Congress Approves Much Needed Changes To The PPP
June 4, 2020
Last night the Senate passed House Bill 7010, the Paycheck Protection Program Flexibility Act (the "Act"), which for the most part provides substantial relief to recipients of loans under the Paycheck Protection Program (PPP). The President is expected to sign the Act into law. The Act changes the PPP and the forgiveness provisions of the CARES Act.
- A 24-week option to expend PPP loan proceeds to be eligible for forgiveness is added instead of 8 weeks.
- Borrowers may apply for a PPP loan through December 31, 2020.
- Borrowers must expend 60% of the PPP loan proceeds on payroll costs to be eligible for forgiveness (allowing 40% for non-payroll costs). Note that this is a change from the proportional test adopted by the SBA.
- Deferral period for repayment extended until the amount forgiven is remitted to the lender by the SBA.
- Employee availability exemptions added to FTE forgiveness calculations.
- Employees rehire and restoration may be accomplished by December 31, 2020 to avoid forgiveness reductions.
- Employer payroll tax deferrals no longer limited if borrower's PPP loan is forgiven.
Prior to the Act, borrowers had to use the funds by June 30, 2020 which was the end date of the covered period. The Act now extends the end of the covered period to December 31, 2020. This will have several impacts under the legislation, but the main one will be that borrowers will have until December 31, 2020 to use the funds. Note, this change has nothing to do with forgiveness which is discussed below. Borrowers can also apply for a PPP loan through December 31, 2020 as opposed to the prior date of June 30, 2020. Changing this definition will permit a longer period for both applying for and using PPP loan proceeds.
Deferral of payments
Prior to the Act and under SBA guidance, PPP loan repayments were deferred for a minimum 6 months and a maximum of one year. Under the Act, this deferral period is extended until the amount of forgiveness is remitted to the lender. If a borrower’s entire PPP loan amount is forgiven, then the borrower will never have to make a payment on its PPP loan. Note, there is an outside limit on this in that the borrower must make an application for forgiveness within 10 months of the end of the 24-week period.
Minimum term of repayment
For PPP loans made after the effective date of the Act, the required amortization period for the loan is amended to be a minimum of 5 years. Note, this section applies only to loans made after the effective date of the Act. The Act does provide that lenders and borrowers may mutually agree to adopt this 5-year period for any PPP loan made prior to the effective date of the Act.
Time constraints expanded
Prior to the Act, borrowers had to use the PPP loan proceeds within 8 weeks of the loan origination to be eligible for forgiveness. The Act amends this period to the earlier of 24 weeks after origination or December 31, 2020. Accordingly, most borrowers will have 24 weeks to use the PPP loan proceeds to be eligible for forgiveness.
Note, all the above provisions apply as if they were adopted in the original CARES Act. However, a borrower may elect to continue to have the 8-week covered period apply to a PPP loan. This provision will permit borrowers to apply for loan forgiveness after the 8-week period if they so choose.
If an employer reduced its full-time equivalents or reduced salaries by more than 25% between February 15, 2020 and April 26, 2020, the employer could restore those FTEs or salaries prior to June 30, 2020 and not be penalized by a reduction in forgiveness. Under the Act, the period for restoring FTEs and salaries is extended to December 31, 2020.
The Act adds a new provision related to these same forgiveness reduction penalties if the employer is not able to fill positions. To be eligible for this exemption, the employer must be able to document its inability to rehire individuals who were employees on February 15, 2020 or an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020. In addition, the employer is also eligible for an exemption if it can document that it cannot return to the same level of business activity that existed prior to February 15, 2020 because of its compliance with requirements or guidance issued by the Secretary of Health and Human Services, the Director of the CDC, or OSHA during the period beginning on March 1, 2020 and ending on December 31, 2020 related to standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID 19.
Expansion of non-payroll expenses but with a catch
In a more worrisome change, the Act changes the requirement adopted by the SBA that 25% of PPP proceeds to be forgiven could be spent on non-payroll costs. The SBA requirement was a proportional standard for forgiveness, meaning that all payroll costs plus an additional 25% of non-payroll costs could be forgiven regardless of their relation to the overall use of the loan proceeds. The Act appears to adopt more of a cliff vesting in this regard, stating that "to receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs, and may use up to 40 percent of such amount for any" non-payroll costs. Accordingly, to be eligible for loan forgiveness at all, a borrower must use 60% of the PPP loan proceeds for payroll costs. While lower than the SBA 75%, this standard appears to be a cliff. If the borrower does not use 60% for payroll costs, no forgiveness appears to apply to any PPP loan proceeds.
Employer FICA tax deferral
Finally, prior to the Act, if a borrower's PPP loan was forgiven, the borrower could not defer the employer portion of social security tax as provided in the CARES Act after the date of forgiveness. This prohibition is removed by the Act, meaning a borrower can continue to defer the employer portion of social security tax through December 31, 2020 even if the borrower has a PPP loan forgiven.