Paycheck Protection Program Flexibility Act Update

KCS Wealth (Byline: Laura Gilman)

June 6, 2020

Today the President signed the Payroll Protection Program Flexibility Act (H.R 7010), which the Senate approved on late Wednesday, into law, providing significant updates to the PPP Loans and Forgiveness rules that currently exist. Many of these updates have been highly anticipated and came about after much confusion around how employers are supposed to calculate the forgiveness application. While some of the terms of the new law create a lot more clarity on how Borrowers can move forward, there still remain many questions.

We present below many of important issues included in the original forgiveness application released on May 15, 2020, as well as an H.R. 7010 update following each point and some personal comments about any additional questions that may remain. This is not meant to be comprehensive, as there are a lot of issues to explore here but we do think it should help provide some needed clarity around questions you may have. If you do not see your question addressed here, please feel free to contact us directly.

  • “Covered Period” for Forgiveness – Alternative Provided: During the application process there were a lot of questions about how to calculate the 8-week time period during which the loan proceeds were to be spent, particularly if the loan proceeds were received in between payroll periods. There were also concerns about whether all the funds can be spent over the 8-week period if businesses were not able to open due to state and local Covid restrictions. The original forgiveness application released May 15 provided some, but not complete, relief here by allowing the Borrower to choose between two different “covered time periods” for calculating payroll costs.
    • 56 days (or 8-weeks) from the date the PPP funds were received,
    • The “alternative payroll covered period”, which was defined as 56 days from the first day of the Borrower’s 1st pay period following the day the borrower received the PPP Funds. However, Borrowers can only choose the Alternative period if the frequency of their payroll is either bi-weekly (every 2 weeks) or more frequent. Borrowers whose pay periods are twice a month or longer are not eligible to choose this option.

⇒H.R. 7010 UPDATE: The new law provides the final relief businesses were looking for. Any business that received their PPP funds before this bill becomes law (6/5/2020) can choose to extend the 8-week covered period to 24-weeks, or keep their original 8-week period, as long as the 24-week period does not extend beyond 12/31/2020. That gives employers more time to bring their employees back, as well as have more of the proceeds used for payroll. Just remember there is still a $100,000 annualized salary cap for all employees (including owners) when using the loan proceeds for compensation.

  • How to determine which expenses can be used: There was also confusion around which expenses to include in the forgiveness calculations – whether to include when the expense was actually paid, or when the expense was actually incurred, as these periods might not both coincide around the 8-week period required to spend the loans. For example, assume your loan period ends on July 5 and you pay your rent for July on June 28 (within the 8-week period). The rent period, July, is technically incurred after your 8-week period is over (as it ends on July 5). Will that payment be forgiven or not? The Forgiveness application tried to clarify this by defining those two parameters – when the cost was “incurred” and when the cost was “paid” as:
    • “Incurred” is defined by the day the employee’s wages are earned.
    • “Paid” is the day paychecks are distributed or the ACH transaction is originated.

Unfortunately, these definitions still don’t resolve the question as the application for forgiveness itself applies the “incurred” definition for some costs and the “paid” definition for other costs when calculating forgiveness. It is therefore very important to read the instructions on the application to see when each of these are applied for your particular costs.

⇒H.R. 7010 UPDATE: There has been no further clarification about how payment of funds can be used or the timing of when they are paid versus when they are incurred. We anticipate more guidance when the Treasury releases more FAQs in the coming weeks.

  • How long before you are granted forgiveness: The original forgiveness application provided new information regarding when you can expect to receive forgiveness. Unfortunately the time between submitting loan forgiveness applications and receiving the actual forgiveness is longer than most people originally thought. The Treasury made clear that lenders had 60 days to submit forgiveness applications to the SBA and the SBA has up to 90 days to approve the actual forgiveness after the borrower submits their application for forgiveness, meaning it could take up to 5 months before receiving a reply to your application for forgiveness. When do you have to submit the application as a Borrower? The deadline for the Borrower’s application is still unclear.

⇒H.R. 7010 UPDATE: There have been no updates about when Borrowers should submit their Forgiveness applications and the new law creates even more confusion as some Borrowers are not sure if they should apply once their funds run out or if the new December 31, 2020 deadlines will apply. We hope to receive more clarification through the Treasury FAQs at a future date.

  • Percentage of proceeds to be used for Payroll vs. Non-Payroll Costs: The May 15 forgiveness application kept the guidelines from the loan application process that non-payroll costs cannot exceed 25% of the total loan or the total amount eligible to be forgiven will be reduced on a sliding scale. It is therefore important to make sure that all non-payroll costs paid and/or incurred during 8-week period do not exceed 25% of the loan, or part of the loan might not be forgiven. The application and Interim Final Rules provide more details on how this loss of forgiveness would be calculated.

⇒H.R. 7010 UPDATE: The payroll expenditure requirement drops to 60% from the original 75% (said another way, the non-payroll costs cannot exceed 40%, an increase from 25%). However, and more importantly, a big change from the original rules says that“to receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs….”. To many, this language implies that if you only use 50% of the proceeds for payroll, then you forfeit 100% of the forgiveness amount. Under the old rules, the forgiveness amount was just reduced by the proportional percentage below the 75% hurdle. This is a massive change, and we believe it was an intentional one as Senators Marco Rubio and Susan Collins indicated that they expect these rules to change back to the sliding scale option as a technical change through the SBA soon.

  • Losing Forgiveness from reduction in Full Time Equivalents (FTE) or reduced wages: Total loan forgiveness can also be reduced if the Borrower does not replace Full Time Equivalent (FTE) employees as well as restore wages back to their February 15, 2020 levels. In order to not have their eligible forgiveness amount reduced, Borrowers must show that they have not reduced any of their employee’s wages by more than 25%, or that they have not reduced any of their employee’s hours (or total FTEs) when compared to one of the following reference periods: (i) February 15, 2019 through June 30, 2019, (ii) January 1, 2020 through February 29, 2020, or (iii) for seasonal businesses, “either of the two preceding methods or a consecutive 12-week period between May 1, 2019 and September 15, 2019”. The Borrower gets to select which reference period to use. However, there is a safe harbor whereby reduction in total forgiveness amounts will not be affected if any of the following apply:
    • Borrower made a written offer to rehire an employee which the employee then rejected (The Borrower must ensure to get have proper documentation to confirm both the written offer and the written rejection by the employee)
    • An employee voluntarily resigned
    • An employee was terminated for cause
    • An employee requested and received a reduction in hours

The Borrower will also not have any of their eligible loan forgiveness reduced as long as they rehire or return their employee wages to regular levels before June 30, 2020. If they do not, then their eligible forgiveness amount will be proportionally reduced by the decrease in FTEs or reduced pay beyond 25% from the reference period.

What is still unclear is how these rules apply to employees whose wages are over $100,000 and have had their wages reduced more than 25%. As of this writing, there is no clear answer, but we believe that as long as the employee’s wages are not reduced BELOW $100,000, even if the reduction is more than 25% from the reference period, this will not affect the forgiveness eligibility. This is merely our current opinion, however, as we await further clarification.

⇒ H.R. 7010 UPDATE: The rules regarding restoring the workforce or wages have been broadened. They now state that, from the period beginning on February 15, 2020 and ending December 31, 2020, the amount of loan forgiveness will not be reduced based on the number of FTEs as long as the Borrower can document either (A):

    • “(i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and
    • “(ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020;


    • “(B) an inability to return to the same level of business activity as such business was operating at before February 15, 2020”, due the government restrictions and compliance with government requirements regarding the Coronavirus during the period from March 1, 2020 to ending December 31, 2020.

As well, the period for which to rehire and/or restore employees and wages has been extended to December 31, 2020 from June 30, 2020. This means that as long as the Borrower restores the FTEs or employee wages by December 31, 2020, there will be no reduction in forgiveness as a result of employment changes. This is a big win for employers, many of whom remain partially or fully closed and were concerned about losing part of their forgiveness because of employees who couldn’t or wouldn’t come back to work. We believe this will provide more flexibility and more options in finding exemptions for any FTE and wage reductions that would have otherwise reduced the eligibility for loan forgiveness.

Aside from the changes to the forgiveness application of May 15 highlighted above, there are some additional changes in the new law that we wanted to highlight:

  • Change in Loan Term: The repayment period for any new loans made after the date of this law (6/5/2020) was increased from 2 years to 5 years. This, of course, would only apply to loans, or portions of loans, that were not forgiven. This is not immediately granted to Borrowers who received their loans before this law went into effect. However, it is our understanding that existing borrowers can request from their lenders to extend their loans to 5 years from their current 2 years. Of course, right now it is up to the lenders if they want to approve this request.
  • Change of loan payments deferral: Loans issued before this new law were able to defer loan payments for six months. The new law now allows borrowers to defer payments until 10 months after the original loan date. This is to coincide with the extended period of time the Treasury allowed for Borrowers to receive forgiveness from the SBA (see discussion above). In this way the borrower doesn’t have to start making loan payments while they are still waiting to hear back from the SBA on their forgiveness approvals.
  • Deferral of Payroll Taxes is now an option: Businesses can now receive a delay in payment of their payroll taxes, even if they have received a PPP Loan. This was a big change and one that was heavily requested by business owners as this option was explicitly denied under the original rules. This means that businesses who received PPP loans can now also defer 50% of the 6.2% share of the 2020 social security tax until the end of 2021 and the other 50% until the end of 2022. This appears to be allowed for social security taxes paid for all of 2020, even if the loan is forgiven before December 31, 2020.

We know this doesn’t answer every question that PPP Borrowers have over how to apply for loan forgiveness, and in fact, for some it creates more questions that still need to be answered. We believe (and hope) that many of these questions will be addressed through clarifications and technical changes made by the SBA through more FAQs. We hope this provides a good basis for determining how to use and track these loan proceeds in a way that will enable receipt of maximum forgiveness.


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