On June 3, the U.S. Senate unanimously passed the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010) (the “PPPFA”), which adopts a number of significant changes to the Paycheck Protection Program (PPP) promulgated under the CARES Act. The PPPFA was passed by the House of Representatives last week by a vote of 417-1. President Trump is expected to sign the PPPFA into law shortly.
Although unusually short in length, the PPPFA provides small businesses with several important modifications to the existing PPP rules. Given that many PPP loan recipients are deep into the current 8-week covered period, prompt attention to the changes articulated in the PPPFA is strongly advised.
A brief overview of the principal PPPFA provisions is set forth below. For clarity, the amendments effectuated by the PPPFA will be effective as if included in the CARES Act and will apply to any PPP loan (including loans already received by a business).
1. Expansion of the Covered Period. In response to concerns from small business owners that the 8-week covered period under the CARES Act is too short and/or does not coincide with their employee staffing needs, the PPPFA extends the time during which PPP funds have to be used from 8 weeks to the earlier of (1) 24 weeks from the date of funding of the loan, or (2) December 31, 2020. There may still be instances where a PPP recipient will want to use the original 8-week period (the PPPFA expressly allows this) -- for example, if the business has a high level of confidence that the entire loan amount was properly utilized on eligible expenses and wants to apply early for forgiveness approval -- but this expanded covered period should be welcome news to many PPP loan recipients.
2. Reduction of 75% Payroll Threshold. There is some good news and some bad news regarding the allocation of eligible expenses. Under current PPP rules, at least 75% of the PPP funds utilized by a recipient (not 75% of the PPP loan amount itself) must be used on payroll costs. This proportional use requirement is not optimal for many businesses (such as restaurants) that may have a higher ratio of expenses tied to leases and utilities compared to payroll costs. The good news is that the PPPFA reduces this 75% requirement to 60%. The bad news is that the 60% requirement now reverts back to an all-or-nothing rule, meaning that a PPP recipient must spend at least 60% of the original loan amount on payroll costs. This adverse change is mitigated (if not eliminated for most businesses), however, by the significant lengthening of the covered period, as discussed in Item 1 above.
3. Expanded Eligibility for the PPP. The PPPFA extends eligibility for the PPP from a deadline of June 30, 2020 to December 31, 2020. It is believed that approximately $120 billion of PPP funds remain available, so it is not too late to apply for a PPP loan.
4. Expanded Eligibility for Payroll Tax Deferment Feature. Under current PPP rules, a business that has received forgiveness of a PPP loan is not eligible to participate in the program under the CARES Act that allows a business to defer payment of the employer portion of 2020 Social Security payroll taxes (6.2% of the wage base) to December 31, 2021 (payment of 50% of the deferred 2020 taxes) and December 31, 2022 (payment of the remaining 50% of the deferred 2020 taxes). PPP loan recipients would now be eligible for this payroll tax deferment feature pursuant to the PPPFA.
5. Expanded Time Period for Restoring Employee Count. Under current PPP rules, a PPP loan recipient has until June 30, 2020 to hire/rehire/restore full-time employees in order to help maximize loan forgiveness. The PPPFA extends this deadline to December 31, 2020.
6. Amnesty for Inability to Hire/Rehire Certain Employees. Under the PPPFA, a PPP recipient will not be deemed to have experienced a reduction in full-time employee headcount during the period from February 15, 2020 and December 31, 2020 if the recipient, in good faith, is able to document:
(a)(1) an inability to rehire individuals who were employees of the recipient on February 15, 2020; and (2) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
(b) the recipient’s business cannot return to the same activity level it was operating at on or prior to February 15, 2020 because of requirements or guidelines established 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 COVID–19 safety standards. Presumably, this new provision will help restaurants, gyms, movie theaters and other retail establishments that are impacted by occupancy rules and other social distancing requirements that make it impossible for the business to restore pre-COVID-19 business levels.
7. Extension of Loan Repayment Period. With respect to portions of a PPP loan that are not forgivable, the PPPFA extends the maturity date from 2 years to 5 years.
8. Forgiveness Application Timing. Under the current PPP guidance, forgiveness must be obtained before the six month anniversary of the PPP loan funding, or the applicant must begin repaying the loan on such date. Under the PPPFA, this period is extended to ten months from the date of funding, and the applicant merely needs to apply for forgiveness within that ten-month period, which allows actual payments to be delayed further (to the extent the applicant is awaiting a response from the lender and/or SBA on whether a PPP loan is forgiven). If an applicant has not applied for forgiveness by the 10-month anniversary of funding, repayments of principal and interest will begin on such date.
Have questions about the PPPFA? Contact a member of the Hirschler PPP task force to help you navigate these impending changes.
Luis F. Ruiz