Congress Increases Flexibility for Forgiveness under the Paycheck Protection Program, yet Uncertainty about Implementation Remains

The Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) was signed into law on June 5, revising a number of key requirements for loan forgiveness under the Paycheck Protection Program (“PPP”).  The Program has provided support to a number of organizations negatively impacted by COVID-19 in the form of loans that can be forgiven if used for certain eligible expenses.

The Flexibility Act extends the period in which organizations can incur or pay for such expenditures and allows employers to avoid reductions in forgiveness amounts when they are unable to (i) rehire qualified employees or (ii) maintain prior employment levels due to operational changes resulting from the pandemic.  The Act also reduces the amount of eligible expenditures that must be spent on payroll costs when seeking forgiveness from 75 to 60 percent.Yet, as with most aspects of the Program to date, a number of outstanding questions remain regarding how the U.S. Small Business Administration (“SBA”) intends to implement these changes, particularly with respect to potential reductions in forgiveness amounts.  The SBA has consistently deviated from the statutory framework that initially established PPP loans, so it would not be surprising if Congress’s revisions to the Program lead to additional unexpected changes at the regulatory level in the coming weeks.

Key Provisions of the Flexibility Act

The Flexibility Act’s provisions will apply to the Program as if they were in effect when the Program was initially established on March 27, 2020 under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.  As a result, the following changes are relevant to both current and future PPP loans.

  • Extension of Forgiveness Period: Most importantly for a number of organizations, the Flexibility Act allows loan recipients to seek forgiveness based on expenses incurred or paid[1] through the earlier of December 31, 2020 or the date that is 24 weeks from loan origination (or potentially disbursement if SBA deviates from the Flexibility Act’s language as it did with the CARES Act).[2]  Loan recipients can still choose to use the CARES Act’s original 8-week forgiveness period, but the extended period will provide a number of organizations with much-needed time to resume operations and incur eligible expenses.
  • Exemptions for Reduced Employment Levels: Also critical for a number of organizations that operate in industries that are severely impacted by the pandemic, the Flexibility Act permits loan recipients to avoid reductions in forgiveness amounts if they are either:
      • unable to rehire individuals who were employed on February 15, 2020 and cannot find similarly qualified individuals to fill positions by December 31, 2020; or
      • able to document that they cannot return to their pre-February 15, 2020 level of business activity due to compliance with requirements or guidance established from March 1 through December 31, 2020 by the Secretary of the U.S. Department of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation social distancing, or any other worker or customer safety requirements related to COVID-19.

These exemptions will be helpful to organizations that operate in industries that have a shortage of qualified employees willing to return to work, such as in certain components of the health care and cleaning industries.  These exemptions will also be important to restaurants, hotels, and other organizations in industries that are being forced to change their organizational models due to health and safety standards for COVID-19.

Unfortunately, there are a number of uncertainties associated with the exemptions that will hopefully be addressed by the SBA.  For example, it is not clear how organizations will need to document that they are covered by one of the exemptions, although the SBA could presumably permit organizations to make good faith certifications similar to other requirements under the Program.  It is also not clear whether the exemption for changes in “business activity” levels will apply to nonprofit organizations.  Congress likely intended for the exemption to apply broadly, but the SBA has historically taken a very narrow view of the term “business” when issuing regulations.

Organizations that are subject to phased openings will also likely have questions about whether the health or safety exemption will continue to apply while they are ramping up staffing following a change in workplace guidelines or requirements.  In addition, some organizations that are required to implement more stringent state and local guidelines or requirements may not be able to take advantage of the health or safety exemption unless SBA expands the exemption to recognize that there may be operational differences at the state and local level.

It is important to note that the Flexibility Act does not appear to extend the exemptions to reductions in forgiveness amounts for lower salaries or wages.  The SBA would likely need to extend the exemptions by regulation to recognize, for example, that salaries or wages may also need to be reduced due to health or safety requirements, such as in connection with shorter operating hours.

  • Expansion of Eligibility for Non-Payroll Costs: The Flexibility Act expands the level of non-payroll costs that can be counted for forgiveness by reducing the payroll cost forgiveness threshold from 75 to 60 percent.  Although not part of the original CARES Act, the SBA by regulation required loan recipients to spend at least 75 percent of loan proceeds on payroll costs and indicated that it would only grant forgiveness for amounts that also met this threshold.  Under the Flexibility Act, organizations will now be able to seek forgiveness for a total amount that includes up to 40 percent of non-payroll costs including rent, utilities, and mortgage interest payments.  The Flexibility Act did not technically change the overall 75-percent limitation on a recipient’s use of loan proceeds outside of the forgiveness context, but the SBA will hopefully address this oversight in implementing regulations.
  • Extension of Program, Maturity, and Deferral: Mirroring the extension of the forgiveness period, the Flexibility Act extends the period in which organizations can receive PPP loans through December 31, 2020.  In addition, the Act establishes a minimum loan maturity period of 5 years, effectively overriding the SBA’s initial use of a 2-year period.  Lenders and borrowers can revise existing loan documents to account for the extended maturity period.

The Flexibility Act also extends deferral of payment on PPP loans through:

      • the date on which the lender receives payment from the SBA for forgiveness amounts, which can occur up to 90 days after forgiveness amounts are determined; or
      • 10 months after the end of a recipient’s forgiveness period (i.e., December 31, 2020 or the 24-week alternative) if a recipient does not apply for forgiveness by the 10-month deadline.

The Act does not address how a deferral period should be measured when the SBA purchases forgiveness amounts in advance from a lender.

  • Employer Payroll Taxes: To help with liquidity, the Flexibility Act makes organizations that receive forgiveness for PPP loans eligible to take advantage of a payroll tax deferral established under the CARES Act, which was previously unavailable once an organization received forgiveness.  However, separate provisions making organizations that receive a PPP loan ineligible for an employee retention tax credit remain in effect.  For additional insight on employer payroll tax deferral, please consult the firm’s recent Tax Withholding and Reporting Blog post.

Based on the SBA’s history of retroactively changing rules under the Program and deviating from requirements established under the CARES Act, reviewing the SBA’s implementing regulations and guidance for the Flexibility Act once issued will be important to understanding how existing and future PPP loans will be impacted in particular circumstances.  However, the Flexibility Act establishes a broad framework that should provide a number of organizations with relief to the extent that they are facing difficulties in fully resuming operations.

[1] The SBA’s current forgiveness application indicates that expenses can be incurred or paid during the relevant forgiveness period notwithstanding different language in the CARES Act.

[2] Under the CARES Act, loan forgiveness amounts can be reduced due to lower employment, salary, or wage levels.  The employment-based reduction is calculated by multiplying the sum of eligible expenses (i.e., payroll costs, rent, utilities, and mortgage interest payments) for the relevant forgiveness period by the quotient obtained by dividing (i) the average monthly full-time equivalent employees (“FTE”) maintained by a loan recipient during the forgiveness period by (ii) the average monthly number of FTEs employed by the recipient from February 15 to June 30, 2019 or January and February 2020.  Contrary to the CARES Act, the SBA’s current forgiveness application permits seasonal employers to use either of these reference periods or, at the employer’s election, a third period constituting 12 consecutive weeks between May 1 and September 15, 2019.

In its current forgiveness application, the SBA has chosen to measure FTEs based on a 40-hour work week.  The SBA has also confusingly suggested that employees need to be paid during the forgiveness period to be counted as FTEs even if they are salaried, which could adversely impact organizations that maintain furloughed employees that are still on payroll and receiving benefits.

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