Pros and Cons: Covered Period Options for PPP Loan Borrowers

There are a number of considerations for a borrower when selecting an eight- or 24-week covered period for their Payment Protection Program (PPP) loan.

The PPP Flexibility Act, which was signed by President Donald Trump on June 5, 2020, extended the length in the covered period for qualified payroll and nonpayroll costs paid or incurred by borrowers from eight weeks to 24 weeks.

It also allowed borrowers that received PPP loans before June 5 to elect to use the original eight-week covered period. The covered period was originally defined in Section 1106 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Borrowers, however, aren’t limited to submitting an application after the covered period of either eight or 24 weeks. Rather, as noted in the interim final rule originally published by the Small Business Administration (SBA) on June 22, the borrower is allowed to submit applications before the end of the 24-week covered period.

Below are some of the benefits of each covered period to consider.

Eight-Week Covered Period

Borrowers that received a PPP loan prior to June 5 can elect to maintain an eight-week covered period. The major pros associated with this period follow.

Pros

Ability to Apply for Forgiveness Sooner

Upon applying, the lender will have 60 days to review the application and submit its determination surrounding forgiveness to the SBA. The SBA will then have 90 days to confirm the portion of the PPP loan, if any, that’s forgiven.

This timeline suggests a higher probability that a forgiveness determination by the lender and SBA will occur during calendar year 2020 and the legally released portion of the PPP loan being recognized in 2020 as income.

Less Uncertainty Around Additional Guidance Changes

Since the CARES Act was ruled into law, there have been weekly, and sometimes daily, updates and interpretations to the PPP loan guidance. A borrower could apply for forgiveness under the guidance currently in effect to mitigate the possibility of future guidance updates potentially having an adverse impact on PPP loan forgiveness.

Less Ongoing Resources Dedicated to PPP Financial Planning

Upon applying for PPP loan forgiveness, the borrower can continue operations with less emphasis on qualified costs and full-time equivalency (FTE) tracking for PPP loan forgiveness maximization.

Instead, management can make decisions solely based on what’s most beneficial in the current economic climate.

FTE Maintenance

FTEs can be reduced to meet operational needs earlier without affecting PPP loan forgiveness calculations, if the borrower has maintained a certain FTE level primarily to achieve maximum forgiveness.

24-Week Covered Period

For borrowers that don’t elect to maintain an eight-week covered period, a 24-week covered period beginning on loan origination is provided through the Flexibility Act.

There are a number of significant benefits associated with the 24-week covered period.

Pros

Greater Opportunity to Accumulate Qualified Costs for Forgiveness

Due to the increased covered period, the borrower has more opportunity to accumulate qualified payroll and nonpayroll costs that flow into the forgiveness amount prior to the application of the FTE reduction quotient.

With the guidance available as of June 26, 2020, there isn’t any evidence to suggest the qualified costs are to be limited to the borrowing amount prior to the application of the FTE reduction quotient. Therefore, an extended covered period could prove favorable to borrowers adversely impacted by their FTE reduction quotient.

Increased Time for Safe Harbor Planning

Safe harbor rules under the Flexibility Act allow the borrower to replace the original June 30 safe harbor date with December 31. This gives the borrower extended time to plan for re-hires and salary or wage reduction reversals if necessary to qualify for available safe harbors.

Lenders and SBA Application Review Process

By the end of the 24-week covered period, PPP lenders and the SBA should have better streamlined their forgiveness application review process, which in turn should ease the borrower application process.

Selection of Payroll Periods to Submit for Forgiveness

Some borrowers can’t use the alternative covered period because they’re on a longer than bi-weekly payroll schedule, such as bi-monthly or semi-monthly, for example.

The additional time should allow borrowers to submit payroll periods without additional calculation or assistance from their payroll processor and still maximize forgiveness. This is achieved by excluding payroll periods that overlap with dates outside of the covered period—at loan origination or the end of their covered period.

Additional Eligibility for Noncash Compensation

The borrower could include payroll costs, such as retirement contributions, incurred and paid during a 24-week covered period that may not be captured during the shorter eight-week covered period.

Ability to Apply for Forgiveness Later

Borrowers are eligible to defer the payment of principal and interest on unforgiven PPP loans until the date they receive a final decision regarding forgiveness if a forgiveness application is submitted to their lender no later than 10 months from the end of their covered period. 

In addition, borrowers that wait to submit their forgiveness application may be able to defer the forgiveness determination by the lender and SBA until calendar year 2021.

Submitting Applications Before the End of 24-Week Covered Period

Borrowers may submit loan forgiveness applications prior to the end of their 24-week covered period. The major considerations associated with applying for forgiveness prior to the end of the 24-week covered period include the following.

Pros

More Flexibility for Borrowers

Borrowers can apply for forgiveness before their covered period ends if they already maximized forgiveness.

Cons

Salary and Wage Reductions Are Calculated Over the Full Covered Period

If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25%, the borrower must account for the excess salary reduction for the full eight-week or 24-week covered period, according to the June 26, 2020, Interim Final Rule.

This implies that if an employee’s wages don’t meet safe harbors, the borrower should reduce forgiveness for the full covered period.

For example: If a borrower applies for forgiveness at 20 weeks into their 24-week covered period and has wage reductions of 40%, they must multiply 15% (40% wage reduction less 25% threshold) by the full 24 weeks instead of 20 weeks.

Average FTE End Date Isn’t Defined

It isn’t yet clear how average FTEs are calculated for borrowers applying for forgiveness earlier than 24 weeks because the SBA hasn’t provided an end date for average FTEs.

Borrowers that need to make operational decisions regarding FTEs should consider that the SBA may require an alternative calculation or estimate. Some borrowers may find relief from this uncertainty because the FTE reduction safe harbor end date is the earlier of December 31 or the forgiveness application date.

We’re Here to Help

For more information on choosing which covered period makes the most sense for you or general PPP questions, please contact your Moss Adams professional. You can also explore our Disruption Services, which includes information about PPP and the Main Street Lending Program.

Note on COVID-19

During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: