On June 3, the United States Senate passed the “Paycheck Protection Program Flexibility Act” (Act), which is designed to create additional flexibility for borrowers under the terms of the Paycheck Protection Program (PPP). The Act previously passed the United States House of Representatives and now heads to the President for signature, which is expected in the coming days. Below are some key changes to the PPP included in the Act:
1. Borrowers can now elect to use a 24-week loan forgiveness period
The Act revises the definition of “covered period” for the PPP loan forgiveness period to begin on the loan disbursal date and end on the date that is the earlier of the date that is 24 weeks after the loan disbursal date or December 31, 2020.
The Act notes that borrowers that received a PPP loan before the date of the Act may elect to maintain the original eight-week loan forgiveness period.
2. 75/25 rule for PPP forgiveness amount changed to 60/40 rule
The first PPP Interim Final Rule (IFR) published by the Small Business Administration (SBA) added a forgiveness requirement that at least 75 percent of the loan amount for which forgiveness is sought must have been used to cover payroll costs and no more than 25 percent can be used for nonpayroll costs.
The Act seems to reduce this 75/25 requirement and provides that, in order to receive forgiveness, the borrower must use at least 60 percent of the “covered loan amount” on payroll costs and up to 40 percent of such amount may be spent on nonpayroll costs. While, neither the CARES Act nor the new Act defines covered loan amount, our initial expectation based on the legislative history is that covered loan amount will be interpreted to mean the loan amount for which forgiveness is sought (as contemplated by the IFR) rather than imposing a new requirement that the borrower must use at least 60 percent of the PPP loan’s principal on payroll costs. Certainly, borrowers are not required to seek forgiveness on any portion of the PPP loan and the IFR limited the original 75/25 rule to only the portion of the loan amount sought by the borrower for forgiveness.
3. PPP loan deferral repayment tolled until lender forgiveness determined
Under the CARES Act, PPP borrowers were granted a deferment on PPP loan repayment for at least six months. Under the Act, PPP loan borrowers will be granted a deferment on PPP loan repayment “until the date on which the amount of forgiveness determined under section 1106 of the CARES Act is remitted to the lender,” provided that the borrower must apply for loan forgiveness within 10 months after the end of the forgiveness period. If the borrower does not apply for forgiveness within such 10-month period, the borrower must begin making PPP loan payments on the 10-month anniversary of the last date of the forgiveness period.
4. New PPP loans will have a minimum maturity of at least five years
The Act provides that for any new PPP loan made after the enactment of the Act, those loans will have a minimum maturity of at least five years and a maximum maturity of 10 years. The SBA had previously interpreted the CARES Act to require that PPP loans have a minimum maturity of at least two years.
For existing PPP loans, the Act clarifies that borrowers and lenders may mutually agree to modify the maturity terms of the existing loans to match this new requirement, but there is no obligation for lenders to agree to this extension.
5. New PPP loans may be issued until December 31, 2020, although the Senate requested that the SBA stop approving new loans on June 30, 2020
The Act modified the definition of “covered period” for PPP loans to be extended from June 30, 2020 to December 31, 2020, which seems to imply that any “covered loan” can now be made until December 31, 2020. However, during the Senate’s consideration of the Act, a Statement for the Record was issued by certain Senators clarifying that the extension of the covered period defined in section 1102(a) of the CARES Act should not be construed so as to permit the SBA to continue accepting applications for loans after June 30, 2020. The Statement of Record states: “Our intent and understanding of the law is that, consistent with the CARES Act as amended by H.R. 7010, when the authorization of funds to guarantee new PPP loans expires on June 30, 2020, the SBA and participating lenders will stop accepting and approving applications for PPP loans, regardless of whether the commitment level enacted by the Paycheck Protection Program and Health Care Enhancement Act has been reached.”
6. New exemptions for borrowers who cannot rehire full-time equivalent employees (FTEE)
The Act adds two more exemptions to the PPP’s loan forgiveness reduction penalties.
First, the forgiveness amount will not be reduced due to a reduced FTEE count if the borrower can document that it attempted, but was unable, to: (i) rehire individuals who were employees of the borrower on February 15, 2020; and (ii) hire “similarly qualified employees” before December 31, 2020.
Second, the forgiveness amount will not be reduced due to a reduced FTEE count if the borrower, in good faith, can document an inability to return to the “same level of business activity” as prior to February 15, 2020 due to the borrower’s compliance with federal requirements or guidance related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19.
7. Safe harbor deadline for rehiring employees is extended to December 31, 2020
Under the Act, loan forgiveness amounts would remain subject to a reduction in proportion to any reduction in a borrower’s FTEEs against prior staffing levels. However, the Act extends the PPP’s June 30, 2020 safe harbor deadline to December 31, 2020. Thus, borrowers who furloughed or laid off employees would not be subject to a loan forgiveness reduction due to reduced FTEE count if they restore their FTEEs by December 31, 2020.
8. Payroll tax deferral under the CARES Act is available to PPP borrowers
The Act lifts the prior ban on borrowers whose PPP loans were partially or completely forgiven from deferring payment of payroll taxes under the CARES Act. Thus, the payroll tax deferral available under the CARES Act would be open to all PPP borrowers.
9. PPP loan documentation and enforcement should continue to be managed carefully
As we have noted previously, companies that received PPP loans, regardless of whether they eventually seek forgiveness, should consider ensuring the decisions related to application and utilization of the funds are documented and approved by senior management, board of directors or managers. The Department of Justice and other governmental agencies, including the SBA Office of Inspector General, have issued statements and already initiated enforcement actions against individuals and companies that have allegedly abused the PPP and other stimulus governmental programs.
In addition to maintaining contemporaneous documentation concerning the rationale and utilization of PPP, a company should also consider developing a plan in the event that the PPP decisions are challenged by the financial institution, SBA or other governmental agency. Such a plan would include a clear chain of command and single point of contact to communicate with the investigating entity. As appropriate, companies should consider updating ethics policies and implementing other mitigating efforts, including employee hotlines, to report fraud, waste or abuse of not just PPP monies, but any company resources. When a governmental agency inquires about the PPP or other programs, the company will likely have a very short time frame to respond. By planning ahead, companies may minimize miscommunications and unintended consequences.