The Paycheck Protection Program (PPP) enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the COVID pandemic established a massive forgivable loan program to support small businesses during these difficult times.  After an initial infusion of $350 billion was claimed in the first two weeks loans became available, an additional $320 billion in funding was added to the program.  Over four and a half million applicants have obtained loans to date - with an average loan amount of $112,000, borrowed funds now total over $512 billion.  The deadline to obtain a loan remains June 30, 2020.

Many borrowers have not been able to resume operations and/or hire back employees to expend the borrowed funds.  As a result, Congress passed the Paycheck Protection Flexibility Act of 2020 (Flexibility Act) on June 5th to offers additional flexibility for borrowers and extend the period during which funds must be expended.

Overview of Paycheck Protection loan forgiveness under CARES and Flexibility Acts

Loans obtained under the PPP were initially established at a 1% interest rate over a two-year period, with a six-month deferment of any payments.  Under the Flexibility Act, the term of loans obtained after June 5th has been extended to a minimum of 5 years, though borrowers and lenders may agree to alternative terms.  Additionally, the start of loan repayment on PPP loans is deferred until the point at which loan forgiveness is remitted to the lender (or 10 months after the covered period if a borrower fails to apply for forgiveness within such period).  Of course, most borrowers expect the bulk of the loan principal to be forgiven.

  • The amount that may be forgiven is based on loan funds expended on:
    • Payroll costs;
    • Interest payments on mortgages (incurred before February 15, 2020) on real or personal property of the business (not including any prepayments);
    • Rent payments under a leasing agreement (in force before February 15, 2020); and
    • Utility payments of the business including electricity, gas, water, transportation, telephone or internet access for which service began prior to February 15, 2020.
  • Under initial SBA guidance, borrowers were instructed that a minimum of 75% of borrowed funds had to be expended on payroll costs in order to obtain forgiveness (otherwise a proportional reduction of forgiveness would occur).  Under the Flexibility Act, a minimum of 60% of borrowed funds must be applied to payroll.
    • While the Flexibility Act appears to require a minimum of 60% of loan proceeds to be expended on payroll in order to receive any forgiveness at all, the SBA has indicated that borrowers will still be eligible for forgiveness on a reduced basis.
      • Example: A business obtains a $200,000 loan under PPP.  Assuming $100,000 is spent on payroll, the total forgivable amount of the loan will be no more than $166,667 (the total loan amount where payroll reached 60% of expenditures).
  • The initial period to spend PPP funds originally was for the eight-week period beginning on the date of origination of the loan.  Under the Flexibility Act, the period to spend PPP funds has been extended to the earlier of 24 weeks from obtaining the loan or December 31, 2020 (the new “covered period” for the loan).
  • Very importantly, the amount of any forgiveness is based on the extent employees are retained on the payroll of the business.  Under the CARES Act, any amount forgiven is reduced proportionally based on any work force reduction relative to the Full-Time Employees (FTEs) of the business during February 15, 2019-June 30, 2019, or (alternately at the election of the lender), the average employees employed during January 1, 2020-February 29, 2020. 
    • Many employers have had difficulty getting employees to return to work – both due to health and safety concerns as well as unemployment benefits that in some cases are more generous than the compensation available.  Recognizing this, the Flexibility Act provides that eligibility for PPP forgiveness will not be reduced due to workforce reduction if:
      • The employer can document an inability to rehire individuals who were employed on February 15, 2020, and an inability to hire similarly qualified individuals for such positions prior to December 31, 2020; or
      • The employer can document an inability to return to the same level of business activity due to public health safety guidelines (per HHS, CDC or OSHA) during the period from March 1, 2020, to December 31, 2020.
    • Note that, while PPP forgiveness will not be ratably reduced due to a workforce reduction in such cases, the inability to apply PPP funds to payroll costs will nonetheless impact an employer’s ability to qualify expenditures for forgiveness. 
    • The amount of loan forgiveness also may be reduced if the salary or wages of employees earning less than $100,000 annually is reduced by over 25% during the covered period for the loan.  The amount of forgiveness reduction is based on the amount of total wage reduction in excess of such 25% level, as determined by reference to the most recent quarter of earnings prior to the loan.
  • Recent Interim Rules from the SBA clarify additional loan forgiveness items, including:
    • A full-time equivalent (FTE) employee is one who who works 40 hours or more per week on average.  Part-time employees may be calculated one of two ways: (1) the employer may track hourly records and calculate each employee equivalent relative to his or her total hours worked as a percentage of 40 (e.g., 30 hours average weekly equals 0.75 FTE); or (2) the employer may treat all part-time employees as 0.5 FTE.  Borrowers must choose one of the two options, however, and apply it consistently.
    • Employees who voluntarily resign or are terminated for cause during the covered period will not be treated as a head count reduction for purposes of loan forgiveness.
    • Borrowers are not penalized for salary reductions that are attributable to work force reduction.  For example, a full-time employee who is moved to a part-time schedule at the same pay rate will be considered a part-time employee for purposes of the FTE calculation and reduction.  The net change in total pay will not be considered an additional reduction in loan forgiveness.
  •  Payroll costs will include compensation paid to furloughed workers, as well as bonuses and hazard pay for employees so long as such compensation does not exceed a total of $100,000 as pro-rated for the covered period.
  • Note that borrowers must request forgiveness from their lenders by submitting documentation verifying the number of full-time equivalent employees, as well as their payroll costs, mortgage payments, rent payments and utilities payments.  Lenders are required to issue a decision to the SBA regarding loan forgiveness within 60 days of receiving a complete loan forgiveness application.  In order to obtain forgiveness, borrowers must file such application within 10 months of the end of the covered period (8 weeks or 24 weeks as described above).

Brooke Zrno Grisham, ChFC®, CLU®, AEP®, is a Vice President at New York Life and Chief Executive Officer of The Nautilus Group®, a membership-based resource accessible to a group of approximately 240 experienced agents and financial professionals affiliated with New York Life.

The Nautilus Group® is a service of New York Life Insurance Company.  Nautilus, New York Life Insurance Company, its employees or agents are not in the business of providing tax, legal or accounting advice. Individuals should consult with their own tax, legal or accounting advisors before implementing any planning strategies. © 2020 New York Life Insurance Company. All rights reserved.      


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Media contact
Sara Sefcovic
New York Life Insurance Company
(212) 576-4499
Sara_M_Sefcovic@newyorklife.com

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