On June 5, 2020, the President signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”). The new law amends the Paycheck Protection Program (“PPP”), the lending system created by the March 27 CARES Act to support the ability of businesses to maintain workers on their payroll during the COVID-19 pandemic. Before the Flexibility Act, borrowers were entitled to forgiveness of PPP loan proceeds spent on eligible costs during the eight-week period after receiving the loan proceeds, subject to certain specified restrictions. The Flexibility Act provides business owners with more flexibility and time to use the loan proceeds and still qualify for forgiveness of their PPP loans.
Previously, the Small Business Administration (“SBA”) had released an Interim Final Rule on loan forgiveness under the PPP (the “May 22nd Interim Final Rule”). That SBA guidance follows its publication of the Loan Forgiveness Application, which answered some long-awaited questions while leaving others still uncertain.
This Client Alert will highlight some of the changes made to the PPP under the Flexibility Act and summarize some of the clarifications provided in the May 22nd Interim Final Rule, most of which we expect will continue to apply. We provided an overview of the CARES ACT on March 27, and provided updates on April 3, April 17, April 29, and most recently, on May 26. Please click here to see all of Prince Lobel’s client alerts relating to COVID-19.
Overview of the Flexibility Act
The following is a summary of the Flexibility Act’s main points, which apply retroactively to all existing PPP loans unless otherwise so stated:
- Borrowers can now qualify for loan forgiveness for PPP funds spent over 24 weeks after the PPP Loan is funded, instead of requiring all funds to be spent during the 8-week “covered period,” so long as the 24 weeks does not go past December 31st. This is intended to make it easier for borrowers to spend enough on payroll costs to qualify for forgiveness of the entire loan amount.
- Currently, the maximum amount business owners can pay themselves or each of their employees and still receive loan forgiveness is about $15,385 over an eight-week covered period, or $100,000 annualized over the year. But with the new law’s extension of the covered period to 24 weeks, it can be inferred that the cap will increase to $46,154 (though SBAhas not confirmed on this point).
- Borrowers previously had until June 30th to restore their workforce levels and salary/wages to avoid reductions of the amount of loan forgiveness. Borrowers now have until December 31st to do this.
- This extension is a positive change for those borrowers that were not in operation and did not have enough employees working to incur significant payroll costs during the 8-week period.
- The PPP requirement that at least 75% of the loan forgiveness amount be spent on payroll costs has been lowered to 60%, but with a significant change: Under the new rule, if a borrower does not spend at least 60% of the PPP loan on payroll costs, NONE of the loan will be forgiven.
- This is a drastic change because prior to the Flexibility Act, it was generally believed that borrowers could rely on what appeared to be a “sliding scale.” The prior rule was understood to allow an employer to spend less than 75% on payroll costs, and then simply reduce the loan forgiveness amount requested so at least 75% of the forgiveness amount was payroll, with the balance paid on the deferral method at year end. Now, 60% of the total PPP loan amount must be spent on payroll costs, so borrowers who have overspent on utilities, mortgage interest and/or rent seemingly automatically lose all eligibility for loan forgiveness. We expect that SBA will provide additional guidance and update the loan forgiveness application regarding this.
- The new law adds two more changes to provisions that allow borrowers to achieve full loan forgiveness even if they don’t fully restore their workforce.
- First, previous SBA guidance allowed borrowers to exclude employees who turned down good faith offers to be rehired; the new law adds an additional requirement that the borrower must also be unable to hire similarly qualified employees for the unfilled positions and provide documentation to show that.
- Second, a borrower may have a reduced workforce and still achieve full loan forgiveness if it can show, with documentation, that it is unable to return to the same level of business activity as compared to February 15th as a result of COVID-19 related health and safety guidelines.
- Before the Flexibility Act, repayment of the principal, interest and fees of the portion of the PPP loan that is not forgiven was deferred for 6 months from the date of disbursement of the loan proceeds. Now, the repayment start date is 6 months after the date on which the amount of the loan forgiveness is processed and paid to the lender by the SBA (which could be more than 6 months, given the extension of the covered period to 24 weeks). If the borrower does not apply for loan forgiveness within 10 months after the last day of the covered period (either the 8-week or 24-week period), then the borrower must start paying the principal, interest, and fees on its PPP loan on that date.
- The maturity period of PPP loans has been extended from 2 years to 5 years. Note that this change is not retroactive and does not affect existing PPP loans. However, borrowers and lenders are allowed mutually to modify the maturity terms of the existing loans.
- The new law also allows borrowers of a PPP loan to delay payment of their payroll taxes. One half of the employer’s share of payroll taxes are now due December 31, 2021 and the remaining half will be due December 31, 2022. Previously, employers that received loan forgiveness under the PPP were not eligible for this benefit.
Highlights from the May 22nd Interim Final Rule on Loan Forgiveness
Below are some of the clarifications from the May 22nd Interim Final Rule. We expect that many of these clarifications will carry over to the program as revised under the Flexibility Act in one form or another.
1. Eligible Costs for Loan Forgiveness
In our previous Alert, we provided explanations and examples of how payroll costs (and other eligible costs) can be included as eligible costs for forgiveness. The PPP loan forgiveness application stated that costs were eligible for forgiveness when they are either paid or incurred during the covered period (or alternative payroll covered period, which is the 8-week or 56-day period following the first payday after the disbursement of their PPP proceeds). It further stated that payroll costs are considered paid on the day that paychecks are distributed and incurred on the day that the employee’s pay is earned. It also stated that payroll costs incurred, but not paid during the covered period (or alternative payroll covered period), are also eligible for forgiveness, so long as they are paid on or before the next regular payday (or billing date, for utilities, rent and mortgage interest).
We had assumed that the latter sentence would apply only if the borrower had been consistently reporting its costs on its application using the incurred method, as it would otherwise be able to include more than 8 weeks’ worth of costs. The latest Interim Final Rule confirms that this is in fact the case. The Interim Final Rule states that costs are eligible for forgiveness when paid during the covered period (or alternative payroll covered period). In addition, costs incurred during the covered period (or alternative payroll covered period) are also eligible for forgiveness so long as they are paid on or before the next regular payday (or next regular billing date, for utilities, rent and mortgage interest).
To illustrate this, let’s take a look at the example from our previous Alert.
- Example 1: Borrower received its PPP loan on 4/27. It is on a bi-weekly payroll cycle. Its next regular payday is scheduled for 5/1, which covers the wages earned by its employees during the pay period of 4/12 – 4/25 as follows:
|Pay Period Start Date||Pay Period End Date||Pay Date|
Since the next regular payday after 4/27 is 5/1, the 8-week or 56-day alternative payroll covered period will begin on 5/1 and end on 6/25. Under the May 22nd Interim Final Rule, all payroll costs paid during this period can be forgiven. In addition, payroll costs incurred during this period can also be forgiven, if they are paid on or before the next regular payday. This means that if the borrower elects to use the alternative payroll covered period (which we recommend), the paychecks issued on 5/1, 5/15, 5/29, and 6/12 are all eligible for forgiveness because each of them was paid during the alternative payroll covered period. In addition, the borrower can also include the 6/26 paycheck, because it was accrued from 6/7 to 6/20 during the alternative payroll covered period and paid on the next regular payday.
- Example 2: Let’s assume that borrower has a covered period of 6/1 – 7/26, and the borrower pays its May electric bill on 6/1 and its June electric bill on 7/1. Both payments are eligible for forgiveness because they were paid during the covered period. In addition, if the borrower pays its July electric bill later than July 26th, the borrower may also seek forgiveness for the pro-rated portion of its July electricity bill accrued through 7/26 (the end of the covered period).
We expect for the moment that the principles provided above will carry over to the revised PPP program. This is likely to be less important for borrowers that elect to apply the 24-week covered period, because they will probably have spent all of their PPP loan proceeds before the end of their covered period.
2. Salary and Wages Paid to Furloughed Employees, Bonuses and Hazard Pay
Over the last few months, we have received many questions from businesses regarding these two points, which the SBA has finally answered. The Interim Final Rule clarifies that salary, wages, or commission payments to furloughed employees are eligible for loan forgiveness so long as they do not exceed the annual salary cap of $100,000 on a pro-rated basis. In addition, hazard pay and bonuses paid to employees for their work during the 8 (now 24) week period are also eligible for loan forgiveness, so long as it does not exceed the $100,000 cap.
3. No Double Penalty for a Reduction in Wage/Salary Levels due to Furlough or Lay-off
The Interim Final Rule clarifies that in case a borrower has furloughed or laid off employees, only the reduction full-time equivalent employees (“FTEs”) will reduce the amount of loan forgiveness: the reduction in wage or salary levels caused by the furloughs and lay-offs will not also be used to reduce the overall loan forgiveness based on the drop in payroll costs. For example, if a borrower with 10 full-time employees lays off 5 of its employees, it has not only reduced its full-time equivalent employees (“FTEs”) by 50% but also effectively reduced its wage or salary levels by 50% as well. The Interim Final Rule explains that this borrower would only be penalized for the reduction in FTEs, not the reduction in wage or salary levels that inevitably goes with it.
The information provided here does not constitute legal advice and the answers to these questions are not a substitute for reading the specific provisions of the law. The CARES Act and the requirements pertaining to the PPP program will continue to be updated by the SBA and our team of attorneys will do our best to keep you updated.
Eligible applicants interested in applying for the program should reach out to the authors of this Alert: Bob Maloney (firstname.lastname@example.org; 617-456-8008); John Bradley (email@example.com; 617-456-8076); John Chu (firstname.lastname@example.org; 617-456-8007) or any other attorney in Prince Lobel’s Corporate Practice Group.