On June 3, Congress passed the Paycheck Protection Program Flexibility Act (PPPFA). The PPPFA aims to address some issues that borrowers and industry groups had raised regarding the PPP as originally passed on March 27, including giving businesses more time to use the funds and rehire employees. The PPPFA is not yet law but is expected to be signed by the president and become effective in the next few days.
As has been the case with the PPP, there are and will be various questions and ambiguities in the PPPFA and potential conflicts with previous guidance, so all borrowers should be prepared for continuing changes to the guidance and potential ongoing uncertainties. That being said, we expect that additional guidance in the form of further interim final rules (IFRs) and Small Business Administration FAQs will be forthcoming.
We previously discussed in our May 20 alert some highlights of the loan forgiveness application. Given the nature of the changes in the PPPFA, it is very likely that borrowers, even those choosing to stick with an eight-week covered period, will need to complete a different application. Therefore, we expect the Treasury and SBA to issue a new or modified loan forgiveness application, and borrowers should stay abreast of future guidance.
Importantly, most of the changes included in the PPPFA are retroactive and will automatically apply to all PPP loans. However, for PPP loans that were issued before the PPPFA was signed, (a) borrowers can choose to remain with an eight-week covered period and (b) PPP loan maturities will not automatically extend to 5 years.
Highlights from the PPPFA include:
Longer Covered Period and Runway to Restore FTE Employees
Under the PPP to date, loan forgivability required expenditure of loan proceeds during the eight-week “covered period.” Under the PPPFA, the “covered period” now runs until the earlier of (i) 24 weeks after a borrower first receives funds or (ii) December 31, 2020. This change is in response to the fact that many businesses shut down by the COVID-19 pandemic simply could not use PPP funds within eight weeks of receiving the money, or would need to pay employees who are not working. The maximum loan amount (which is equal to roughly 2.5 months of payroll costs) was not increased, but it can now be spread-out over the 24-week covered period.
With this extended covered period, borrowers will still need to meet the test on maintaining full-time equivalent (FTE) employees. Therefore, in order to maximize forgiveness borrowers will have to maintain FTE employees for approximately three times longer (24 weeks instead of eight weeks) However, the PPPFA addresses this mismatch in several ways:
- Any borrower who received a PPP loan before the PPPFA was signed into law can opt to remain with an eight-week covered period and use their funds and measure FTE employees during such shorter period.
- If by December 31, 2020, an employer has the same number of FTE employees on its payroll as it had as of February 15, 2020, any reduction in the number of FTE employees during the covered period relative to the prior reference period will be disregarded and forgiveness will not be reduced. (However, the reduction in FTEs must have occurred between February 15, 2020 and April 26, 2020). This deadline to make up for reductions in FTE employees during the covered period was previously June 30, 2020.
- The PPPFA provides for two more exceptions so that the forgiveness will not be reduced even if the number of FTE employees during the 24-week covered period is lower than the prior reference period. Specifically, the amount of loan forgiveness will not be reduced by a reduction in the number of FTE employees, if, with respect to the period beginning on February 15, 2020 and ending on December 31, 2020, the borrower is able to document in good faith one of the following:
A. An inability to rehire employees who had been employed on February 15, 2020, and an inability to hire similarly qualified employees for unfilled positions by December 31, 2020.
B. An inability to return to the same level of business activity at which the borrower was operating before February 15, 2020, due to compliance with certain federal agencies’ requirements or guidance set forth between March 1, 2020, and December 31, 2020, relating to standards of sanitation, social distancing, or other worker or customer safety requirements due to COVID-19. Note: the slowdown cannot be due simply to a broader economic slowdown or loss of business to a particular borrower due to COVID-19. It must be due to the federal agencies’ requirements mentioned above.
More Flexibility to Use Funds but Beware the 60% Cliff
The PPPFA provides that in order to rece5ive forgiveness borrowers must “use at least 60 percent of the covered loan amount for payroll costs, and may use up to 40 percent of such amount for” qualifying mortgage interest, utility, and rent payments. Previously the SBA imposed a requirement that at least 75% of loan proceeds must be spent on payroll costs and up to 25% could be spent on other qualifying costs. (See this alert for a discussion on allowable uses of PPP funds).
Although the PPPFA lowers the spending threshold to 60% on qualified payroll costs, it also dramatically increases the penalty for failure to meet the threshold from a proportional reduction to a complete loss of forgivability.
- Senator Marco Rubio, an author of the original PPP bill, has stated, “People need to know that the way the Treasury has told us they are going to interpret [the PPPFA] — if you don’t spend 60% of your money on payroll, if you only spend 59.9%, you will get zero forgiveness.”
Longer Loan Maturities and Payment Deferment
The PPPFA eliminates a six-month period in which payment of principal and interest is deferred and replaces it with a potentially much longer period. The new period of payment deferment lasts until the date on which the SBA remits to the lender the amount forgiven. Given the new 24-week covered period and the time period established by the SBA for review of loan forgiveness applications (lenders have 60 days and the SBA has 90 days), this could push the deferment period out to closer to a year for some borrowers and even longer if the application is under review and payment to the lender is delayed. There are two potential exceptions though:
- Borrowers who opt to keep the eight-week covered period and apply for forgiveness shortly after the end of it – but are denied forgiveness in whole or in part – may have a relatively short deferment period.
- If a borrower fails to apply for forgiveness within 10 months after the last day of the PPP loan forgiveness covered period (the earlier of 24 weeks from origination or December 31, 2020), the deferment period ends and the borrower is obligated to begin making payments.
Finally, the PPPFA allows all employers to take advantage of the CARES Act deferral of the 6.2% employer portion of social security payroll taxes (FICA), regardless of whether they have had a PPP loan forgiven. Previously, PPP borrowers were not allowed to defer the employer’s share of FICA that was due after they received a decision from their lender that the PPP loan was forgiven. However, borrowers should keep in mind that this FICA deferral is different from the CARES Act employee retention tax credit. The PPP and the employee retention credit are still mutually exclusive and businesses may not apply for one if they use the other.