COVID-19: CARES Act Changes Provide PPP Borrowers With More Flexibility
Posted June 5, 2020

For businesses that have received or are applying for funding under the CARES Act’s Paycheck Protection Program (PPP), this blast is a must read! On June 5, 2020, President Trump signed H.R. 7010 into law. The bill, entitled the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”), amends the various provisions of the CARES Act and the Small Business Act. Unlike the CARES Act (880+ pages), the PPPFA is only 10 pages. The bill is effective immediately upon enactment. You can find the full text of H.R. 7010 here.

As a reminder, the CARES Act created the Paycheck Protection Program (“PPP”) (among other provisions). The PPP is a fund of $350 billion dollars intended to provide small businesses (500 employees or fewer) with economic assistance loans to cover losses due to COVID-19 business disruptions. Within weeks of its launch, the initial round of PPP funding was completely exhausted. Congress then approved a second wave of PPP funding, this time in the amount of $310 billion dollars. Under the PPP, small businesses can apply for loans of up to $10,000,000. PPP loans can be forgiven (in whole or part) if the borrower meets certain criteria. For further information on the details of the CARES Act, view our prior detailed legal updates on our website here and here.

The PPPFA amends the CARES ACT, and more specifically the PPP, to create additional flexibility for borrowers in several important ways. Below are five key takeaways for borrowers:

1) The loan forgiveness “covered period” has been expanded from eight weeks to 24 weeks.

Under the PPPFA, borrowers now have 24 weeks (formerly 8 weeks) to spend their PPP money, and be eligible to receive loan forgiveness, if all other criteria are met. The PPPFA modified the defined term “covered period” to now mean, “… the period beginning on the date of the origination of a covered loan and ending the earlier of -- “(A) the date that is 24 weeks after such date of origination; or “(B) December 31, 2020.”

The PPPFA also contains a provision that allows PPP borrowers to use the original 8-week post-loan origination “covered period,” so long as the borrower received its PPP loan funding before the PPPFA was enacted.

2) The payroll cost cutoff has been reduced to 60%.

The PPPFA also revised the “payroll cost” rules under the CARES Act so that only 60% (not 75%) of the borrowed PPP loan funds must be spent on qualifying “payroll costs” to be eligible for loan forgiveness. The remaining 40% of the PPP loan funds can be spent on other qualifying non-payroll costs [the CARES Act initially set this at 25%].

The bill provides: “To receive loan forgiveness … an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs, and may use up to 40 percent of such amount for any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), any payment on any covered rent obligation, or any covered utility payment.”

3) Loan maturity has been expanded from two to five years.

For any PPP loans issued after the PPPFA took effect, there is a new “minimum maturity of five years.” The PPPFA also provides that loan payments will be deferred until the date on which the amount of forgiveness is determined by the SBA and remitted to the lender. The bill also clarifies that, “If an eligible recipient fails to apply for forgiveness of a covered loan within 10 months after the last day of the covered period … such eligible recipient shall make payments of principal, interest, and fees on such covered loan beginning on the day that is not earlier than the date that is 10 months after the last day of such covered period.”

4) The headcount/salary reduction “amnesty” period has been extended to December 31, 2020.

Under the CARES Act, the percentage of loan forgiveness was proportionally tied to any reductions in the borrower’s workforce (or salaries) during the “covered period” (formerly the 8-weeks post-loan origination), unless the workforce was restored back to its former headcount and/or salaries on or before June 30, 2020. Under the PPPFA, as noted above, the eight-week “covered period” becomes 24 weeks, and the restoration “amnesty” period is extended from June 30, 2020, to December 31, 2020.

For example, if a borrower had 20 employees before the COVID-19 pandemic, and it reduced that workforce to 10 employees, PPP loan forgiveness is still achievable if the borrower brings its headcount back up to 20 employees by no later than December 31, 2020 (through rehiring of former employees or hiring new employees), along with meeting other loan forgiveness criteria.

You might ask what happens if a borrower, despite its best efforts and good faith attempts, simply cannot increase its workforce headcount or salaries back to pre-COVID-19 levels? PPPFA to the rescue! The PPPFA creates a new “exemption based on employee availability,” which applies to the time period between February 15, 2020, through December 31, 2020.

This exemption provides that if the employer is acting in “good faith,” and it can document one of the qualifying reasons below to justify why the workforce/salary reduction cannot be cured, the borrower can be exempt from any proportional reduction in its loan forgiveness (assuming all other loan forgiveness requirements are met).

Per the PPPFA, those qualifying reasons include that the borrower: “(A) is able to document -- “(i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and “(ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or (B) is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or 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 the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”

5) Payroll tax deferral is available to borrowers.

The PPPFA also allows employers to receive a two-year deferral for payment of the borrower’s (employer’s) portion of its Social Security tax obligation (6.2%). This tax deferral is not contingent on, or tied to, the borrower achieving loan forgiveness. Under this deferral option, 50% of the tax will be due on December 31, 2021, and the remaining 50% by December 31, 2022. This deferral option was not available to borrowers under the original CARES Act provisions.

Like the prior COVID-19 stimulus bills, the new PPPFA legislation has quite a few moving parts. As with the CARES Act, we can expect that the SBA and the Treasury will issue Frequently Asked Questions, implementing rules and other guidance in the near future. For now, in addition to the assistance LightGabler can provide on employment law issues relevant to the PPPFA, employers with PPP loans should consult their lenders, accounting professionals and insurance advisors to better understand how the many layers of the PPPFA and CARES Act will impact them and their loan forgiveness options.

For further questions regarding COVID-19 issues, or other employment law questions specific to your business, contact the employment attorneys at LightGabler.

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