With roughly $129 billion in PPP loans still available, an extension has been passed to allow businesses an additional 5 weeks to apply for the funds. The Senate and House both unanimously approved the extension just before the original deadline of June 30^th and President Trump officially signed it into law on the July 4^th holiday. Businesses who experienced difficulty due to the COVID-19 pandemic will now have until August 8^th to apply for a PPP Loan.

The forgivable loans were first introduced in April by the U.S. Small Business Administration (SBA) in partnership with the U.S. Treasury to provide aid to businesses affected by the Coronavirus. A message on the SBA website states they have “resumed accepting applications July 6, 2020, at 9:00 AM EDT in response to the Paycheck Protection Program Extension Act”.

For more information on PPP loans and how to apply, click here.

Please contact your trusted Scheffel Boyle team member with questions. We are always here to help.

On June 16^th, the SBA and Treasury released the revised PPP Loan Forgiveness Application. The new application is just five pages long, is said to be “borrower-friendly”, and reflects the changes implemented by the Paycheck Protection Program Flexibility Act of 2020.

The revised PPP Loan Forgiveness Application and instructions contain a number of updates, including:

• Loan recipients whose funds were disbursed prior to June 5 can now have an option for a new 24-week Covered Period or keep their original 8-week Covered Period. Loans disbursed after June 5 will only have the new 24-week Covered Period.
• Safe harbors for salary and hourly wage reductions and reductions in Full-Time Equivalents (FTE) are extended to the date the forgiveness application is submitted or December 31, rather than the original deadline of June 30, unless the 8-week Covered Period is selected.
• Retirement costs for S Corporation owners are eligible for forgiveness, but health insurance costs for S Corporation owners cannot be included in the payroll calculation.

In addition to the revised application, the SBA also introduced the EZ PPP Loan Forgiveness Application, which requires fewer calculations and less documentation for eligible borrowers. The EZ application applies to loan recipients who meet any one of these criteria:

• are self-employed with no employees,
• did not reduce the salaries or hourly wages of their employees by more than 25% during the Covered Period compared to 1/1/20 and 3/31/20 and did not reduce the number of employees or the average hours paid between 1/1/20 and the end of the Covered Period,
• did not reduce the salaries or hourly wages of their employees by more than 25% during the Covered Period compared to 1/1/20 and 3/31/20 and experienced reduced business activity due to COVID-19.

Instructions clarify that employee compensation is limited to 24/52 of $100,000 during the 24-week Covered Period (8/52 of $100,000 if the 8-week Covered Period is used). This means that up to $46,152 can qualify as forgivable employee compensation during the 24-week Covered Period.

For owner-employees, self-employed individuals and general partners using the 24-week Covered Period, compensation is limited to the 2.5-month equivalent of 2019 compensation, capped at $100,000.  In this case, such an individual will have a maximum forgivable compensation of $20,833 ($100,000 divided by 12 times 2.5).  It may be less if the individual had 2019 compensation below $100,000.  If the 8-week Covered Period is selected, the formula is 8/52 of 2019 compensation, capped at $100,000.

 

Additional Items

A few of the other major changes to forgiveness requirements from the Paycheck Protection Program Flexibility Act of 2020 include:

• Lowers the portion of PPP loan funds that must be used for payroll from 75% to 60%, allowing 40% to be used toward other non-payroll, eligible costs such as rent and utilities.
• Extends the loan term of any funds not forgiven to 5 years from 2 years. Please note that for existing loans prior to the passing of this bill, both lender and borrower must agree to the change in loan terms through a refinance of the loan. The interest rate remains 1%.
• Allows businesses who qualify for loan forgiveness to also defer the employer portion of payroll tax, which would be paid in two installments (50% by 12-31-2021 and 50% by 12/31/2022)
• Changes the loan repayment deferral period to the date forgiveness is decided rather than 6 months from disbursement

The SBA and the Treasury Department are hopeful that the revised application and new EZ application will make the forgiveness process more efficient for borrowers, while making it easier for businesses to be eligible for full forgiveness of their loans.

Our team is closely monitoring this situation as updates are released. Please reach out to your trusted Scheffel Boyle team member with questions. We are always here to help.

The COVID-19 pandemic has caused widespread disruption to business operations across all industries. In the face of unprecedented uncertainty, financial institutions have a pivotal role in the urgent response to the crisis. There are also specific measures to take that can mitigate the impact of the crisis on financial institutions themselves.

Here are answers to some of the most frequently asked questions for financial institutions and specialty finance organizations, along with relevant resources to help businesses in their response to the pandemic and in planning for the future.

 

How does this impact CECL adoption?

The effects of COVID-19 could complicate how banks and other financial institutions comply with the current expected credit loss (CECL) accounting standard, given the impact on forecasting credit losses and underlying economic fundamentals, as well as partial relief offered under the CARES Act. For example, unemployment, which has risen significantly, is a driver of credit risk. Management should consider impacting factors just like any other significant estimate, which must be based on reasonable and supportable estimates and not on speculative information.

As a result of the financial reporting uncertainty, the CARES Act allows banks and other financial institutions to suspend applying CECL rules until December 31, 2020, or whenever the deferral is lifted, whichever comes first. The SEC also issued a public statement that applying the provisions of the CARES Act is in accordance with GAAP.

What is the impact to our supply chain?

As an “essential business,” banks and other financial institutions are mandated to stay open, even with a limited worker presence. However, the COVID-19 outbreak has disrupted supply chains due to the forced closure of nonessential businesses and related workforce shortages. For banks and other financial institutions, this has caused a sharp increase in delays for supplies from vendors (including sanitizer, disinfectant and gloves that may be required to continue retail branch operations safely), and it has impacted the array of service providers that support banking operations. Some of these necessary vendors and service providers may also be in danger of financial default themselves due to business interruption and revenue losses.

Banks and other financial institutions should also bear in mind that when business survival is on the line, organizations tend to be less transparent and more focused on finding workarounds, which can result in an uptick of fraudulent activity that impacts the entire supply chain system. In the longer term, it’s prudent to consider diversifying the supply chain where possible, which can help expand options during future periods of scarcity. While product cost is typically a determining factor in choosing a vendor or service provider, availability and stability take on greater importance when the usual supply chain has been disrupted. By optimizing current inventory and developing a more dynamic sourcing footprint, financial institutions can mitigate some key aspects of disruption to supply chains.

Should we be thinking about re-tooling our business strategy to capture new business opportunities?

Financial institutions have seen significant disruption as employees work from home, and even “late-adopter” customers have turned to mobile apps and online channels to conduct routine financial transactions. The COVID-19 pandemic has forced banks and other financial institutions to innovate in a very short period of time, and as a result, the ‘new normal’ may look very different to pre-crisis operations. The development or acquisition of proprietary fintech applications to support customer conversion and servicing will likely accelerate at an even faster rate.

The industry also stands to benefit financially as an administrator of loans under the Paycheck Protection Program (PPP), a forgivable loan program included in the CARES Act, which significantly expands the types of organizations that are eligible for Small Business Administration (SBA) loans. To manage a backlog of applications, banks and other financial institutions are competing with other fintech entities to process these and additional small business loans.

It’s clear that banks and other financial institutions have a lot to consider when it comes to new business opportunities in the long term. They will need to think creatively about value-add to appeal to customers, especially as the fintech industry continues to gain market share at their expense in managing consumers’ financial transactions.

How can I prevent data loss while employees are working from home?

Many banks and other financial institutions have rapidly shifted their employees from an office-based work environment to a remote one. As a result, organizations have been forced to urgently review their security practices. When IT professionals set up a business’ network, they implement numerous controls that are designed to prevent data leakage and loss. However, many popular platforms that enable remote work do not align easily with these controls. For example, while corporate controls might enforce a policy that prohibits the remote sharing of desktop files and USB connections, remote working tools may allow such actions. Moreover, employees who use their own devices for work instead of company-issued devices could unwittingly introduce malware to the network. This endangers the security of all network data, with particular concern regarding proprietary and sensitive information, especially related to revenues, costs, cash flow and new business opportunities.

Increasing the number of entry points to a network raises serious issues for data protection and increases the possibility of data loss. Security teams have also observed an increase in phishing attempts that could expose a network to ransomware. For this reason, employees should receive additional training for cybersecurity while working remotely. Not only could a company lose important data and be unable to retrieve it, but that data could also be shared improperly outside the organization or breached by a malicious third party, thereby exposing the business to potential violations of data privacy laws.

To mitigate data security and privacy risks, financial institutions and specialty finance organizations should use cloud computing for all files and require employees to connect using a cloud VPN. This provides secure access to the organization’s network and shared files, and it encrypts all data. Two-factor authentication further strengthens these controls. Companies should also consider implementing specific data loss prevention (DLP) solutions, which give the network administrator control over the data that employees handle, and they should enforce policies around what data can be transferred and who can receive transfers. Advanced detection tools may also be deployed to prevent improper remote access. These technologies use machine learning to identify and respond to suspicious activities. Overall, network access for remote workers should be protected by numerous robust controls and barriers and actively monitored for any issues in real time.

How do I keep my workplace safe?

Banks and other financial institutions are deemed “essential businesses,” meaning that branches are allowed to remain open during the COVID-19 pandemic. To minimize the risk of the virus’ transmission, they have been encouraging customers to use drive-through facilities to conduct routine business transactions, and to make appointments to avoid crowds gathering in common branch areas such as lobbies.

Banks and other financial institutions should also refer to federal, state and local government requirements to inform social distancing and remote working protocols at branches. For example, San Francisco mandates that workers must work from home if they can do so, and only be ‘on-site’ if they are unable to perform their job functions from home.

Furthermore, social distancing best practices include maintaining at least six feet between people, regularly disinfecting high-touch areas and having a stock of hand sanitizer available to promote personal hygiene. Various shelter-in-place orders throughout some states also help to reduce foot traffic as citizens are required to stay indoors unless they have a justifiable reason or extenuating circumstances. For reference, a list of banks’ COVID-19 response plans can be found on the American Bankers Association website.

What does IT need to do to prepare for remote working? What remote working issues should I anticipate?

Even as an “essential business” at the branch level, banks and other financial institutions have been forced to rapidly shift operations so that all non-essential employees work remotely, from HQ office workers to branch employees that can perform job functions independent of the facility. As a result, their IT departments are crucial to maintaining business continuity in the wake of these unexpected disruptions. IT should ensure that employees have the training to use collaboration, communication and conferencing technology—whether this is Microsoft Teams, Slack, Skype, Cisco Webex or another option.

For security, staff also need training on how to identify suspicious activity, such as phishing emails, and promptly report such activity to the IT department. This is especially critical for banks and other financial institutions that conduct transactions of a highly sensitive nature on a regular basis.

Cloud computing is another vital tool that facilitates remote working by providing secure access to the organization’s network and shared files. Decision support systems in the cloud can also help employees be more productive. Using a cloud VPN can ensure that data is encrypted when employees access the cloud, and two-factor authentication strengthens that security. Employees should also be required to use company-issued devices for work purposes whenever possible, because personal devices may have unknown vulnerabilities or more lax privacy settings.

However, the widespread deployment of collaboration tools and cloud computing also increases demands on core network infrastructure. So, it’s important to ensure the network architecture can support these demands and that IT has the necessary resources. The expansion of virtual teams also introduces more potential points of failure between end users and the network, and it creates more user support needs as well. Management can assist the IT department with employee training resources and change management initiatives to encourage the ongoing success of remote teams.

What tax strategies should I consider changing in light of the current environment?

In the short term, banks and other financial institutions should consider leveraging any tax strategies that can help offset costs and increase cash flow. These include provisions in the various stimulus bills like payroll tax credits and delays in payment due dates for both income and payroll taxes, AMT credits, net operating loss carrybacks and tax-deductible charitable contributions.

Outside of the existing stimulus bills and other response measures, financial institutions and specialty finance organizations should also consider measures to reduce their total tax liability that were already available prior to the start of the pandemic, such as state and federal Research and Development (R&D) tax credits that can offset the costs associated with, for example, developing fintech applications to service customers. Companies that operate internationally should also assess the tax relief options being offered in the countries in which they operate.

While there are many tax savings opportunities available, eligibility for some provisions is dependent on company size and other factors, and many benefits are mutually exclusive or have other tax implications that could affect an organization’s total tax liability. Given the level of complexity in tax planning during this time, it is critical that banks and other financial institutions consult with tax professionals in order to maximize their savings and understand the long-term impacts of their tax strategies.

How is COVID-19 impacting deal flow?

Most management teams and investors are hitting the pause button on deal activity. The economic realities are changing fast, and so too are deal threats and opportunities. For banks and other financial institutions, COVID-19 has introduced significant risk and led to fewer lenders willing to facilitate deals. Furthermore, some borrowers are struggling to repay loans due to their own deteriorating financial situation, impacting the bottom line for potential deal targets. Valuations have also dipped as the market downturn has affected EBITDA and financial projections for sellers.

Parties in M&A deals—buyers, sellers and lenders—are currently assessing the situation and will be making decisions to proceed, adjust or discontinue deal processes based on critical factors including crisis management, performance outlook, valuation changes and COVID-19’s lasting impact on the economy. Deal activity in certain in-demand sectors—such as technology, healthcare, and those facilitating essential services like distribution logistics—are likely to rebound sooner than other industries. Ultimately, and hopefully sooner rather than later, the path forward will become clearer and many sellers will resume sale processes. However, some will have to modify their approach or even take longer pauses as the uncertain outlook persists.

 

How can we help?

Our team is closely monitoring updates regarding the programs and relief efforts surround the COVID-19 pandemic. Please contact our Financial Institutions Group with questions. We are always here to help.

To assist with the U.S. response to the 2019 novel coronavirus (COVID-19), the IRS has released two notices providing greater flexibility for employers who maintain Internal Revenue Code Section 125 cafeteria plans for their eligible employees. Notice 2020-29 relaxes the rules regarding mid-year election changes during calendar year 2020 for employer-sponsored health plan coverage, health Flexible Spending Arrangements (FSAs), and dependent care assistance programs (DCAPs). It also allows a special grace period to apply unused amounts in health FSAs and DCAPs to expenses incurred through December 31, 2020.

In addition, Notice 2020-33 permanently increases the carryover limit of unused amounts remaining as of the end of a plan year in a health FSA that may be carried over to pay or reimburse a participant for medical care expenses incurred during the following plan year, from $500 to $550 (20% of the deferral amount). That notice also clarifies that a health plan can reimburse individual health insurance policy premium expenses incurred before the beginning of the plan year for coverage provided during the plan year (which will help implement individual coverage health reimbursement arrangements (HRAs)).

Background

Due to the COVID-19 pandemic, the amount of pre-tax salary deferrals elected by many employees into their Section 125 cafeteria plans have not matched their needs. Perhaps the most obvious are amounts set aside for dependent care for parents to work or attend school. With most U.S. schools and day care centers closed since mid-March and likely to remain closed for months, many employees are not paying qualifying child care expenses and therefore will not incur the expenses that were projected when they made their elections. Similarly, employees who had to postpone scheduled medical procedures might have contributed more to their health FSAs than they can spend. Any employee whose expenses are going to be less than their salary reduction election may wish to reduce future reductions. Others who are furloughed or working reduced hours might need to make a less expensive election for their health plan coverage. On the other hand, employees who contract the COVID-19 virus will have extraordinary expenses and might need increased benefits.

Yet, strict rules under Section 125 require participants to make cafeteria plan salary deferral elections before the start of the plan year and prohibit mid-year changes, except in very narrow circumstances.

Health FSAs and DCAPs also impose a “use it or lose it” rule, where employees generally forfeit unused amounts after the plan year ends. Some health FSAs give employees a grace period (which cannot be later than 2 ½ months after the end of the plan year) during which they may use amounts deferred in the prior year or allow a carryover of up to $500 (but plans generally cannot allow both the grace period and the carryover).

Insight:

The IRS created the carryover and grace period concepts to soften the impact of a general prohibition against a Section 125 plan deferring compensation across tax years (i.e., the “use it or lose it” rule).

Notice 2020-29

Special 2020 Mid-Year Changes. To provide greater flexibility in response to the public health emergency posed by COVID-19, Notice 2020-29 provides that employers may (but are not required to) permit employees who are eligible to make salary reduction contributions under the plan to take any of the following actions as a mid-year election made during calendar year 2020.

Employer-sponsored health coverage

• Make a new election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage.
• Revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis.
• Revoke an existing election on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or will immediately enroll, in other health coverage not sponsored by the employer.

Health FSAs

• Revoke an election.
• Make a new election.
• Decrease or increase an existing election on a prospective basis.

 

Dependent Care

• Revoke an election.
• Make a new election.
• Decrease or increase an existing election on a prospective basis.

 

Insights:

• The amendment to make mid-year election changes will be effective only to changes made during 2020 as a temporary tool that allows employees to respond to changes in their personal needs. However, there is no requirement in Notice 2020-29 that an individual must be adversely affected by COVID-19 to be eligible to make an election change.
• Under Section 125(i), the maximum amount an employee could contribute to a health FSA was $2,700 for 2019 and $2,750 for 2020.
• Section 3702 of the CARES Act (which became law on March 27, 2020) expanded health FSAs to include over-the-counter (non-prescription) medications as well as menstrual supplies.

 

Extended Claims Period. For unused amounts remaining in a health FSA or DCAP as of the end of the plan’s allowable grace period (i.e., up to 2 ½ months after the end of the plan year) or plan year ending in 2020 (including plans that allow for a carryover of unused amounts), the plan may permit employees to apply those unused amounts to pay or reimburse medical or dependent care expenses, respectively, incurred through December 31, 2020.

Insights:

• As an example, for a plan year that ended on December 31, 2019, but had a grace period that ended on March 15, 2020, instead of forfeiting unused amounts on March 16, 2020, the plan may permit participants to apply those amounts to expenses incurred through December 31, 2020. Accordingly, employers may need to coordinate with their flex plan and payroll providers to reverse any forfeitures that have already been made.
• The extended claims period may help employees who had to postpone elective medical, dental or vision procedures.

 

Retroactive Relief for High Deductible Health Plans (HDHPs). Notice 2020-29 allows the previously announced temporary relief for HDHPs to be applied retroactively to January 1, 2020 (i.e., with respect to HDHPs covering expenses related to COVID-19 and giving HDHPs a temporary exemption for telehealth services).

Notice 2020-33

Increased Health FSA Carryover Amount. In Notice 2020-33, the IRS increased the maximum unused amount from a health FSA plan year starting in 2020 that is allowed to be carried over to the immediately following plan year beginning in 2021, so that it is 20% of the maximum deferral amount. For 2020, this means an increase from $500 to $550.

Insights:

• The maximum carryover ($500 for 2019 and $550 for 2020) does not count against the annual health FSA salary deferral limit ($2,700 for 2019; $2,750 for 2020).
• An employer may specify in its plan document a lower amount for the health FSA carryover or may decide to not permit any carryover at all.
• Carryover amounts can be used to pay or reimburse a participant for medical care expenses incurred during the following plan year. For example, amounts deferred under a health FSA in 2020 can be carried over to pay expenses

 

Health FSAs that use the IRS’s maximum carryover amount generally would need to be amended by the end of the 2021 plan year to reflect the increased carryover amount for plan years that begin in 2021. However, Notice 2020-33 also allows plans to be amended for the 2020 plan year. Such amendments may be retroactively effective to January 1, 2020, provided that the employer informs all individuals eligible to participate in the plan of the changes.

Individual coverage Health Reimbursement Arrangements (HRAs). Notice 2020-33 also clarifies that a health plan can reimburse individual insurance policy premiums incurred before the beginning of the plan year for coverage provided during the plan year (which will help implement individual coverage HRAs).

Action Items for Employers

1. Determine which provisions of Notices 2020-29 and 2020-33 will be allowed.
2. Contact your Section 125 cafeteria plan administrator to coordinate:
   1. The process to handle the increased volume of mid-year employee election changes.
   2. The impact of the retroactive adoption date on previously forfeited amounts and employee contributions that need to be refunded as employees retroactively decrease a pre-tax deduction amount.
   3. The process to draft and distribute employee notices of the plan changes and their ability to make mid-year election changes.
3. Notify employees of the specific elections they can change and how to do so, as well as whether they will have additional time to use plan balances at year end.
4. Set up a reminder to make sure the written plan amendment is executed by December 31, 2021.

 

Our team continues to monitor the programs and changes surrounding COVID-19. Please contact us with any questions. We are always here to help.

On Wednesday, June 3^rd, the Senate passed the Paycheck Protection Program Flexibility Act of 2020. The bill was passed in the House last week with large bipartisan support and eases the strict guidelines currently in place to qualify for forgiveness of PPP loan funds. It will now move to President Trump for his signature.

As many recipients of PPP loans are approaching the end of their 8-week Covered Period, the bill offers important guidance and relief to borrowers looking to qualify for forgiveness of the funds. If the bill becomes law, recipients of PPP loans will now have an additional 16 weeks to use the funds for eligible expenses. The bill also provides more flexibility for use of the funds on “non-payroll” expenses.

A few of the major changes to forgiveness requirements appear to be:

• Extension of the Covered Period from 8 weeks to 24 weeks (or the end of the year, whichever comes first)
• Lowers the portion of PPP loan funds that must be used for payroll from 75% to 60%, allowing 40% to be used toward other non-payroll, eligible costs such as rent and utilities. There is a potential for no forgiveness (loan to be repaid) if 60% of the loan proceeds is not spent on payroll costs.  This could be a significant change.
• Increases the maximum payroll amount for the extended Covered Period from $15,385 to $46,154 per employee
• Extends the Full Time Equivalent (FTE) and Salary/Wage Reduction safe harbor date from June 30, 2020 to December 31, 2020, which allows employers more time to restore their FTE count and Salary/Wage amounts to pre-COVID-19 numbers.
• Outlines additional FTE reduction exemptions for changes in business activity and allowing exemptions for borrowers who are unable to hire similarly qualified employees
• Extends the loan term of any funds not forgiven to 5 years from 2 years. Please note that for existing loans prior to the passing of this bill, both lender and borrower must agree to the change in loan terms through a refinance of the loan. The interest rate remains 1%.
• Allows businesses who qualify for loan forgiveness to also defer the employer portion of payroll tax, which would be paid in two installments (50% by 12-31-2021 and 50% by 12/31/2022)
• Changes the loan repayment deferral period to the date forgiveness is decided rather than 6 months from disbursement
• The Forgiveness Application must be submitted no later than 10 months from the end of the recipient’s Covered Period.

If President Trump signs the bill into law, PPP loan borrowers will now have to choose to either adopt the new 24-week Covered Period or continue with their original 8-week option. We would advise to look closely at your eligible expenses to date, payroll costs, and your FTE count, among other factors, when making this decision.  There could be more changes forthcoming to the PPP loan program through additional legislation, as well as SBA and Treasury Department guidance.

Due to the changes the bill would introduce, the SBA Forgiveness Application will have to be updated, as well as other specific regulations/calculations from the original law. As the requirements for PPP loan forgiveness continue to evolve, we would suggest submitting your SBA Forgiveness Application at a time where it is most advantageous to your business.

Please contact your trusted Scheffel Boyle team member with questions. We are continually monitoring this situation and will provide updates as news is released. We are always here to help.