As we previously reported, the Paycheck Protection Program Flexibility Act (“PPP Flexibility Act”) became law earlier this month, introducing numerous changes to the Paycheck Protection Program (PPP). The PPP, which is part of the CARES Act, provides aid to qualifying small businesses in the form of loans with terms favorable to borrowers, including, in particular, provisions that allow potentially the entire loan amount to be forgiven if the proceeds are spent on payroll and other qualifying expenses.
The PPP Flexibility Act directed changes relating to eligibility, length of time for borrowers to spend the loan funds, the amount of the loan funds that must be spent on payroll costs, and various aspects of loan forgiveness. As a result of the PPP Flexibility Act, the Small Business Administration (SBA) had to revise several of the prior rules it had published, as well as the loan application and forgiveness application form. Below is a summary of the most important changes:
- 24-Week Covered Period. Congress has now mandated that borrowers have longer to spend loan proceeds; the time for using the monies has been extended from eight weeks to 24. SBA’s new Loan Forgiveness Application form, the Interim Final Rule on Revisions to First Interim Final Rule, and the Interim Final Rule on Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules implement this extension. However, borrowers whose loans were disbursed before June 5, 2020 may still elect to have the loan forgiveness covered period be the eligible eight-week period beginning on the date the loan was disbursed. The new loan forgiveness application and new Interim Final Rule clarify that borrowers with biweekly payroll schedules may still elect to calculate eligible payroll costs using an Alternative Payroll Covered Period whereby the 24-week (or eight-week) covered period begins on the first pay period after loan disbursement, rather than the day the borrower received the loan proceeds. However, both the Covered Period and the Alternative Payroll Covered Period cannot extend beyond December 31, 2020.
- 60% Payroll Costs. Congress has also directed that only 60% of the loan proceeds need to be used for payroll, not 75%, as had been announced. SBA’s new rules and forgiveness application state that borrowers need only use 60%, rather than 75%, of the loan proceeds towards payroll costs. Additionally, SBA’s Interim Final Rule on Revisions to the First Interim Final Rule explained that the 60% requirement is a “proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness.” (Emphasis added.)
- Cash Compensation. The instructions to the new Loan Forgiveness Application explain that, for each employee, the total amount of cash compensation eligible for forgiveness still may not exceed an annual salary of $100,000, as prorated for the Covered Period or Alternative Payroll Covered Period. For eight weeks, that total is $15,385, while for 24 weeks, that total is $46,154. To calculate the amount of forgiveness available for compensation to owner-employees and self-employed individuals, the Interim Final Rule on Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules provides two different methodologies. First, for borrowers that received a PPP loan before June 5, 2020 and elect to use an eight-week Covered Period, the amount of loan forgiveness requested for owner employees and self-employed individuals’ payroll compensation is capped at eight weeks’ worth (8/52) of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual, whichever is less, in total across all businesses. Second, for all other borrowers, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at 2.5 months’ worth (2.5/12) of 2019 compensation (i.e., approximately 20.83 percent of 2019 compensation) or $20,833 per individual, whichever is less, in total across all businesses. Therefore, for borrowers electing to use a 24-week Covered Period, the cap on the amount of loan forgiveness available for owner-employees and self-employed individuals’ payroll compensation is proportionately lower than it is under the eight-week Covered Period.
- When to Apply for Forgiveness. A borrower may apply for forgiveness “any time on or before the maturity date of the loan—including before the end of the covered period—if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.” The maturity date of a loan that received a loan number before June 5, 2020 is two years, unless the borrower and lender mutually agree to extend the term of the loan to five. Whereas, for loans receiving SBA loan numbers on or after June 5, 2020, the maturity date is a minimum of five years, and a maximum of ten years.
If the borrower does not apply for loan forgiveness within 10 months after the last day of the Covered Period, the PPP loan is no longer deferred and the borrower must begin paying principal and interest. Therefore, to take maximum advantage of the PPP Flexibility Act’s new determination that the deferment period lasts until the date that SBA remits the forgiveness amount to the lender, borrowers should apply for forgiveness no later than 10 months after the end of the Covered Period.
- FTE Safe Harbors. Unless an exception applies, if the borrower’s average number of full-time equivalents (FTEs) during the Covered Period (or the Alternative Payroll Covered Period) is lower than its average number of FTEs between February 15, 2019 and June 30, 2019 or between January 1, 2020 and February 29, 2020, then the forgiveness amount will be subject to a reduction (unless salary/wage reduction is also a factor, as detailed below). In general, a reduction in average FTEs will reduce the loan forgiveness amount by the same percentage as the percentage reduction in average FTEs.
The new rules do not change how FTEs are calculated. However, for purposes of determining whether the FTE Reduction Safe Harbor (now referred to as the “FTE Reduction Safe Harbor 2”) applies, SBA now has stated it will compare the number of FTEs on either December 31, 2020 or the date the loan forgiveness application is submitted, whichever comes earlier, to the number of FTEs in the borrower’s pay period inclusive of February 15, 2020. If the FTEs on December 31, 2020 or the date of the forgiveness application are higher or the same as the number of FTEs in the borrower’s pay period inclusive of February 15, 2020, then any reduction in employees that occurred between February 15, 2020 and April 26, 2020 will not be used against the borrower to reduce the loan forgiveness amount.
SBA also implemented an additional FTE safe harbor identified by Congress in the PPP Flexibility Act, the “FTE Reduction Safe Harbor 1,” which explains that, if between February 15, 2020 and the end of the Covered Period the borrower’s business is unable to return to former levels of business activity due to social distancing requirements and other COVID-19-related restrictions that are put in place between March 1, 2020 and December 31, 2020, the borrower will not be subject to a reduction in forgiveness due to a reduction in FTEs.
There are also three additional FTE reduction exceptions: (1) where an employee terminated after February 15, 2020 refuses the borrower’s written offer of rehire AND the borrower is unable to hire another qualified individual by December 31, 2020; (2) where an employee rejects the borrower’s written offer to restore any reduction in hours, at the same salary or wages, during the Covered Period or Alternative Payroll Covered Period; or (3) where an employee is fired for cause, voluntarily resigns, or voluntarily requests and receives a reduction in hours during the Covered Period or Alternative Payroll Covered Period.
- 25 Percent Wage Reductions. SBA may also reduce loan forgiveness if there is a reduction in an employee’s salary or wages in excess of 25 percent during the Covered Period or Alternative Payroll Covered Period, as compared to the wages paid during the period from January 1, 2020 to March 31, 2020. The forgiveness amount will be reduced by the weekly reduction in salary or wages that exceed 25 percent.
For example, where a borrower elects a 24-week Covered Period, if a full-time employee’s weekly salary was $1,000 per week during the reference period, but only $700 per week during the Covered Period (or Alternative Payroll Covered Period), and that employee continued to work 40 hours or more a week, then the forgiveness amount would be reduced by $1,200. This is because the first $250 reduction per week (i.e., 25 percent of $1,000) is exempt from reduction, but the remaining $50 of reduction per week must then be multiplied by 24 (i.e., the number of weeks in the Covered Period). However, this calculation only applies to employees receiving salaries or wages below $100,000 annually.
The Interim Final Rule on Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules explains that where a borrower applies for forgiveness before the end of a Covered Period or Alternative Covered Period (because the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness before the end of the Covered Period) then the borrower must account for the excess salary reduction for the full eight-week or 24-week covered period. Therefore, in the above example, if the borrower applies for forgiveness before the end of the covered period, the borrower will still need to account for the salary reduction for the full 24-week covered period (i.e., a total of $1,200).
Additionally, if the borrower eliminates any reduction in an employee’s salary or wages by restoring the average annual salary or wage to the pre-February 15 level by December 31, 2020, or the date the forgiveness application is submitted, whichever is earlier, then the salary or wage reduction will not be used to reduce the forgiveness amount.
- EZ Version of Loan Forgiveness Application. In addition to the updated Loan Forgiveness Application, SBA introduced an additional EZ Version of the application, which is a simplified version that requires less documentation and fewer calculations. Though the new version reflects certain changes to loan forgiveness that were introduced by the PPP Flexibility Act, the Act itself did not mandate that SBA need adopt an additional simpler version of the forgiveness application. The EZ Version is only available to the following borrowers: (1) self-employed individuals, independent contractors, or sole proprietors that have no employees at the time of the PPP loan application and included no employee salaries in computing average monthly payroll costs; or (2) those that did not reduce the salaries or wages of any employee by more than 25% during the Covered Period or Alternative Covered Period when compared to the salary between January 1, 2020 and March 31, 2020 and did not reduce the number or hours of employees between January 1, 2020 and the end of the Covered Period; or (3) those that did not reduce the salaries or wages of any employee by more than 25% during the Covered Period or Alternative Covered Period when compared to the salary between January 1, 2020 and March 31, 2020 and the borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with social distancing requirements and other COVID-19-related restrictions that are put in place between March 1, 2020 and December 31, 2020.
- Eligibility for Owners with Certain Criminal Histories. Previously, SBA stated that if any owner with 20% or more of a stake in the applicant has been convicted of a felony within the last five years, the applicant was ineligible for a PPP loan. SBA’s Additional Revisions to the First Interim Rule now provides that if a 20%+ owner is presently incarcerated, indicted, or on probation or parole, or has been convicted of a felony involving fraud, bribery, embezzlement, or a false statement in a loan or federal financial assistance application within the last five years or any other felony within the last year, then the applicant is ineligible. In other words, the SBA has relaxed the look-back period for certain felonies. SBA’s most recently updated Borrower Application Form, issued on June 24, reflects this new relaxed eligibility.
- Borrower Information Made Public. Though not part of the PPP Flexibility Act, the SBA and U.S. Treasury Department issued a press release on June 19, 2020 indicating that they will release certain limited data about the recipients of PPP loans. Specifically, for loans over $150,000, SBA will disclose the business names, addresses, NAICS codes, zip codes, business type, demographic data, non-profit information, jobs supported, and loan amounts of borrowers. The amounts will be disclosed as ranges as follows:
- $350,000–$1 million
- $1 million–$2 million
- $2 million–$5 million
- $5 million–$10 million
For loans below $150,000, SBA will only release the total number of loans, aggregated by zip code, by industry, by business type, and by various demographic categories.
 The Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116-136 (2020).
 These calculations must exclude qualified sick leave or family leave for which credit is claimed under the Families First Coronavirus Response (FFCRA) Act, Pub. L. 116-127 (2020).
 The SBA and Treasury issued a new Question and Answer in its Frequently Asked Questions Document that explains that the promissory note for the PPP loan will state the term of loan. See Small Business Administration & Dep’t Treasury, Paycheck Protection Program Loans Frequently Asked Questions, 49.
 The borrower has the option to choose one of these two time periods. Seasonal employers will also be able to compare their Covered Period to either of these periods or to any consecutive 12-week period between May 1, 2019 and September 15, 2019.
 Previously, SBA intended to compare the FTEs on June 30, 2020 to the number of FTEs in the borrower’s pay period inclusive of February 15, 2020.
 This ignores any reductions from an inability to rehire individuals by December 31, 2020 and reductions in hours that the borrower offered to restore and the employee refused.