The U.S. Senate, on June 3, 2020, approved H.R. 7010, referred to as the “Paycheck Protection Program Flexibility Act of 2020.” This advances to the president legislation that was previously approved with nearly unanimous support in the U.S. House of Representatives. If signed into law, this legislation would extend the so-called “covered period” for borrowers to spend loan proceeds received under the Paycheck Protection Program (PPP) and qualify for forgiveness. This legislation would also make other significant changes to the terms of PPP loans, many of which are now at the end of their original eight-week covered period. Some initial questions and answers based on this legislation are provided below:
- Does the new legislation automatically extend the covered period for all PPP borrowers?
No, the legislation provides that borrowers who received their PPP loan before the new legislation is enacted will be able to elect between their original eight-week covered period or the new covered period that ends on the earlier of 24 weeks after their loan was originated or December 31, 2020. New PPP loan borrowers would automatically have the extended covered period. Note, however, that the legislation does not increase the per person cap on permitted payroll costs, meaning that no more than $15,385 in direct cash compensation paid per employee will qualify for forgiveness.
It is unclear how this legislation would affect the “alternative payroll covered period” authorized by the Small Business Administration (SBA) in recent rulemaking and the PPP loan forgiveness application form. For more information on these topics, see our earlier update.
- Since extending the covered period could delay a borrower’s application for loan forgiveness, is there a corresponding change to the payment schedule for PPP loans?
Yes. PPP loans originally had a six-month deferral period for payment of principal, interest, and fees. The legislation would extend this period until “the date on which the amount of forgiveness determined under Section 1106 of the CARES Act is remitted to the lender.” This would be a relief for borrowers who received early PPP loans and are concerned about whether they will get a determination on their loan forgiveness application before payments become due. Under this legislation, borrowers that fail to apply for loan forgiveness within 10 months after the last day of their covered period (as applicable) would be required to make payments on their PPP loan beginning 10 months after the last day of such covered period.
- Does the PPP still require that 75% of loan proceeds be spent on payroll costs?
No. This “75% Rule” was created by the SBA and was not part of the CARES Act. The legislation would overrule this, providing instead that only 60% of loan proceeds would be required to be spent on payroll costs in order to qualify for the maximum possible loan forgiveness. As a result of this change, up to 40% of loan proceeds could be used for qualifying mortgage interest, rent, and utility payments without a loss of forgiveness. However, unlike the prior 75% Rule that limited forgiveness on a dollar-for-dollar basis, if the 75% test was not met, the new 60% Rule appears to be a “cliff” that provides that no forgiveness will be provided if less than 60% of the loan proceeds is used for payroll costs.
- Does the change in the “covered period” affect other calculations that reduce loan forgiveness?
Yes. The legislation provides that the date used to measure whether a borrower has “eliminated” a reduction in full-time equivalent employees (FTEs) or a reduction in salary or wages is being changed from June 30, 2020, to December 31, 2020. The legislation does not include language allowing borrowers to “opt-out” of this change. This could require some borrowers to stretch out rehiring employees or restoring salaries or wages as they work to balance the requirements for a maximum PPP loan forgiveness against real-world concerns about budgeting to survive the current economic uncertainty.
- What if a borrower is unable to rehire employees by December 31, 2020?
The legislation includes new provisions that provide that reductions to loan forgiveness based on a reduction in FTEs will not apply if the borrower is able to document (1) their inability rehire individuals who were employees of the borrower on February 15, 2020, and (2) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020. Guidance has not yet been provided detailing what documentation will be acceptable.
Additionally, the reduction to forgiveness for FTE reductions will not apply if the borrower is able to document that they have been unable to return their business activity to the same level as it was operating before February 15, 2020, due to compliance with requirements or guidance issued by the secretary of Health and Human Services (HHS), the director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OSHA) during the period between March 1, 2020, and December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or other worker or customer safety requirements related to COVID-19. Notably, state and local shelter-in-place orders and similar orders are not expressly referenced.
- Does the legislation allow borrowers to apply for an additional loan or borrow more under PPP loans?
No. Although each borrower’s PPP loan amount is calculated based on 2.5x the borrower’s historic average monthly payroll cost, this legislation’s expansion of the covered period is not accompanied by an opportunity to borrow more under a PPP loan or any changes to the calculation of the loan amount for new PPP loans.
- To the extent the PPP loan is not forgiven, does the legislation change the maturity date of the PPP loan?
Loans made after the effective date of H.R. 7010 will have a minimum maturity of five years, rather than the two-year maturity date that has applied to prior PPP loans. With respect to PPP loans that existed prior to the effectiveness of this legislation that are not fully forgiven, the legislation contemplates that lenders and borrowers may mutually agree to extend the loan maturity date, but it does not provide any criteria for how lenders are to decide whether to agree to an extension of the maturity date.
- Does the legislation change any other aspects of PPP loans?
Not directly; however, the legislation would revoke prior language in the CARES Act that excluded borrowers who had all or a portion of their PPP loan forgiven from deferring payroll taxes as otherwise permitted under the CARES Act. As a result, PPP borrowers who qualify for loan forgiveness would also be eligible for the payroll tax deferral.
- What happens next?
Once this legislation is signed into law, which seems very likely due to its broad bipartisan support, the SBA and Department of Treasury will need to issue additional rulemaking to reconcile existing guidance to the new legislation and also update the PPP loan forgiveness application form. This process may result in guidance that modifies or changes certain aspects of the legislation or existing rulemaking, so it is important to continue monitoring developments as this process unfolds.