On June 3, 2020, the Senate passed the Paycheck Protection Program Flexibility Act (the Act), which is expected to be signed by President Trump. While the Act contains several favorable changes to the PPP, the SBA will need to issue new guidance clarifying the provisions in the Act. The passage of this bill was a big step in the PPP, and future legislation may be needed to address potential drafting errors according to some Senators.
The key provisions included in the Act are detailed below, along with Warren Averett’s insights.
Extension of the Covered Period from 8 Weeks to 24 weeks
The covered period, which is used to spend loan proceeds on eligible expenses, has been extended from 8 weeks to 24 weeks. This change also extends the time period borrowers are required to maintain full-time equivalent (FTE) employees to 24 weeks, and the period during which an employer must not decrease pay rates by more than 25% in order to receive full forgiveness.
Warren Averett Insight: A borrower may elect to use the original 8-week covered period provided for in the CARES Act. This election puts a borrower back under the original rules in this regard (i.e., 8–weeks to use funds and an 8–week requirement to maintain FTEs and pay rates).
Date to Restore FTEs/Pay Rates Moved to December 31, 2020
The date by which a borrower may rehire FTEs and restore pay rates related to decreases from February 15, 2020 to April 26, 2020 has been moved from June 30, 2020 to December 31, 2020.
Warren Averett Insight: Perhaps the biggest question that needs to be addressed in light of the above is whether borrowers that use the 24-week covered period will be required to wait until the end of the 24-week covered period to apply for forgiveness.
For example, if a borrower exhausts all PPP funds by week 12, can the borrower apply for forgiveness at the end of week 12? Borrowers that have maintained FTEs and salary/pay rates or restore them before the end of the of the 24-week period will want to apply for forgiveness as soon as they are able to. Additional guidance or FAQs will be needed to address this question.
Minimum Percentage of PPP Loan Forgiveness for Payroll Costs Decreased to 60%
The minimum percentage of PPP loan forgiveness to be used for payroll costs is reduced to 60% from 75%.
Warren Averett Insight: This provision is a major change. Not only did the payroll cost percentage change, but now there is a cliff that requires the borrower to spend 60% or more of the loan proceeds on payroll costs or none of the loan is eligible for forgiveness.
Several Senators are of the opinion that there may be a drafting error in this section that needs to be corrected with additional legislation. We will continue to monitor any future developments on this provision.
UPDATE: On June 8, 2020, the SBA along with Treasury, issued a joint statement regarding the changes to the PPP under the Paycheck Protection Program Flexibility Act. In their joint statement, the SBA clarified that a borrower would still be eligible for partial loan forgiveness even if the borrower uses less than 60% of their loan amount for payroll costs. This is a very favorable interpretation and will prevent additional legislation to correct the drafting error.
Changes to the Term of Loans Made after the Passage of the Act
The minimum maturity of loans has been increased to five years for loans made after the passage of the Act. The interest rate remains at 1%.
Warren Averett Insight: Borrowers with loans made before the passage of the Act would be required to renegotiate loan terms with their lenders.
Expansion of Social Security Deferral
Borrowers that receive loan forgiveness are now allowed to defer depositing the employer side of Social Security through December 31, 2020.
Warren Averett Insight: Previous guidance allowed borrowers to defer these taxes up until the date they received a decision about loan forgiveness from their lender. The deferred employer Social Security tax will be due on December 31, 2021 (50%) and December 31, 2022 (50%).
Two New Exceptions to Receive Full PPP Loan Forgiveness
There are two new exceptions that allow borrowers to achieve full PPP loan forgiveness if they are not able to restore FTEs or pay rates by December 31, 2020. Borrowers will not receive a reduction in loan forgiveness due to FTE or pay rate decreases if they are 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; or
- Document that they are unable to rehire individuals who were employees on February 15, 2020, and unable to hire similarly qualified employees.
Warren Averett Insight: These two new exceptions may be very favorable for certain borrowers. However, the SBA or Treasury will need to issue new guidance to interpret how these tests will be performed.
For the second option, not only do borrowers have to demonstrate that they are unable to rehire an employee, but they must also document that they attempted to hire a similarly qualified individual without success.
Considering Your Business’s PPP Loan Forgiveness Strategy
For businesses that were running out of time to spend their PPP proceeds, this Act provides welcomed relief. We are hopeful the SBA will release guidance soon so that borrowers will be able to take advantage of the new provisions in the Act. In an effort to keep you informed, Warren Averett is continuing to monitor the guidance as it becomes available. If you have questions about how these changes impact your business, please reach out to your Warren Averett advisor, or have a member of our team reach out to you.
This article reflects our views at the time this article was written and should be used as reference only. We recommend that you talk to your Warren Averett advisor, or another business advisor, for the most current information or for guidance specific to your organization.