Today, President Trump signed into law the Paycheck Protection
Program Flexibility Act of 2020 (Act). The Act is intended to fix problems
with the Paycheck Protection Program (PPP). The Act brings some change and
clarity, but raises new questions and leaves some old questions unanswered. I
expect additional guidance and rule-making from the Small Business Administration
(SBA).
Key provisions of the Act include:
- Change in Loan
Maturity
- Extends the
deferral period for payments
- Covered Period
Extension for a PPP Loan
- Safe Harbor for
Rehiring Workers
- Deadline to Use
the Loan Proceeds
- Requirement to
Spend 60% of Loan Proceeds on Payroll Costs
- Payroll Tax
deferral
Make the minimum loan period five
years (from 2 years)
All existing PPP loans have a two-year term. Loans made on or
after the date of the Act must have at least a five-year term. The Act states
that prior loans may be amended by mutual agreement between the bank and the
lender to extend their maturity, but they are not automatically extended.
Presumably, the SBA will issue additional guidance on an acceptable interest
rate change with respect to any extensions.
Change the date on which payments are
deferred until the date the forgiveness amount is determined, except that if
the borrower hasn't applied for loan forgiveness within 10 months after the
last day of the covered period (as defined in Section 1106(a) of the CARES
Act), the first payment is due then.
I assume a borrower that elects to stay with the eight-week
covered period, as permitted, and requests early loan forgiveness will
nonetheless continue to benefit from at least the six-month deferred payment
date.
Define the "covered period"
in which forgivable loan proceeds must be spent from eight weeks to 24 weeks,
except that a borrower who already has a loan may elect to stick with the
eight-week period,
Because the maximum loan is 2.5x payroll, and because the
forgiveness reductions based on the FTE quotient and salary reductions were
not modified by the Act and are measured as averages over the covered period,
on its face the changes appear to make it less likely borrowers will be able
to maintain average FTE and salary levels over the 24-week period. A borrower
that received a PPP loan and spent all of it on payroll at historical rates,
for example, would run out of PPP money in week 10, which leaves 14 weeks to
maintain FTEs and salaries at pre-COVID-19 levels or lose forgiveness for
much of the PPP loan, unless it qualifies for the re-hire exemption or the
FTE exclusions described below.
Extend the "re-hire"
provisions from June 30, 2020 to December 31, 2020
The Act does not clarify what "eliminated the
reduction", and does not clarify whether a one-day restoration of
historical employment levels is sufficient, whether an average period that
includes a day prior to December 31, 2020 is required, or whether some other
method applies.
Provide that the FTE reductions to
loan forgiveness amounts don't apply if the borrower in good faith is able to
document either-
An
inability to re-hire an individual who was an employee of the eligible
recipient on February 15, 2020 and an inability to hire similarly qualified
employees on or before December 31, 2020.
The first part of this provision dovetails with Section III.5 of
the SBA's existing interim rules, which requires a bona fide written offer
for the same salary and wages, documentation of rejection of the offer, and
that the borrower report the offer and rejection to the state unemployment
office.
The latter part of the provision is new, and its existence gives
more weight to the idea that a borrower can hire new employees, at lower
salary levels, to replace old employees and maintain FTEs. To qualify for the
exclusion from FTE reductions, however, a borrower has an affirmative
obligation to attempt to re-hire prior employees before attempting to hire
replacement employees.
OR
an inability to return to the same level of business activity as such
business was operating at prior to February 15, 2020, due to compliance with
requirements established or guidance issued by the Secretary of Health and
Human Services, the Director of the Centers for Disease Control and
Prevention, or the Occupational Safety and Health Administration during the
period beginning on March 1, 2020, and ending December 31, 2020, related to
the maintenance of standards for sanitation, social distancing, or any other
worker or customer safety requirement related to COVID-19.
This concept is new, and presumably this provision was designed
for restaurants and retailers that have not been allowed to open or to open
at full capacity.
For a loan to be forgiven, at least
60% of the loan must be used for payroll and up to 40% may be used for other
allowed uses.
Clearly, the provision is intended to reduce the SBA "75%
payroll" requirement to a "60% payroll" requirement.
Unfortunately, "covered loan" means the entire PPP loan, not just
the portion eligible for forgiveness, and literally this provision states
that if a borrower does not spend at least 60% of the loan on payroll, none
of the loan is forgivable. (Under pre-Act SBA treatment, a borrower that used
$50 of its $100 loan for payroll and $50 for other expenses would have been
eligible to have $66.67 forgiven; under the revised language, $0 would be
forgiven because the borrower did not spend $60 on payroll.)
Payroll Tax Deferral Available
The CARES Act allows employers to defer payment of payroll
taxes, but excluded employers who had PPP loans forgiven. The Act deletes the
exclusion. Now, the payroll tax deferral is now open to all PPP borrowers.
For a
copy of the Act, click on the link below: