The New PPP Math: 24 + 60 = > Forgiveness + > Paperwork

June 8, 2020 Alerts and Newsletters

On June 5, the President signed into law the Paycheck Protection Program Flexibility Act. This is the second amendment to the Program, the first being on April 24, to increase funding levels to $659 billion from the original $349 billion. The Flexibility Act dramatically increases the proportion of PPP borrowers who will qualify for 100% forgiveness.

Here is a comparison showing prior features on the left and new Flexibility Act features on the right:



LOAN AMOUNT: An eligible small business can receive up to 2.5 times its average 2019 monthly payroll amount (subject to adjustments for higher-paid employees). Under the original statute, the lending period expires June 30, 2020. As of May 30, there still was nearly $150 billion of lending capacity left (about 22% of the total authoriza­tion).

The Flexibility Act does not change the loan amount calculation. BUT the Act does make loan forgiveness more likely and could encourage more businesses to apply for PPP loans before June 30. As a result, loan amounts should go up overall even though the maximum amount per borrower remains unchanged.

SPENDING REQUIREMENT: The entire loan amount is subject to forgiveness only if the borrower is able to spend 100% of that amount on covered expenses during the covered period.

The Flexibility Act does not change this principle, BUT by extending the covered period (see next item) does increase the likelihood that a borrower will be able to spend the full loan amount within the covered period.

COVERED PERIOD: The original statute measured expenditures and headcount over an 8-week period. For a business whose payroll costs remained unchanged from 2019, this meant that a borrower had 8 weeks to spend an amount equal to about 11 weeks’ worth of payroll expense. Allowed expenses did include certain specified non-payroll items including covered rent, utilities, and mortgage interest (as defined).

The Flexibility Act extends the covered period to 24 weeks, thereby (i) tripling the number of days within which to spend 100% of the loan amount on covered expenses and (ii) lengthening the period over which average headcount and average wage rates are to be computed. A pre-June 5 borrower can elect to apply the shorter period of 8 weeks at its option.

PAYROLL THRESHOLD: The original statute treated all covered expenses equally, and its forgiveness provisions did not impose any requirement about the mix of expenses. By rule, however, SBA/ Treasury required that payroll costs must constitute at least 75% of the forgiveness amount.

The Flexibility Act overrides the 75% threshold, requiring that 60% be spent on payroll costs.

THE HAIL MARY DEADLINE: The original statute offered two “Hail Mary” safe harbors by which a borrower might avoid forgiveness reductions by restoring headcount and/or wage rates “not later than” June 30, 2020.

The Flexibility Act leaves the two original safe harbors in place but substitutes December 31, 2020 for June 30, 2020. The Act also includes new FTE hardship exemptions if the borrower demonstrates an inability to rehire workers or replacements, or demonstrates that federal COVID-19 related regulations or guidance prevent a return to the prior level of business activity.

LOAN TERM: The CARES Act provided for a maximum 10 year loan term. However, SBA/Treasury issued a rule setting a fixed term of just 2 years.

The Flexibility Act specifies a minimum 5 year loan term for all new loans (on or after June 5), and allows – but does not require – the borrower and lender to modify the term of an existing loan (pre-June 5) to be 5 to 10 years long.

The Flexibility Act is thus intended to allow a greater proportion of businesses to qualify for 100% (or nearly 100%) forgiveness, in that (A) The period to expend 100% of the loan amount on covered costs is 3 times longer; (B) The permitted non-payroll portion has been liberalized, to 40% from 25%; and (C) The Act’s exemptions for attempted rehires and for impossibility due to federal restrictions on activity will allow some businesses to avoid the FTE reduction factor in whole or in part.

The Flexibility Act offers no guarantee, however, of reaching 100% forgiveness:

  • The Cliff. Many commentators read the 60% threshold now as a “cliff” – i.e. zero forgiveness unless payroll costs during the covered period reach at least 60% – rather than a mere substitution of 60% for 75% under the proportionate disqualification approach adopted by SBA/Treasury. I could be wrong, but I am betting that proportionate treatment will carry the day.
    The statutory wording is not totally clear, and a harsh outcome here seems jarringly inconsistent with the overall tone and purpose of the Flexibility Act. I expect that SBA/Treasury (or perhaps even Congress) will step in and resolve the question in favor of the hard-hit subset of businesses which would be hurt by the cliff – namely, those businesses whose payroll levels over a sustained period are down from 2019 by more than 70%. [2.5 months x 60% = 46 days of payroll; 46 days = 27% of the number of days in 24 weeks]
  • The Wage Reduction Math. Under the Forgiveness Application published on May 15, 2020, there is a dollar-for-dollar reduction in forgiveness for each employee whose wage rate per hour (or salary rate per year) has been reduced by more than 25% from the average rate in effect for her during Q1 of 2020. To illustrate, if Sally’s wage shortfall below 75% is $2.50 per hour, then in a 40 hour work week this amounts to $100. Multiplied by 8 weeks is $800. But multiplied by 24 weeks is $2,400. So the 24-week period is not an unmixed blessing.

  • The Wage Hail Mary. For any given employee whose wage reduction exceeds 25%, the dollar offset for her can be sidestepped if her wages are restored to 100% of her February 15, 2020 rate by the Hail Mary deadline. Formerly this deadline was June 30, and now it has been extended to December 31. This, too, is an unmixed blessing in that if Sally finds a job somewhere else before her wage level is restored, there is no way to reclaim the dollar offset for her. As a result, delaying the Hail Mary deadline does provide more time to restore her wages, but also provides more time for her to leave for greener pastures – perhaps due to her having suffered a more than 25% reduction in her rate of compensation.
  • The Headcount Hail Mary. The headcount-related reduction can be sidestepped if the business is able to restore its February 15 headcount number by the Hail Mary deadline. Extending the deadline to December 31 provides additional time to accomplish this. This will generally be favorable to employers. A longer period does carry the risk of more FTE reductions. However, the business gets two more bites at the apple if it can show that its failure to regain the February 15 headcount was due either to (i) failed attempts to rehire departed employees and an inability to hire qualified replacements for those positions by December 31 or (ii) compliance with COVID-19 requirements or guidance issued by certain federal agencies (Health and Human Services, the Centers for Disease Control, or OSHA).

Increased Homework. The Forgiveness Application published by SBA on May 15 will now need to be extensively re-written. In the course of doing so, SBA/Treasury likely will clarify some issues created by the Flexibility Act and might clarify other issues left unchanged by that Act.

The Application form calls for construction of very detailed, employee-by-employee tables. All other things being equal, the extension of the covered period from 8 weeks to 24 means an increase in the number of calculations needed in order to complete the Application, and an increase in records needed to support these calculations. So, yes, one cost of greater forgiveness is a greater amount of work for bookkeepers and accountants who are responsible for assembling the Applications.

Close Enough at 8 Weeks? If your company has sufficient payroll costs and other covered costs to support 100% (or close to 100%) forgiveness based on the 8-week period, it generally would be advisable to elect to stay with 8 weeks (as the Flexibility Act permits) and go ahead with your Forgiveness Application. Doing so gets this off your plate and avoids the extra work later to arrive at a similar outcome. Moreover, if we have learned anything over the past 9 weeks since SBA’s first Interim Final Rule, it is that the rules can change – perhaps dramatically – with little or no warning. Filing soon helps avoid the risk of future adverse twists and turns. In considering whether to stick with the 8-week period, keep in mind that the new Act allows you to use the 60% threshold for payroll costs, rather than 75%. They don’t call it the Flexibility Act for nothin’.