COBRA & Special Enrollment Extensions, CARES Act & PPP Loan Updates
By Dorothy Cociu
Editor’s Note: Part One of this series was published in the June issue of California Broker.
A lot has happened since I wrote the COVID-19 Guide for Employers, so I felt I was obligated to continue with a “Part 2” of sorts, to fill you in on the most recent legislative and regulatory changes coming from COVID-19 and its impact on all of us. So, I’ll begin where I left off…
In the earlier “COVID-19 Legislation – A Helpful Guide to Employers” article, I ended with brief summaries of the COBRA, Special Enrollment and Claims Procedure emergency extensions, with a promise to revisit this in a later article, so that I could do these provisions justice. I also want to update you on The CARES Act changes (which are extensive); particularly the PPP Loan and Forgiveness updates and processes. To help me explain this, I decided to get a little help from my friends, and asked third party administrators, stop loss carriers, attorneys and accountants to help me to explain the provisions, and provide their professional insights as well, as I know this information is tedious. Sometimes it’s better to get multiple perspectives on complicated matters, so I hope I can do that for you.
At the end of April, in what seemed to be a direct response from the Trump Administration to a “Suggestions” communication from the National Association of Health Underwriters’ concerns about helping employers and individuals maintain their health coverage, the Departments of Labor and Treasury released emergency legislation on COBRA extensions and related legislation. This suggestion letter from NAHU was sent to the Secretaries of Labor, HHS, Department of Treasury and Administrator of CMS on April 7. NAHU was concerned with the number of employers working from home, and concerned that things like COBRA notifications, COBRA election periods and the deadlines for premium payments may be disrupted, and individuals who were laid off due to COVID-19 would lose their ability to receive COBRA continuation coverage, as well as other related concerns. On April 29, 2020, the IRS, DOL and Other Federal Agencies released updated COBRA extensions and claims filing rules due to COVID-19, to be posted in Federal Register on May 4, 2020. For a copy of the letter to the Trump Administration from NAHU’s website.
In addition to COBRA extensions, the federal agencies included special temporary rules for the special enrollment period under ERISA, filing benefit claims, appealing adverse claim determination and external review processes and more.
Effective Date & Basic COBRA Provisions & Extensions
On April 29, 2020, The Departments of Labor and Treasury released an emergency final regulation regarding the COBRA-election period during the dates of the COVID-19 national emergency. The emergency rule took effect immediately and can be applied retroactively to March 1, 2020. The emergency rule allows more flexibility for initial COBRA election periods, deadlines for COBRA premium payments, and timelines for the employer to provide COBRA election notices. The changes in these timelines will be in effect until the Administration declares the end of the COVID-19 national emergency.
The U.S, Department of Labor released the EBSA Disaster Relief Notice 2020-01, which provided guidance and relief for employee benefit plans due to the COVID-19 outbreak, and the DOL’s EBSA released 29 CFR Parts 2560 and 2590 and the IRS 26 CFR Part 54, which provides for an “Extension of Certain Timeframes for Employee Benefit Plans, Participants, and Beneficiaries Affected by the COVID-19 Outbreak.”
Overview of Emergency Rules
This relief provision allows all group health plans, disability and other welfare benefit plans, and employee pension plans subject to ERISA to disregard the period from March 1, 2020, until 60 days after the announced end of the national emergency, or such other date announced by the Agencies in a future notice (called the “Outbreak Period”) in determining special enrollment periods, a COBRA continuation election period, the date for making premium payments, the date for individuals to notify the plan of a qualifying event, the date which a benefit claim is filed, the date for filing an appeal of an adverse benefit determination, the date to file a request for an external review after an adverse benefit determination, and the date which a claimant may file information related to a request for external review upon a finding that the request was not complete.
Accordingly, “under the authority of section 518 of ERISA, and section 7508A(b) of the Internal Revenue Code of 1986, the Agencies are extending certain timeframes otherwise applicable to group health plans, disability and other welfare plans, pension plans, and their participants and beneficiaries under ERISA and the Code.”
This emergency rule has been reviewed and approved by HHS, and HHS advised the Agencies that they will exercise enforcement discretion to adopt a temporary policy of measured enforcement to extend similar timeframes otherwise applicable to non-Federal government group health plans and health insurance issuers offering coverage in connection with a group health plan, their participants, beneficiaries and enrollees under applicable provisions of the PHSA. Therefore, public and private plans are subject to these emergency rules.
COBRA Election Period
The emergency rule changes the COBRA-election period by allowing a person who has an election period between March 1, 2020 and the end of the national emergency an additional 60 days after the end of the national emergency to choose COBRA-continuation coverage. Prior COBRA rules provided enrollees to have 60 days to elect COBRA, but this extension will allow eligible COBRA beneficiaries to have more time to make a COBRA election period decision during the pandemic.
Examples were provided for seven scenarios in the Federal Register dated May 4, 2020, which assist beneficiaries and administrators to understand the extensions. It is important that you understand when reading the examples, that the DOL and Treasury Dept are assuming for purposes of the examples that the national emergency ends on April 30, 2020 (which of course, it did not), and the Outbreak Period ends on June 29, 2020 (the 60th day after the end of the national emergency). But, the examples will help you to understand how the extensions work. Three of the first four examples discuss the COBRA extensions. (Example Two is related to special enrollment and is discussed in the next section).
Example One relates to initial COBRA Elections due to reduction in hours. It summarizes an individual who works for an employer and participates in that employer’s group health plan. Such individual’s hours are reduced due to the national emergency, which results in an offer of COBRA coverage. This individual is provided a COBRA election notice on April 1, 2020, so what is the deadline to elect COBRA? Under this example, the outbreak period is disregarded. The last day of his election period is 60 days after June 29, 2020, which is August 28, 2020.
Example Three relates to COBRA premium payments. On March 1, 2020, an individual was receiving COBRA continuation coverage under a group health plan. More than 45 days had passed since this person had elected COBRA. Monthly premium payments are due by the first of month, and the plan only provides for the statutory 30-day grace period for making premium payments.This person made the February payment on time, but did not make the March payment or any payments during the Outbreak Period. As of July 1, the individual had not made any premium payments for March, April, May or June. Does this person lose COBRA coverage, and if so, for which months? For this example, the outbreak period is disregarded. Premium payments made by 30 days after June 29, 2020, for March, April, May or June 2020 are considered timely, so this individual would be entitled to COBRA continuation coverage for these months if he or she makes the payment.The payments will be considered timely if they are made within 30 days after the end of the outbreak period. Premium payments for all four months were due by July 29, 2020.The plan cannot deny coverage and may make retroactive payments as long as they were received by July 29.
Example Four relates to COBRA premium payment – partial payment. Assume the same facts as Example 3. By July 29, 2020, the individual made a payment equal to 2 months’ premiums. How long does this person have coverage? Because the individual made two months’ payments, he or she is entitled to COBRA continuation coverage for March and April, 2020, the two months for which the premium payments were made, and the individual is NOT entitled to COBRA continuation coverage for any month after April, 2020. Therefore, any services incurred in March or April would be covered by the plan. The plan would NOT be obligated to cover any benefits after April 30, 2020.
Impact of the COBRA Extensions in the Real World
As I said, I asked for a little help with comments from the industry friends on this topic, to assist you in better understanding the impact of these provisions for an employer. My first questions to my friends and associates were, what are your overall thoughts on how the extensions until the 60 days after the announcement of the national emergency or other such dates announced by the agencies affect employers and employees? Will it be helpful for plan participants? Will the provisions be confusing to employers?
Marilyn Monahan, a benefits and insurance attorney from Monahan Law Office, Marina Del Rey, provided some insights: “The COBRA deadlines that have been extended only apply to COBRA continuation coverage, not state mini-COBRA coverage”, she wanted to be sure to clarify. “The new guidance from EBSA will provide some welcome relief to struggling plan participants, as well as overburdened HR departments. However, employers will have to have a clear understanding of what the new rules allow, so that they can implement the changes going forward. Coordination with outside vendors, such as TPAs and COBRA administrators, will also be important.”
On that note, I of course asked two third party administrators for their opinions. Jeffrey Strong, Vice President of Sales for Sterling Administrators, discussed the possible confusion with me. How will it help participants? Jeff replied: “This will help participants as it provides more time to absorb and adjust to the market and major disruption that has occurred.” Will it be confusing to employers? “It will if the definition of the end of the national emergency period is not clearly defined and executed to the market.” Jeff went on to say, “This will be a time for the employer’s brokers to shine as they have their ear to the ground and are working to stay as current as possible to help their clients.”
To clarify some provisions, Jeff stated; “As a reminder, COBRA coverage does not become active until a participant pays, regardless of the relaxed deadlines. I’m wondering if the ultimate need for coverage will overtake the extended deadlines with no end date.”
MaryAnn Wessel of EBA&M Corporation, a TPA in Irvine, CA, stated, “As you can well imagine—just as you are in the midst of guiding clients, we are in the midst of reviewing all aspects of the extensions as they impact our forms of communication here.” She continued: “I am not sure how confusing this will be to plan participants, Qualified Beneficiaries, etc.; as always, this depends on the population of a client….It certainly does add another layer of effort to our already busy environment and work as a TPA but these are “unusual” times and we cannot ignore what is coming from our Federal government—we just have to prepare, train and be ready!”
I followed with a question that has concerned me since I read the new emergency rules…. The ability to “make up” the contributions after several months. I asked Marilyn Monahan if she felt the ability to make up the contributions of 4 months will be realistic for those who perhaps lost their jobs? “The ability to make up premium payments months after a qualifying event will offer individuals flexibility as they grapple with meeting competing financial obligations during a very difficult time,” commented Marilyn. “However, making up months of missing premium payments soon after the end of the National Emergency will be difficult and even impossible for many qualified beneficiaries. Therefore, after losing coverage, qualified beneficiaries should consider all their coverage options, including enrolling in a Marketplace plan (for which premium tax credits may be available).”
Jeff Strong had opinions on the make-up of contributions and stated: “No, and we suspect that there will be some policy adjustments to handle these situations as unemployment has increased at an unprecedented rate.The extended deadline only solves half the problem for most affected workers – they have a lot more time to pay, but no guaranteed way to pay for it.The prior recession saw a subsidy of 2/3 of COBRA premium amounts; we will likely need it again.”
Special Enrollment Timeframes
In general, HIPAA requires a special enrollment period in certain circumstances, including when an employee or dependent loses eligibility for any group health plan or other health insurance coverage in which the employee or the employee’s dependents were previously enrolled, including coverage under Medicaid and CHIP, and when a person becomes a dependent of an eligible employee by birth, marriage, adoption, or placement for adoption. Generally, group health plans must allow such individuals to enroll in the group health plan if they are otherwise eligible and if enrollment is requested within 30 days of the occurrence of the qualified event (or within 60 days, in the case of the special enrollment rights added by the Children’s Health Insurance Program Reauthorization Act of 2009).
Like the COBRA extensions, this emergency rule extends the special enrollment period for all group health plans, disability plans and other employee welfare benefit plans, and employee pension plans subject to ERISA or the Code must disregard the period from March 1, 2020 until 60 days after the announced end of the National Emergency, or such other date announced by the Agencies in a future notice. Therefore, the 30 day (or 60 day in the case of certain CHIP enrollments) special enrollment period is extended until 60 days after the announced end of the National Emergency. Remember, in the examples, they are assuming that the end of the national emergency is April 30, 2020, with the Outbreak Period ending 60 days later, or June 29, 2020.
Example Two relates to a special enrollment period. If an individual previously declined participation in their employer-sponsored group health plan, and on March 31, 2020 such individual gave birth and would like to enroll herself and the child into her employer’s plan, however, the employer’s open enrollment period does not begin until November 15. When can such individual exercise her special enrollment rights? In this example, the Outbreak Period is disregarded. The individual and her child qualify for special enrollment into her employer’s health plan as early as the date of the child’s birth. She can exercise her special enrollment rights for herself and her child into the plan until 30 days after June 29, 2020, which is July 29, 2020, provided that she pays the premiums for any period of coverage.
CLAIMS PROCEDURE TIMELINES
Federal regulations require ERISA-covered employee benefit plans and non-grandfathered group health plans and health insurance issuers offering non-grandfathered group or individual health insurance coverage to establish and maintain a procedure governing the filing and initial disposition of benefit claims, and to provide claimants with a reasonable opportunity to appeal an adverse benefit determination to an appropriate named fiduciary. Group health plans and disability plans must provide claimants at least 180 days following receipt of an adverse benefit determination to appeal (60 days in the case of a pension plan or other welfare benefit plans). The extensions apply to these claims procedure timelines, as discussed in the next example.
Medical Claims Deadlines
Example Five relates to claims for medical treatment under a group health plan. Assume an individual is a participant in a group health plan. On March 1, 2020, this individual received medical treatment for a condition covered under the plan, but a claim relating to the medical treatment was not submitted until April 1, 2021. Under the plan, claims must be submitted within 365 days of the participants’ receipt of the medical treatment. Was the individual’s claim timely? Yes, for purposes of determining the 365-day period applicable to the individual’s claim, the Outbreak Period is disregarded. Therefore, the last day to submit a claim is 365 after June 29, 2020, which is June 29, 2021, so the individual’s claim is timely.
WHAT THESE PROVISIONS MEAN TO EMPLOYERS
As stated above, the emergency regulation extends the regular timeframes for group health plan participants to request a special enrollment period under ERISA, notify the plan about a qualifying event or determination of a disability, file a claim or appeal and adverse claim determination, or file or amend an external review. I asked Marilyn Monahan if she would like to comment on any of these and what they mean to participants and employers? “The new rules also allow beneficiaries more time to file claims for benefits and appeal adverse benefit determinations,” stated Marilyn. “Employers may be less focused on these changes because TPAs will be primarily responsible for implementation. However, employers with self-funded plans should consider the impact of these changes on such issues as reserves, claims run-out, and stop-loss coverage.”
SELF-FUNDED STOP LOSS CONSIDERATIONS & SELF-FUNDED PLAN EFFECTS
From a stop loss provider’s perspective, these emergency extensions, I asked Marc Floyd, Executive Vice President of US Benefits, a stop loss managing general underwriter in Irvine, CA, how these extensions could impact Stop Loss for self-funded plans and their pricing. “Our message is basic… In accordance with federal and state regulations, all applicable mandated coverage requirements will be accepted with no changes in the group’s current premium rates and/or aggregate factors.”
Are stop loss carriers requiring plan amendments for these provisions? I recently asked four stop loss carriers if they required plan amendments. Two stated that they would require them, one said they weren’t required but were recommended. The fourth, Marc Floyd of US Benefits, stated,” Since we have little to no DOL guidance at this point, we would again simply plan on being in compliance with federal legislation and state mandates as pertaining to our stop loss policies. We are honoring mandated coverages (testing, etc.) without a plan amendment” [for now].
I also had a concern, particularly for self-funded plans, of what the adverse effects that these extensions could have on incurred but not reported (IBNR) claims. “It is certainly possible to have an adverse effect on IBNR but it’s too early to tell. If so, we don’t expect there to be more than a slight uptick in IBNR,” stated Marc Floyd.
Self-funded plans have to be concerned about run-out claims. These extensions could affect those run out (claims paid after the plan year ends) claims. Can these claims affect not only this year, but next year’s plan costs if claims cross over plan years? There seems to be conflicting opinions on this. While some stop loss carriers are saying there will definitely be cross-over claims from one plan year to the next, others are thinking claims should be paid from the “extensions” of the first plan year. “Our initial thought,” stated Marc Floyd, “is that ‘extensions’ would apply back to the stop loss contract which was in force when the initial liability was incurred and NOT be part of the run-in liability” [for the next plan year]. My advice on this is to check with your stop loss carrier, if you are a self-funded plan, or if you are a broker whose clients are self-funded, to see how they are interpreting these provisions, so that you know your plan liability.
Another thought of mine on this is what kind of actuarial impact these extensions could have on stop loss in general? Could this affect the plan’s renewal rates in an adverse way? “It’s too early to tell,” stated Marc Floyd.“These rules most likely would have a relatively minor affect on overall stop loss pricing. A major concern is unknown group shrinkage, changing the group demographics and lowering overall projected premiums.”
So with that in mind, if you’re self-funded, or a broker representing self-funded plans, you should make note of the overall reduction, if any, in the group’s population, and how the remaining population’s demographics may have changed when all of this is over.
CLAIMS PROCEDURES & APPEALS
Internal Appeal – Disability Plan
Example Six discusses an internal appeal of a disability plan, but it shows the timeframes for all internal appeals. In this example, an individual received a notification of an adverse benefit determination from their disability plan on January 28, 2020. The notification advised the individual that there are 180 days within which to file an appeal. What is the individual’s appeal deadline? According to the rules, when determining the 180-day period within which the appeal must be filed, the Outbreak Period is disregarded. Therefore, the individual’s last day to submit an appeal is 148 days (180 days – 32 days following January 28-March 1) after June 29, 2020, which is November 24, 2020.
Internal Appeal – Pension Benefit Plan
Example seven discusses an internal appeal for an employee pension plan. An individual received a notice of adverse benefit determination from his/her 401K plan on April 15, 2020. The notification advised the individual that there are 60 days within which to file an appeal. What is the appeal deadline? When determining the 60-day period within the appeal must be filed, the Outbreak Period is disregarded. Therefore, the individual’s last day to submit an appeal is 60 days after June 29, 2020, which is August 28, 2020.
SUMMARY CONCLUSION – COBRA, SPECIAL ENROLLMENT & CLAIMS EXTENSION PROVISIONS
The main thing to remember is that regarding COBRA, the key date is 60 days after the announcement that the national emergency has ended. In terms of making retro COBRA payments, my concern is that if someone was laid off for a period of time, as months accumulate in retro status, it will be that much more difficult to pay the past-due premiums, the longer the time accumulates. If you aren’t able to afford month one payments, will you be able to afford months one through four and pay within the allowed time-frames? I think the intent is good, but we’ll see how the reality of the financial situation plays into this. We all know how in the past, someone could wait until the end of the old 60-day election period, elect at the end, then have 45 days to pay the premium. Employees with knowledge (or help from someone who has knowledge) of how the COBRA timeframes work could wait and see if they had claims that needed paid during that 45-day window. If no claims, no need to pay the premium. Now, with these extensions, keep in mind, allowing those months to accumulate until the end of the national emergency just means that the COBRA participant will have even MORE MONTHS to make up premium payments for if they did have claims during that period. And if they were laid off or had a reduction in hours, that will not be easy. Again, great intent but I’m not so sure if it will actually help people who lost their jobs during this time. Perhaps enrollment in exchanges (with possible subsidies) may be the way to go.
The Special Enrollment extensions concern me because first, it’s an administrative nightmare for the employers to determine how long someone has to enroll, and even more of a nightmare getting the enrollment documents in to the carrier or administrator and having claims paid retroactively, due to the retro-active enrollments. The examples, once again, assumed the end of the national emergency was April 30, but we’re already in July and there is no announcement of an end. In fact, COVID-19 cases are rising. If the national emergency goes on for several more months, this could be chaotic, not to mention disruptive and costly for the insurance carriers, and may result in drastic adverse selection, which could affect future premium rates, for sure.
The claims rules will be chaotic for the insurance carriers and third- party administrators primarily, but employers will also be involved in these matters, causing HR departments to cringe.
GUIDANCE FOR CORONAVIRUS-RELATED DISTRIBUTIONS AND LOANS FROM RETIREMENT PLANS UNDER THE CARES ACT
The IRS released Notice 2020-50. The notice provides guidance relating to the application of the CARES Act for qualified individuals and eligible retirement plans. A coronavirus-related distribution is not subject to the 10% additional tax, including the 25% additional tax for certain distributions from SIMPLE IRAs. I suggest that you review this guidance if you have or plan to make distributions from your retirement plan.
THE CARES ACT – PPP FLEXIBILITY ACT & LOAN FORGIVENESS
Since my last article on this topic, so much has changed regarding the Paycheck Protection Program. As I’m sure you’ve heard, new legislation entitled The PPP Flexibility Act was signed into law, which gives businesses additional time to get their employees back to work so that they may qualify for loan forgiveness, or partial loan forgiveness. The original 8-week period was extended to 24 weeks, so that businesses such as restaurants, which were not allowed to re-open during the 8 week period, were not eligible to have their loans forgiven may now have additional relief. In addition, the PPP Flexibility Act offers an option to change the percentages from at least 75% spent on payroll expenses to 60% for payroll-related expenses.
Before I go any further, I do want to emphasize that I am not an attorney or an accountant, and therefore I am not providing any legal, financial or tax advice here. I will give my standard disclaimer that I am only taking on the role of a quasi-reporter for this article. To assist me with some of the complexities of this, I did reach out to a tax accountant and an attorney for assistance in understanding these provisions, but again, I am only providing general, public information, and also remember that situations vary and the provisions I may discuss here may have different applications depending on your industry, type of entity (corporation, independent contractor, sole proprietor, etc.), and more, so as always, I recommend that you seek the advice of your legal and financial/tax professionals before you act. In addition, please understand that things are constantly changing, and I strongly encourage you to continue to monitor, read, and follow all updates, as they will likely continue to be released throughout 2020.
PPP Flexibility Act Overview
Recently released guidance on the business loan program’s temporary changes to the Paycheck Protection Program, provides revisions to the first interim rule. What this does is add the PPP program to the SBA’s 7(a) loan program, on a temporary basis.
The PPP Flexibility Act changed key provisions in the Paycheck Protection Program, including loan maturity, deferral of loan payments and forgiveness provisions.
With the COVID-19 national emergency, many small businesses nationwide were experiencing economic hardship as a direct response to the Federal, State and Local public health measures taken to minimize the public’s exposure to the virus. The CARES Act was signed on March 27, 2020, to provide emergency assistance and health care response for those affected by the coronavirus pandemic. The Small Business Administration (SBA) received funding and authority through the CARES Act to modify existing loan programs and establish a new loan program to assist small businesses nationwide that were adversely affected by the COVID-19 emergency. Through the CARES Act, the Paycheck Protection Program was established, including provisions relating to the maturity of PPP loans, the deferral of PPP loan payments, and forgiveness of the PPP loans.
PPP Flexibility Act – Summary of Changes
Loan Maturity
Under Section 1102 of the CARES Act, certain provisions regarding the issuance and use of PPP loans are limited to the “covered period,” which was originally defined as the period from February 15, 2020 to June 30, 2020. However, section 3(a) of the Flexibility Act extended the covered period until December 31, 2020.
Section 2(a) of the Flexibility Act provides for a minimum maturity of five years for all PPP loans made on or after the date of the enactment, which was June 5, 2020, and permits lenders and borrowers to extend the maturity date of earlier PPP loans by mutual agreement. The rule now reads “PPP’s maturity of two years for PPP loans made before June 5, 2020 unless the borrower and lender mutually agree to extend the maturity of such loans to five years, or PPP’s maturity of five years for PPP loans made on or after June 5.” Therefore, it is important that you check the date of your loan to determine whether you will automatically have a 5 year maturity, or if earlier than June 5th, understand that you must request this extension from your lender.
Deferral Period for PPP Loans
Section 3 (c) of the Flexibility Act extended the deferral period on PPP loans. If you submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness period, you will not have to make any payments of principal or interest on your loan before the date on which SBA remits the loan forgiveness amount on your loan to your lender, or notifies your lender that no loan forgiveness is allowed.
Your “loan forgiveness covered period” is the 24-week period beginning on the date your PPP loan was disbursed; however, according to the Federal Register (Vol. 85, No. 116, June 16, 2020/Rules & Regulations) if your PPP loan was made before June 5, 2020, you may elect to have your loan forgiveness covered period be the eight-week period beginning on the date your PPP loan was disbursed. Your lender must notify you of remittance by SBA of the loan forgiveness amount, or notify you that SBA determined that no loan forgiveness is allowed, and the date your first payment is due. Interest continues to accrue during the deferment period.
If you do not submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you must begin paying principal and interest after that period. For example, if a borrower’s PPP loan is disbursed on June 25, 2020, the 24-week period ends on December 10, 2020. If the borrower does not submit a loan forgiveness application to its lender by October 10, 2021, the borrower must begin making payments on or after October 10, 2021.
Loan Forgiveness (8 weeks to 24 weeks and 75% to 60% Provisions)
The original provisions of the PPP program under the CARES Act had a covered period of eight weeks, beginning on the date of the origination of the covered loan. Section 3(b) of the Flexibility Act extended the length of the covered period from 8 weeks to 24 weeks, while allowing borrowers that received PPP loans before June 5, 2020 to elect to use the original eight-week period (Flexibility Act Section 3(b)(3). This option to extend or not to extend will most likely be related to whether or not an entity was able to keep their employees on payroll from the loan origination date. If they were a restaurant, hair salon, gym, nail salon or other type of business that was not allowed to reopen, or they could only reopen with limited staff (such as carry-out service only from a restaurant), then they would likely gain from the extended covered period. In those instances, you should view favorably giving the businesses more time to use the loan proceeds as intended by the PPP in the first place, since businesses that received a loan should not only have a better chance at survival, but also to help retain and hire employees, and of course, meet the forgiveness qualification standards. If your business was able to keep your employees on payroll during the eight-week period, you may want to stay with the original loan terms of 8 weeks.
Section 3(b) of the Flexibility Act also amended the requirements regarding forgiveness of PPP loans to reduce, from 75% to 60%, the amount of the PPP loan proceeds that must be used for payroll costs for the full amount of the PPP loan to be eligible for forgiveness.
PPP loans can be forgiven in whole or in part. The amount of the loan forgiveness can be up to the full principal amount of the loan and any accrued interest. An eligible borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes and the employee and compensation levels are maintained or, if not, an applicable safe harbor applies.
To receive full loan forgiveness, a borrower must use at least 60% of the PPP loan for payroll costs, and not more than 40% of the loan forgiveness amount may be attributable to nonpayroll costs, as allowed in the PPP.
Loan Forgiveness Safe Harbor
There is a new safe harbor in the PPP Flexibility Act that provides that if a borrower is unable to rehire previously employed individuals or similarly qualified employees, the borrower will not have its loan forgiveness amount reduced based on the reduction in full-time equivalent employees.
Possible Tax Consequences From PPP Loans
One concern that I and others have had was whether or not companies that receive PPP loans will be able to write off their expenses during the eight-week or 24 week period that they were using PPP proceeds. I asked John Piekarski, a Tax Accountant in Huntington Beach, CA, to provide more details on this. “The Payment Protection Program, or PPP, is a loan designed to provide a direct incentive for small businesses to keep their workers on payroll, commented John. “The Small Business Administration will forgive loans if all employees are kept on the payroll for 8 [or 24] weeks, and the money is used for payroll, rent, mortgage interest, or utilities. Upon forgiveness, the PPP has the look and feel of a non-taxable federal grant. Congress intended the PPP expenses to be fully taxable with no effect on deductibility of the expenses paid during the 8-week [or 24-week] period. All write-offs will be able to be used on your tax forms.” John also stated that the loan proceeds would NOT be considered income for the businesses receiving the loans, at least not as of now. (As we all know, this could change, so keep in close contact with your accountant and tax professionals!)
Loan Forgiveness Application Process
You may recall that when first enacted, the PPP program was supposed to be a simple process… You were supposed to complete the application, a loan would be generated, and the loan would be forgiven easily and simply. That is no longer the case. The process is cumbersome, tedious, and sometimes overwhelming. What makes it worse is that the process is changing seemingly every couple of weeks, and it’s very difficult to keep up with the rules. So, I’m sure that by the time this article is published, the application and process will have changed again.
The Loan Forgiveness Application has two options, a long form or a short, easy form (but neither are easy), with detailed instructions that will cause some business owners to stare cross-eyed. You can find the loan applications and instructions online.
PPP Regulations & Guidance – What’s Next & Where Do You Go From Here? Has the PPP Been Worth It?
I want to end by coming back to what I said in the beginning of the PPP section… The Flexibility Act has many important points that must be closely considered and understood by all borrowers, and this latest guidance is certainly not the last. You can expect additional regulations and guidance to be forthcoming between now and the end of the year. I suggest that if you borrowed money from the PPP Loan program, that you closely follow all of the related releases, guidance and rules published by the IRS and SBA. You should prepare and maintain all of your documents used to apply for the loan and show a detailed spreadsheet on how you spent the loan proceeds. You should also consult with your accounting and tax professionals, and if necessary, your legal counsel, to be sure that you strictly follow your lender’s requirements related to the Forgiveness Application. “Moving forward,” commented John Piekarski, “business owners are urged to keep meticulous records on how much and where PPP money was spent, taking care to note employee names, purveyors, landlords, and insurance carriers.”
The PPP Program has been materially flawed from the start, but we can hope that despite the way in which the program was pushed out and the complexities that followed, that many businesses and employees will survive and remain or become employed in part because of the PPP. So, I suggest you look at it in the positive light that it was intended, and I think you’ll probably see a better result.
“In my opinion,” stated John Piekarski, “the PPP loans are positive in this business climate, because it puts money into the hands of employers, who are held accountable by the SBA to spend on what matters in business: payroll, and immediate expenses.”
Yes, it’s been challenging, but to some businesses, it’s been a lifeline. “Many businesses are having difficulty bringing employees back to work because of the lucrative unemployment benefits offered by the state and federal governments,” stated John Piekarski. “So now, the small businesses can concentrate on keeping open, for when employees finally run out of unemployment benefits. Other businesses should be able to keep all of their employees on payroll because of the PPP loans. The best part of the PPP program is the opportunity for businesses to get back on their feet or to continue in their chosen professions. The hardest part of the PPP program has been the lack of information and misinformation given out with no clear-cut way forward. Accountants and taxpayers alike were subject to the lack of information available with nowhere to find assistance.”
So, do your homework, don’t wait until the last minute, and please, continue to review all of the updates from the IRS and SBA, to make sure you can get the most financial help possible for your business.
Author’s Note: I’d like to thank the following individuals for their assistance with this article: Marilyn Monahan, Monahan Law Office (Marina Del Rey) (310) 989-0993 or marlyn@monahanlawoffice.com; , MaryAnn Wessel, EBA&M Corporation (Irvine) : 714.668.8920 x101, or maryann.wessel@ebam.com; Jeffrey Strong, Sterling Administrators, Oakland, (800) 617-2729 x 280 or jeff.strong@sterlingadministrators.com; John Piekarski, Tax Accountant (Huntington Beach) (714) 296-5677 or johnptehtaxman@gmail.com; Marc Floyd, US Benefits Stop Loss, (Irvine) (949) 468-3023 or mf@usbstoploss.com; and David Green, General Counsel, Cetera Financial Group (El Segundo).
Dorothy M. Cociu, RHU, REBC, GBA, RPA, LPRT, is CAHU V.P. communications and
president of Advanced Benefit Consulting & Insurance Services, Inc. She can be reached at (714) 693-9754 x 3, or by email at dmcociu@advancedbenefitconsulting.com.