Significant Changes to PPP Signed Into Law

Signed into law today, the Paycheck Protection Program Flexibility Act made significant changes to PPP.  Here are more details on the seven provisions of this new law:

1.   Borrowers Can Extend the 8 Week Period to 24 Weeks. This will make it much easier for borrowers to get full or close to full forgiveness on their loans, but also makes it more challenging to keep a full workforce in place to qualify for full forgiveness, as further discussed below. This legislation allows borrowers with outstanding loans as of the date of the enactment of this legislation to make an election to have the original 8-week period apply in lieu of the 24-week period. This election would make sense for borrowers who have already spent the funds on sufficient expenses that provide for full forgiveness, so they can confirm their loan forgiveness and be better able to borrow, attract capital, have cleaner balance sheets, and better mental health. 

Notwithstanding this extension, borrowers, and their bankers and accountants, will be best advised to file the application promptly after the 8 weeks, if they can qualify for full forgiveness in order to get the debt off of the books in case they will need bank financing, and to receive full forgiveness before the rules may change or the SBA bureaucracy might break down or delay the process. Even if somewhat aggressive (but justifiable) positions are taken to qualify for 100% forgiveness in the first 8 weeks, most likely a new law would allow forgivable expenses paid during the longer period of time to apply in the event of an audit.

2.   The 75% Test Now Becomes a 60% Cliff!  This law changes the 75% test that was issued by the SBA which requires that at least 75% of the amounts forgiven have to be spent on payroll expenses, meaning that if otherwise countable interest, rent and utilities exceed 1/3 of what is spent on payroll, health insurance or retirement plans, then the forgiveness will be reduced. 

To be eligible to receive loan forgiveness under this new legislation, an eligible recipient of a PPP loan will now be required to use at least 60% of the loan amount for payroll costs, and may use up to 40% for permitted rent, utilities, and interest on secured debt, as defined in the law.

3.   Penalties and Calculations for the Reduction in Work Force – June 30th Rolled Back to December 31st. The loan forgiveness rules that were originally in place contain a provision which generally reduces forgiveness in proportion to the reduction of the loan recipient’s workforce during the 8-week period, if the same number of employees are not hired or rehired by June 30th. This new law modifies this provision by using the 24-week period instead of the current 8-week period, while also extending the June 30th “amnesty rehire date” to December 31st. An example of how this would work is as follows: If a business that had 100 employees before the virus reduces its workforce to 50 employees during the 24-week period, it will nevertheless receive complete forgiveness of its loan if it spends what was borrowed on payroll, health insurance, retirement plan contributions and permitted interest rent and utilities during the 24-week period, as long as it has 100 employees on December 31, 2020, and they apparently do not have to be the same employees, or even doing the same things as the pre-virus employees. 

4.   Some May Still Be Hurt. Some businesses will be better able to have the 100 employees on June 30th while they are still operational with a chance to survive, as opposed to waiting until December 31st as the alternate testing date. However, if we do recover from these high unemployment numbers, most businesses will find this change to be advantageous, assuming that they stay open and can be back to full force, or implement some other configuration that provides for the equal number of full-time employee equivalents on December 31st. So, do you need to plan on working New Year’s Eve if you are employed in December by a PPP borrower? Fortunately not, in that receiving earned Paid Time-Off is counted as working for purposes of this rule, and getting to what may be a virtual New Year’s celebration for many. 

5.   New “We Tried to Rehire But We Really Couldn’t Exception”. The legislation also provides an exemption from a reduction in loan forgiveness for employers that have reduced their workforce if, during the period beginning on February 15, 2020, and ending on December 31, 2020, the employer, in good faith, is able to document one of the following:

6.   Repayment Period Extended to Five Years with 1% Interest During the Five Year Term.  This legislation extends the period for repayment of loans still owed, after being reduced for expenses that qualify for forgiveness and the EIDL grants (of up to $10,000), from 2 years to 5 years, and allow for payments on the loans to be deferred until the date on which the SBA makes a determination on loan forgiveness of the applicable borrower (which could be up to 150 days after submission of the loan forgiveness application under current guidance). The interest rate for these loans would remain at 1%. 

7.   Two Year Deferral of Employer’s Share of Payroll Taxes for All Employers. The final change under this Bill allows borrowers to be eligible for the deferral of payment of the employer’s share of Social Security payroll taxes (6.2%), regardless of whether the borrower receives loan forgiveness. This allows borrowers to now defer the payment of the employer’s share until 2021 when 50% of such taxes must be paid, with the remaining 50% due in 2022.