June 8, 2020 | Covid-19 | Posted by Bob Greene, Senior HR Industry Analyst at Ascentis
The Paycheck Protection Program Flexibility Act is Now Law: What You Need to Know!
UPDATE: On June 8, 2020, just a few days after the PPP Flexibility Act was signed into law, Treasury Secretary Mnuchin and SBA Administrator Jovita Carranza issued a joint statement clarifying various aspects of the new law. This statement detailed that, although there had been some conjecture that legislative intent in the law was to not only reduce the minimum direct payroll spend limit from 75% to 60%, but also to invoke the "cliff" or "bright-line" limit articulated in this blog, that it would be the official stance of SBA and Treasury that such a change would not take place. In other words, employer borrowers are still able to claim some degree of forgiveness for their PPP loans, on a pro-rata basis, even if they fail to meet the new, 60% minimum direct payroll spend. Click here for the statement that provides additional important clarifications.
On June 5, 2020, the President signed HR 7010, the Paycheck Protection Flexibility Act, which makes a number of needed changes to the PPP as originally designed under the Coronavirus Aid Relief and Economic Security (CARES) Act, which was signed into law March 27, 2020. The new law is a response to mounting criticism of various provisions of the original PPP provisions, many of which may have looked good prospectively in late March, but appear differently to small businesses with the pandemic still dominating both the news and consumer sentiment 10 weeks later.
The new law is designed to “surgically” address key criticisms around loan forgiveness, and the process by which that forgiveness is calculated. More basic provisions, like the amount of money allocated to the program and method of calculating the loan amount itself, have not changed. One fascinating aspect of the strange odyssey of this small business aid program is its rise and fall in popularity – which can best be seen by the amount of money remaining in the program to lend.
The first $349 billion traunch of funds were fully committed in less than two weeks, and a second allocation of $310 billion began on April 27. The average loan size in the first allocation was $206,000, while the average loan size so far in the second allocation is $113,000. As the second phase of the lending program was rolling out, two specific concerns were getting major press attention among small businesses: (a) the fact that the economic disruptions implicated by business closures due to COVID-19 was going to be much longer than the eight weeks the original bill allowed employers to fund their businesses, after which forgiveness calculations were to begin, and (b) increasingly strong language from Treasury attempting to hone the program’s terms to exclude small-to-medium size businesses which had other financial alternatives available to them.
As a result, as of May 18, the PPP program had about $100 billion left to lend. As of June 5, the program has about $140 billion left to lend. How can this be, you ask? It is clear that Treasury’s warnings to “unqualified” borrowers (in Treasury’s own evolving view, even if those views weren’t codified in the original law) to repay the loans immediately or face increasingly severe consequences, worked!
Recognizing the circumstantial combination of loan demand beginning to dry up, the lending “pool” actually growing as some larger and well-known companies repaying their loans immediately, and the COVID health crisis clearly “overstaying its welcome,” Congress felt the need to take corrective action.
Congress Takes Action
The PPP Flexibility Act (HR7010) included, as a cornerstone of its revisions, the extension of the forgiveness measurement period, from 8 weeks to 24 weeks, but ending no later than December 31, 2020. Borrowers who already have loans outstanding can choose to either use the 8-week period OR the 24-week period, and new loans originated after June 5, may also make that choice.
The PPP Flexibility Act passed the House by a vote of 417-1 on a roll call vote while it was in session. In the Senate on the other hand, because the body was technically not in session, a unanimous vote was required. As a result of one Senator objecting, the Senate included documentation in the Record clarifying that no new loans can be originated under the program after June 30, 2020. Employers finding these new PPP terms more accommodating, and wanting to originate new PPP loans are advised to move quickly, since the process includes securing a lender, assembling the application and supporting documentation, getting approved and receiving the funding. Backing up all of those steps from December 31 of this year, the clock is ticking loudly.
Three other revisions of the original PPP under the Flexibility Act are worthy of mention here. The original law required employers to spend at least 75% of the proceeds on “direct payroll costs” (including direct compensation, employer cost of health insurance, and employer contributions to retirement plans); if 75% of proceeds were not spent on these items, the implication was that the forgiveness amount would be proportionately reduced. The new law reduces the required minimum payroll spend from 75% to 60%, but it also makes this a “cliff” – if an employer spends 59.9% or less of their proceeds on payroll costs, they cannot claim ANY forgiveness on the loan.
Another set of revisions which will be welcomed by employers will be flexibility on restoration of workforce reductions. First, the new law extends from June 30, 2020 to December 31, 2020 the date by which terminated, furloughed and/or laid off headcount must be restored to avoid a reduction in forgiveness. Secondly, the new law officially incorporates specific guidance that employers were waiting for: excluded from the forgiveness penalty are (a) voluntary resignations during the applicable measurement period, (b) for-cause terminations during the applicable measurement period, and (c) offers officially extended to recall or rehire an employee that the employee officially declines. Employers are advised to keep detailed, employee-by-employee documentation on these three circumstances.
Finally, the Flexibility Act clarifies that employers MAY participate in both the OASDI deferred payment program AND the PPP simultaneously – they simply may not include in forgivable expenses employer OASDI amounts that have been deferred to future payment in 2021 and 2022.
Here is a chart comparing key provisions of the PPP that were modified by the new Flexibility Act:
Bob Greene currently serves as Senior HR Industry Analyst at Ascentis. Bob’s 40 years in the human capital management industry have been spent in practitioner, consultant and vendor/partner roles. As practitioner, he managed payroll for a 5,000-person bank in New Jersey. As consultant, he spent 8 years advising customers in HRMS, and payroll and benefits system design as well as acquisition strategies. Bob also built a strategic HCM advisory practice for Xcelicor (later acquired by Deloitte Consulting.)