The Impact of the PPP Flexibility Act and Related SBA Releases of Updated Form 3508
Over the last several weeks, we have watched the Paycheck Protection Program (PPP) continue to evolve with the issuance of numerous pieces of guidance, forms and frequently asked questions. The passage of the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act), while applauded by borrowers, has created new questions for lenders. In the following paragraphs, we offer our insights on the more recent changes as we continue to monitor the additional expected guidance from the Small Business Administration (SBA).
Updated Borrower Loan Forgiveness Applications
On June 16, 2020, the SBA released an updated Interim Final Rule (IFR) and on June 17, 2020, the SBA released an updated Form 3508 PPP loan forgiveness application and Form 3508EZ, which is a simplified version of the updated Form 3508.
Form 3508EZ
Borrowers may utilize Form 3508EZ if they meet any one of three criteria:
- Applied for the PPP loan as self-employed, an independent contractor or a sole proprietor with no employees;
- Did not reduce annual salary or hourly wage rates of any employee by more than 25% during the covered/alternative covered period compared to the first quarter of 2020, and did not reduce the number of employees or the average paid hours between January 1, 2020, and the end of their covered period; or,
- Did not reduce annual salary or hourly wages of any employee by more than 25% during the covered/alternative covered period compared to the first quarter of 2020, and were unable to operate during the covered period at the same level of business activity as before February 15, 2020.
Our initial observations on Form 3508EZ are:
- In comparing to the Form 3508, it provides advantages to borrowers with few or no employees as well as borrowers with no reduction in employees, as Form 3508EZ requires less data and fewer calculations on full time equivalents (FTE). Specifically, with one modest exception of FTEs as of January 1, 2020 and end of their covered period, the borrower will not need to provide FTE information.
- Borrowers must certify they meet the requirements to use Form 3508EZ. When using the EZ form, the borrower will need to certify that they have experienced a COVID-19 related reduction in business activity.
- We expect the lender review of borrower applications to be the same for the Form 3508EZ and 3508. Required borrower documentation is essentially the same for Form 3508 and 3508EZ, except that EZ requires less information on FTEs.
Updated Form 3508
This form now reflects the following changes made by Congress in the PPP Flexibility Act and the related new interim final rule:
- $100,000 cash compensation limits updated for 24-week covered period.
- Employees are capped at $15,385 for eight weeks and $46,154 for 24 weeks
- Owner compensation is determined based on 2019 compensation amounts, capped at $15,385 for eight weeks or the lower of $20,833 or the two-and-half-month equivalent of the owner’s applicable compensation in 2019 for the 24-week period.
- Health insurance benefits only include the employer-paid portion of health insurance premiums and exclude amounts for all owners, regardless of owner type (e.g., self-employed individuals, general partners, or owner-employees of S-corporations).
- Retirement plan benefits only include the employer-paid portion of the retirement plan contributions and exclude amounts for self-employed individuals and general partners. Amounts contributed on behalf of owner-employees of S-corporations are includable, but are capped at two and a half months’ worth of the 2019 contribution amount.
- On the previous loan forgiveness application, the safe harbors for both salary/hourly wage reduction and FTE reduction were measured using corresponding salary/wage and FTE amounts determined as of June 30, 2020. Under the updated guidance, the safe harbor for any salary/wage or FTE reduction was eliminated and can now be assessed using amounts determined on the earlier of December 31, 2020, or the date the forgiveness application is submitted.
- The new application introduces two additional new FTE reduction safe harbors. Based on the previous lender guidance, lenders are expected to perform a good faith review on this conclusion, and borrower will still need to provide support for its FTE calculations.
Additional PPP Flexibility Act Considerations for Lenders
The Flexibility Act made three major changes that affect lenders.
- Extension of the “covered period” from 8 weeks to 24 weeks
The positive impact for borrowers and lenders is an increase in expected forgiveness to borrowers. Borrowers with no employees and minimal qualifying non-payroll expenses, who opt for the 24-week covered period, could improve their likelihood of obtaining full forgiveness so long as the evidence provided aligns with their compensation support in their PPP loan application. This combination of full forgiveness and little supporting documentation will appeal to a subset of borrowers, but delays the timing of forgiveness applications for borrowers estimating only partial forgiveness when utilizing an 8-week covered period.
The resulting negative impact for lenders is they originally anticipated the majority of their PPP loans would be removed from their balance sheet in a short time frame. However, with the extension of the covered period lenders should consider (a) the impact to their balance sheets for potentially holding a greater portion of these assets into 2021, (b) the option to request expected forgiveness from SBA per the interim final rule, and (c) the ongoing management of these loans and borrower relationships.
- Deferral period is now extended to 10-months following the end of the covered period. All PPP borrowers now have until 10 months following the end of the covered period to either (a) submit for forgiveness in which case no payment is due until the SBA approves the forgiveness request or (b) begin paying principal and interest payments. This presents challenges to lenders with PPP loans made through June 4, 2020, as these loans carried a two-year term. Assuming a borrower opts for the 24-week covered period, and uses the full 10 months before applying for forgiveness, they will theoretically only have approximately 3 to 6 months to pay their remaining loan in full.
- Loans made on or after June 5, 2020 now have a five-year maturity.
From a lender perspective, the extension of the covered period and deferral period on loans funded through June 4, 2020 presents areas for consideration. For loans made on or after June 5, 2020, the maturity is now five years at 1%. Lenders should consider the likelihood of holding the unforgivable piece of these loans for this term and the impact on their balance sheets.
Additionally, the revisions to the interim final rule also provide an option for a PPP borrower whose loan was made before June 5, 2020 to request an extended maturity date from their lender. Beyond the administrative challenges of modifying these existing loans, this option could introduce challenges to a lender’s credit risk management. There are still many questions around this option and lenders should consider a policy to address these requests consistently and equitably.
How can we help? Throughout the PPP process, we have seen continuously changing guidance for both borrowers and lenders and we expect more to come for lenders as we move into the forgiveness phase for borrowers. CLA is here to know you and help you, and we can help you understand SBA guidance. Please contact your CLA representative anytime for more information. We are here to help you navigate through it.
Susan is a CPA with more than 20 years of combined experience in public accounting and the financial institution industry, including experience with Fortune 500 financial services companies. Susan serves as the managing principal of CLA’s financial services group. Her responsibilities include providing engagement oversight in the areas of assurance and internal audit. In addition, Susan provides board advisory and management consulting services in the areas of strategic planning and mergers and acquisitions. Susan has been involved in multiple mergers and acquisitions of sizes ranging from $150 million to $500 billion with engagement at all stages of the process.
If client organization has semi-monthly pay periods and chooses to use the 8-week covered period and is not eligible to use an Alternative Payroll Covered Period, then the first payroll paid crosses over the start of the covered period. In other words, part of the payroll cost is incurred before the start of the covered period, and part is incurred after the start of the covered period – although 100% is paid in the covered period. Question — how much of the payroll cost for that first pay period is included in the Loan Forgiveness calculation? 100% because it was paid during the covered period? Or only the amount that was incurred during the covered period?
Thank you for your assistance.