Loan Forgiveness Requirements Among the Changes
The Paycheck Protection Program Flexibility Act, signed into law by the President Friday, was enacted in response to criticism that the original Paycheck Protection Program was too restrictive and underestimated the long-term impacts of the COVID-19 pandemic.
The PPP provides businesses with access to low-interest loans with the potential for loan forgiveness if the borrower complies with certain rules. While the PPP has helped many businesses weather the economic hardships caused by COVID-19 so far, the PPPFA will significantly modify the current rules and restrictions to provide businesses greater leeway to use funds in a manner that accounts for the prolonged economic uncertainty many face.
Key changes and the impacts on loan forgiveness by the PPPFA:
Extension of the Covered Period
The PPP loans were originally provided to cover payroll costs and other eligible non-payroll expenses for an 8-week period following the loan origination date, called the “covered period.” If a borrower intended to seek full forgiveness of the loan, the borrower was required to spend the PPP funds during the 8-week covered period and could not reserve the funds to offset later anticipated losses. The PPPFA triples the length of the covered period from 8 weeks to 24 weeks, providing businesses with greater flexibility to spread out the use of the funds over more time. As such, the new deadline for borrowers to expend PPP funds will be 24 weeks after the loan origination date or Dec. 31, whichever is earlier. That being said, borrowers who received funds prior to PPPFA enactment will still be able to use the 8-week period if they so choose.
Extended Forgiveness Related to Staff Levels and Compensation
As discussed in our prior Legal Alert regarding the PPP forgiveness application process, a borrower’s eligibility for forgiveness is partially contingent upon the borrower maintaining pre-pandemic levels of employee compensation and full-time equivalent employees. The United States Small Business Administration recently provided guidance explaining that borrowers would not be faulted for certain reductions in FTEs, such as those caused by for-cause terminations, resignations and refusals to return to work. The PPP also provides a safe harbor for borrowers who reduced employee compensation or FTEs between Feb. 15 and April 26, but are able to return staffing and compensation to pre-pandemic levels by June 30.
The PPPFA expands on these provisions by extending the safe harbor deadline to rehire employees until Dec. 31, and creates new safe harbors based on employee availability and reduced business. Specifically, a borrower’s eligibility for forgiveness will not be reduced in proportion to reductions in FTEs if the borrower demonstrates an inability to rehire individuals who were employees on Feb.15, and an inability to hire similarly qualified employees for unfilled positions on or before Dec. 31. Further, a borrower will not be faulted for FTE reductions where such reductions are caused by an inability to return to pre-pandemic levels of business activity (based on business activity at or before Feb. 15) due to compliance with COVID-19 related federal health and safety regulations in effect between March 1 and Dec. 31. SBA has not yet released additional guidance regarding these new exemptions for FTE reductions, we anticipate the SBA will be issuing a FAQ clarifying how borrowers are expected to document rehiring efforts and business activity when applying for forgiveness under the above exemptions.
Proportion of Funds to Be Used for Payroll
The PPP currently requires a borrower seeking forgiveness to utilize at least 75 percent of the loan amount toward payroll costs, with the remainder to be spent on eligible non-payroll costs. This requirement, commonly referred to as the 75/25 rule, is amended by the PPPFA to 60/40, so borrowers will only be required to spend at least 60 percent on payroll costs. This amendment is critical for businesses that might need to prioritize rent and mortgage obligations over employee payroll given longer-than-anticipated mandatory business closures. It is also important to note that, under previous SBA guidance, a borrower would not be disqualified from loan forgiveness entirely for violating the 75/25 rule. The borrower would instead have the forgiveness amount reduced to match the correct proportions under the 75/25 rule, with the excess spent on non-payroll costs to be paid back to the lender. The SBA and U.S. Treasury issued a joint statement this morning confirming the new 60/40 rule will be interpreted by the SBA in the same manner, and borrowers will remain eligible for partial loan forgiveness, even if less than 60 percent of the PPP funds are used toward payroll costs.
Deferred Payments and Extended Loan Maturity
PPP loans made after PPPFA’s enactment will have a minimum maturity of 5 years, as compared to the prior SBA regulations that established a minimum 2-year maturity. Lenders are not required to extend the maturity date for loans issued prior to PPPFA’s enactment. However, borrowers should speak to their lenders, as the PPPFA allows borrowers and lenders to agree to extend the maturity date at their discretion. In addition to modifying the maturity of the PPP loans, the PPPFA extends the deferment period for repaying loans. PPP loans were previously granted with a minimum 6-month payment deferment from the loan origination date. The PPPFA instead defers payment until the final amount of forgiveness is determined and remitted to the lender. To the extent a borrower does not request forgiveness, the deferral period will be extended to 10 months from the end of the borrower’s covered period.
Deferral of Payroll Taxes
In addition to financial resources provided under the PPP, the CARES Act contains provisions allowing employers to defer payment of certain employment and payroll taxes that would otherwise be due between March 27 and Dec. 31. Employers are permitted to defer the deposit and payment of the employer’s portion of Social Security taxes with half of the deferred payments to be deposited by the end of 2021 and the other half by the end of 2022. However, borrowers under the PPP were initially excluded from deferring payroll taxes, as this was construed as “double-dipping.” In short, because businesses were being given funds to cover payroll costs, they were also expected to timely pay applicable taxes out of those funds. The PPPFA will eliminate this restriction, thereby allowing a borrower to defer payroll taxes as described above despite having received forgiveness for funds used toward payroll costs.
As with prior PPP legislation and regulations, the PPPFA raises many new questions that will need to be addressed by further SBA guidance. For example, it is unclear whether borrowers can expect additional funding given the drastic increase in the covered period, how borrowers are expected to document rehiring efforts and business activity, and whether borrowers will have the option to request forgiveness prior to the end of the new 24-week covered period. The joint statement released this morning by the SBA and Treasury indicates that new interim rules, FAQs and application forms will be released soon in order to address some of these concerns, and BB&K will continue to provide updates as new guidance is released.