Late last week Congress approved and the President signed the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”). This new bill attempts to address some of the more troubling requirements when applying the Paycheck Protection Program (“PPP”) to actual business situations.
PPP was created by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was passed on March 27, 2020. See the resource links at the end of this alert for quick access to Ulmer’s numerous client alerts and webinars on the PPP.
SBA, Treasury, and Fed Guidance: If the U.S. Treasury Department (“Treasury”) and the U.S. Small Business Administration (“SBA”) hold true to form, additional materials gradually will be issued to resolve questions about the Flexibility Act. Starting on March 31, 2020, the Treasury, SBA and Federal Reserve Bank (“Fed”) have each issued press releases, sporadic interim final rule guidance (“Interim Rules”) and non-binding frequently asked questions (“FAQs”), sometimes with multiple revisions, regarding PPP loans and the CARES Act.
The description below is based solely upon the Flexibility Act passed by Congress, and the Joint Statement by Treasury Secretary Mnuchin and SBA Administrator Carranza issued June 8, 2020 (“Joint Statement”).
FLEXIBILITY ACT – MATERIAL CHANGES
Every single business is different — ownership structures, employment practices, payroll cycles, and expense structures. No economic program can possibly fit every scenario. The CARES Act and PPP are no exceptions.
As a result, many businesses have struggled mightily with certain CARES Act and Treasury requirements, which simply do not take into account how businesses actually work, especially due to the extended economic damage caused by COVID-19.
Below are the key changes made by the Flexibility Act. Except for the loan maturity minimum, the changes automatically apply to all existing and future PPP loans.
- Expands the period within which the PPP loan proceeds must be used (the “Covered Period”) from eight weeks to 24 weeks (but not later than December 31, 2020);
- Any existing PPP borrower may choose to continue using the original authorized eight-week period;
- Provides additional flexibility by changing the 75/25% required payroll-to-nonpayroll cost expenditures to 60/40%;
- Extends the safe harbor to rehire or restore pay reductions (exceeding 25%) from June 30, 2020, to December 31, 2020;
- Potentially avoids reductions in your loan forgiveness due to layoffs or furloughs, if you are unable to recover to pre-COVID full time equivalent employee (“FTE”) levels, but you can document that you have, in good faith, been unable to:
- rehire individuals who were employees on February 15, 2020; and
- hire similarly qualified employees by December 31, 2020;
OR
- return to the February 15, 2020 level of business activity due to federal requirements or guidelines, pertaining to special sanitation, social distancing, or other worker or customer safety requirements during the period from March 1, 2020, through December 31, 2020;
- Allows at least five years to repay the unforgiven portion of the PPP loan for loans approved by the SBA on or after June 5, 2020;
- Lenders and borrowers can mutually agree that existing PPP loans (made before June 5, 2020) also may have at least five years (instead of two years) to repay the loan;
- Extends the deferral period for loan principal, interest, and fees, until i) the date that the loan forgiveness amount is remitted by the SBA to the lender, or ii) ten months after the end of the 24 week period if you fail to apply for loan forgiveness;
- Allows businesses that receive PPP loan forgiveness to defer all 2020 social security taxes until 2021 and 2022.
Loan Forgiveness May Be Easier To Achieve
Many businesses, especially those in the restaurant or hospitality industries, have been extremely challenged to satisfy the prior 75/25% payroll-to-nonpayroll cost expenditure requirement, especially during an eight-week measurement period. Due to the extended state Stay At Home orders, social distancing guidelines, and employee and customer fears about personal safety, many businesses simply could not spend their PPP loan as originally required.
With the relaxed 60/40% payroll-to-nonpayroll cost requirement, and a total of 24 weeks within which to comply, many businesses will be in a better position to achieve the requirements for loan forgiveness.
Sen. Marco Rubio had warned that Treasury may interpret the 60/40% requirement as a cliff test, meaning if you spent only 59.9% of your PPP loan on payroll costs you might not receive any loan forgiveness. However, on the afternoon of June 8, 2020, the Joint Statement announced that if a borrower uses less than 60% of the loan amount for payroll costs during the Covered Period, the borrower would still be eligible for partial loan forgiveness. The Joint Statement also assured that further guidance will soon be issued interpreting the Flexibility Act.
FTE Counts – Potential Relief
Even though many businesses are starting to slowly reopen, due to social distancing and sanitation requirements it may take a long time to recover. Once a business reopens, it remains to be seen when consumer or customer demand will return to pre-COVID levels.
The Flexibility Act gives every employer a better chance for loan forgiveness in light of actual experience. First, the new law extends the measurement for FTEs from June 30 to December 31, 2020. If your business can restore FTEs to February 15 levels prior to year-end, no reduction in loan forgiveness will be required due to layoffs or FTE reductions that occurred between February 15 and April 26, 2020.
Second, even if you cannot fully restore your FTEs, you may be eligible for loan forgiveness if, in good faith, you can document that you were unable to: 1) rehire people who were your employees on February 15, and unable to hire similarly qualified employees for the open positions by December 31, 2020, OR 2) return to February 15 levels due to compliance with requirements and guidance issued by the federal Health and Human Services Department, Centers for Disease Control, or OSHA related to sanitation standards, social distancing, or any other worker or customer safety requirement related to COVID-19.
Last Day Loan Applications Will Be Approved
The Joint Statement announced the upcoming new rules from Treasury will confirm that June 30, 2020, is the last date on which PPP loan applications can be approved. Thus, eligible businesses that have not yet applied for a PPP loan should do so immediately to allow sufficient time for the loan application to be processed by both their bank and by the SBA. See the resource links below for client alerts describing the PPP loan applications and eligibility.
New Questions Created
With the new Flexibility Act passed by Congress, there are new questions that must be resolved by Treasury:
- What formula will Treasury apply for partial loan forgiveness if less than 60% of the PPP loan is used for payroll costs?
- If your business rehires employees and achieves February 15, 2020 FTE levels on any date between June 30 and December 31, 2020, will that be sufficient to avoid loan forgiveness reductions?
- With the extended 24-week period to spend the PPP loan money, will that also increase the pro-rata maximum limit on cash compensation per employee from $15,385 to $46,153?
- Will owner-employees, limited liability company members, and partners be permitted pro-rata cash compensation increases due to the extended 24-week time period (based on a 24/52 week measurement)?
- Will self-employed, sole proprietors, and other Schedule C workers be permitted similar pro-rata increases on cash compensation?
- Will the “Alternative Covered Period” be preserved in light of the expanded 24-week Covered Period?
- Will the Treasury require higher interest rates (currently 1% per annum) for a five-year repayment term (compared to the current two-year repayment term)?
- If a borrower must apply for loan forgiveness no later than 10 months from the end of its Covered Period, will its loan forgiveness application automatically be rejected if submitted after that date?
- How soon can a business apply for loan forgiveness in light of the new Flexibility Act rules?
Conclusion
At a minimum, the Flexibility Act changes will require updates to the Treasury’s Interim Final Rule on Loan Forgiveness issued May 22, 2020, as well as the Loan Forgiveness Application issued May 15, 2020.
Ulmer and Berne LLP is working hard to assist clients in these challenging times. We expect further Interim Rules and FAQs from Treasury and the SBA on how to comply with the required PPP loan use, and the loan forgiveness process, under both the existing CARES Act and new Flexibility Act provisions. Our team of attorneys will continue to monitor new developments and their impact on the PPP.
Additional contributors for this material include: Matthew I. Pollack, Steven P. Larson, Ethan Lee Rosenfeld, and Maxwell Berg.
Resources
Prior Ulmer Client Alerts:
