greater than your loan amount.

Will 100% of Your Loan Be Forgiven?

Not necessarily. If you have laid off or furloughed any workers, you still need to deal with the provisions set forth in the SBA guidance and expanded in the act that can scale back your loan forgiveness. That is, if during the “covered period,” you reduced either (1) the number of your full-time equivalent (FTE) employees or (2) the wages of any of your sub-$100,000 employees by a significant amount, your loan forgiveness may be scaled back. The PPPFA gives you some additional methods of satisfying the first provision that you did not have previously, but you may find that even those new methods are of no help to you.

Why Is It Now More Likely Your Forgivable Costs Will Equal or Exceed Your PPP Loan?

First, the period of time in which you have to spend your loan proceeds was extended from 8 weeks to 24 weeks. While you may have found it difficult to spend the loan proceeds in the allowable percentages in 8 weeks, you should have a much easier time spending all of them in that fashion in 24 weeks.

Second, the requirement that 75% of the loan proceeds had to be spent on payroll has been relaxed to 60%. Numerous commentators speculated that the 60% test was “all or nothing” when it was first announced. That is, they were concerned that if less than 60% of the loan proceeds were spent on payroll, that no amount would be forgiven. I a statement made on June 8 and repeated later in the week, Treasury Secretary Steve Mnuchin clarified that the payroll test was not “all or nothing,” and that if less than 60% was spent on payroll that partial forgiveness would be permitted.

What Are the New Tests for Scaling Back Loan Forgiveness by Reason of Laying Off or Furloughing Employees, and How Do They Compare to the Old Tests?

Laying Off or Furloughing Employees

Prior to the PPPFA, your potentially forgivable costs would be multiplied by the following fraction to determine your actual forgivable costs:

Average # of FTE employees during the covered period

divided by

Average # of FTE employees during the comparison period

In the above fraction, the covered period refers to the eight-week period after your PPP loan was funded. The comparison period refers to either the four and a half-month period from February 15, 2019 through June 30, 2019 or the two-month period from January 1, 2020 through February 29, 2020. An employee who works 40 hours per week is considered to be a 1.0 FTE employee; but an employee who works 28 hours per week is considered to be a 0.7 FTE employee. Put another way, if you terminated a number of full-time employees and replaced them with part-time employees or did not replace them at all, the above fraction would cause a portion of your otherwise forgivable costs to be scaled back.

However, the SBA guidance gave you the opportunity to comply with one of two Safe Harbors, either of which would allow you to undo some of the scaling back required by application of the above fraction. Safe Harbor #1 was hiring enough people to bring your FTE employee number up to your February 15 levels by June 30. Safe Harbor #2 was making a good faith effort to rehire employees who had been laid off or furloughed. Each laid off or furloughed employee who declined to be rehired could be disregarded. That is, the FTE employee number for each declining employee could be removed from the denominator (the number on the bottom) of the above fraction.

Under the PPPFA, the new test is as follows: you may remove the FTE employee number from the denominator of the above fraction if (1) you are unable to rehire one who was an employee on February 15, (2) you are unable to hire a similarly qualified employee by December 31, or (3) you are unable to return to your February 15 level of business activity by reason of requirements or guidance issued by the U.S. Department of Health and Human Services (HHS), the Centers for Disease Control and Prevention (CDC) or the Occupational Safety and Health Administration (OSHA) after February 29 relating to sanitation, social distancing, or any other worker or safety requirements related to COVID-19.

Although the above provision (3) may help out a lot of borrowers, it will not help you if the reason you are unable to return to a February 15 level of employment is that demand for your product or service has been reduced if it can’t be linked to an HHS, CDC or OSHA requirement. In that case, you will have to rely on either the first or second provision if either is applicable to avoid loan forgiveness reduction.

Significantly Reducing the Compensation of Employees

The PPPFA did not provide any additional methods to undo loan forgiveness reduction in the situation where you significantly reduced an employee’s compensation during the covered period as compared to the period from January 1 through March 31. However, it did extend the time period for restoring the compensation from June 30 to December 31.

What Happens If Some Portion of Your Loan Is Not Forgiven?

Then you will have to take solace in the fact that the interest rate on your PPP loan is only 1% and the PPPFA increases the maximum term of the loan from two years to at least five years.

This article is part of a series called COVID-19 Coverage.