By Molly M. Carroll and Brendan P. Slean
On June 5, 2020, President Trump signed into law the Paycheck Protection Flexibility Act (“PPPFA”) which amended key provisions of the Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Click here to see our previous post covering the PPP loans under the CARES Act. The PPPFA’s changes are welcomed by many individuals and businesses alike, because the PPPFA expands upon key relief and loan forgiveness eligibility requirements, allowing loan recipients greater flexibility of how to allocate PPP loan proceeds. A copy of the PPPFA can be found here: H.R. 7010 - PPPFA.
KEY AMENDMENTS UNDER THE PPPFA
1. Payroll Minimum: One of the major complaints about the PPP loan program was that it required businesses to spend 75% of the loan on payroll to be eligible for loan forgiveness. This was challenging for businesses that were closed due to COVID-19 with employees who received unemployment benefits instead of a salary. The PPPFA significantly reduces the amount of the loan proceeds that needs to be spent on payroll from 75% to 60%, thus increasing the amount of funds available for other expenses from 25% to 40%.
It is critical to note that the PPPFA does not change the types of expenses eligible for forgiveness, and loan proceeds must still be used for the enumerated expenses, such as to cover rent, mortgage payments, utilities, and interest on loans.
2. Forgiveness Period: Under the CARES Act, PPP loan recipients were required to spend their loan proceeds in the initial eight-week period from the date funds were received, or the loan would not be forgiven. Under the PPPFA the loan forgiveness covered period has been extended from eight-weeks to either: (i) twenty-four weeks after disbursement of the PPP loan or (ii) until December 31, 2020, whichever is earlier.
Furthermore, while businesses do have an extended period of time to apply for loan forgiveness, they are not required to wait the twenty-four weeks to have their loan forgiven, and may apply for loan forgiveness at any time after the eight-week period.
3. Rehiring: Under the CARES Act, PPP loan forgiveness is reduced proportionately based on a reduction in the amount of full time equivalent employees employed by the loan recipient during the covered period. In other words, this means that a loan recipient may have their loan forgiveness reduced based upon a reduction in the number of full time equivalent employees (“FTE”) employed by the loan recipient at a certain date. Prior to the enactment of the PPPFA, there was a requirement that all FTE employees had to be rehired by June 30, 2020 in order for their salaries to count towards the loan forgiveness. However, now under the PPPFA, loan recipients have until December 31, 2020, to rehire workers back to their normal levels to remain eligible for full loan forgiveness.
Under the PPPFA, loan recipients have been granted an additional six months to restore the FTE headcount and wages to its February 15, 2020 levels. In effect, this will give loan recipients more incentive to rehire their employees and remain eligible for a greater amount of loan forgiveness. It will also better enable employers to rehire workers after the Federal contributions to recipients of state unemployment payments expire on July 30, 2020.
ADDITIONAL EXEMPTIONS PROVIDED UNDER THE PPPFA:
Previously, under the CARES Act the only exception to the rule that an employer had to rehire the same number of FTE employees by June 30, 2020, was if an employer could document in writing an attempt to rehire an employee who rejected the offer. However, now under the PPPFA, the time period to rehire FTE employees has been extended until the end of the twenty-four week period or until Decembery 31, 2020. Furthermore, the PPPFA has included additional exemptions to this requirement based upon employee availability. Specifically, the PPPFA states that a loan recipient will not receive a forgiveness reduction, if the recipient, in good faith:
can document an inability to rehire the same or similarly qualified employees that were in place on February 15, 2020;
can demonstrate an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
can document an inability to return to the same level of business activity as of February 15, 2020, due to compliance with 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 sanitation, social distancing, or other safety measures applicable to employees or customers.
While there remains a need for some additional guidance as to how businesses or borrowers would be able to proactively demonstrate and document these exceptions, the key takeaway from this amendment is that loan recipients need to keep very clear records of all employment decisions that are made during the time in which they receive and use the PPP loans, and must remain fully diligent during the rehiring process, so that they do not miss an opportunity for loan forgiveness based upon a failure to properly document.
CHANGES IN LOAN TERMS
The PPPFA also made amendments to the deferment and repayment period allotted to loan recipients under the CARES Act and eliminated the requirement for loan recipients to decide between deferring social security taxes or receiving PPP loan forgiveness.
1. Deferred Payments on PPP Loan: The CARES Act required lenders to defer the payment of PPP loan principal, interest, and fees for the first six months of the loan. However, now under the PPPFA, the start date for payments on any remaining PPP loan amount is deferred until the date the lender actually receives the forgiven amount from Small Business Administration (“SBA”). Thus, the start date for the deferred payments could vary by lender, and under the current regulation, some loan recipients could have until May of 2021 to make the first payment on the loan.
Why this is beneficial: Loan recipients now have more time to defer payments to their lenders. It is to be noted, that if a borrower fails to apply for forgiveness within 10 months of the end of the forgiveness period, then the start date for payments will commence on that date (i.e. 10 months after the end of the forgiveness period).
2. Repayment Term Extension: The PPPFA eases repayment terms in the event that loans or portions of the loans are not forgiven, extending the maturity date from a minimum of two years to five years. This extension of repayment terms is only extended for new PPP loan recipients. However, the PPPFA specifically permits existing PPP loans to be amended to reflect the longer term by “mutual agreement” of lenders and borrowers.
Why this is beneficial: If existing PPP loan recipients believe they will not be able to pay a portion of their loan back within the two-year period they are now able and encouraged to negotiate an extension term with their lender to ensure they have enough time for full repayment. If this extension is granted, loan recipients will then have a minimum of five years instead of two years to repay any non-forgiven portion of the loan back at 1% interest.
3. Removal of Restrictions on Payroll Tax Deferral: Under the CARES Act, an employer can defer its share of 2020 social security taxes, with 50% due at the end of 2021 and 50% due at the end of 2022. This deferral was previously not available for employers obtaining forgiveness of a PPP loan. However, the PPPFA has now eliminated the provision of the CARES Act that prohibited PPP borrowers from receiving loan forgiveness, while utilizing the Act’s social security tax deferral. This provision is also retroactive to the date that the CARES Act was enacted.
WHEN DOES THE PPPFA GO INTO EFFECT?
The amendments and exemptions provided under the PPPFA supersede some of the rules and guidelines that were put in place following the CARES Act and the majority of the changes apply retroactively to the date the CARES Act was enacted (March 27, 2020).
WHO DOES THE PPPFA EFFECT?
The provisions under the PPPFA apply retroactively to the date that the CARES Act was enacted and all PPP loans granted under the program. In other words, this means that if you or your business were provided with a PPP loan under the CARES Act then these amendments and extensions provided under the PPPFA govern the terms of your existing PPP loan.
ARE PPP LOANS STILL AVAILABLE FOR INDIVIDUALS AND BUSINESSES IN NEED?
Yes, the SBA still has funding available for applicants and is still accepting loan applications for PPP loans under the CARES Act and PPPFA through June 30, 2020. Furthermore, with the favorable restrictions provided under the PPPFA, now is a great time to apply for a PPP loan. We expect in the near future that the SBA will issue new Interim Rules, additional FAQs and a revised loan forgiveness application all of which shall govern the PPP loan forgiveness process in conformity with the adoption of the PPPFA.
Furthermore, the PPP provisions have been changing quickly and the measures and interpretations described herein may change. We recommend contacting us or your accountant to discuss your specific concerns and for specific information concerning the provisions and impact of the PPP.
If you would like to apply for a PPP loan and have not done so already, or would like assistance with the loan forgiveness application process, Lawson & Weitzen can assist in navigating the process and options in applying for these loans and to further address questions regarding alternative financing options during these challenging times.