Important Updates Regarding Your PPP Loan
By Jack Gannon Jr.
Attorney at McGuire, Craddock & Strother, P.C
June 10, 2020
In an earlier article, we summarized key information that borrowers under the Paycheck Protection Program (“PPP”) need to know. Despite initial guidance and instructions from the Small Business Association (“SBA”) and the United States Department of the Treasury (“U.S. Treasury”), many questions were left unanswered and uncertainty ensued. Ongoing concern regarding the underlying PPP framework has lingered.
Recent developments have addressed and relieved some of this uncertainty and concern. On May 15, the highly anticipated PPP loan forgiveness application and instructions were released. Shortly thereafter, on May 22, two new interim rules were issued, shedding additional light on the PPP. One of the interim rules addresses loan forgiveness, while the other addresses the loan review process and responsibilities of borrowers and lenders. Then, on June 3, Congress passed new legislation entitled the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), which amends and supplements the PPP in many notable ways.
This article summarizes key takeaways from the Flexibility Act and the aforementioned interim final rules. If your business has obtained or plans to obtain a PPP loan, we encourage you to review the information below, as well as the source material itself.
Paycheck Protection Program Flexibility Act of 2020
The Flexibility Act attempts to address several PPP issues with which borrowers have expressed concern. Notable amendments and supplements to the PPP as a result thereof are set forth below.
- Extended Forgiveness Period. The end of the forgiveness period (i.e., the period during which uses of loan proceeds are eligible for forgiveness) is extended from the date that is eight weeks from loan origination to the earlier of (1) the date that is 24 weeks from loan origination or (2) December 31, 2020. Borrowers with loans that precede the Flexibility Act can elect to retain the eight-week forgiveness period.
- Required Use of Loan Proceeds. To receive loan forgiveness, the borrower must use at least 60 percent of loan proceeds for payroll costs, meaning up to 40 percent of loan proceeds can be used for other approved purposes. Notably, it appears that if this requirement is not met, the borrower will not be eligible to receive any loan forgiveness whatsoever. Originally, borrowers were required to use at least 75 percent of loan proceeds for payroll costs, and any failure to do so would result in a reduction, not necessarily a complete elimination, of loan forgiveness.
- Extended Restoration Safe Harbor Deadline. For purposes of determining loan forgiveness reductions, the deadline by which borrowers can restore employment or wage levels is extended from June 30, 2020 to December 31, 2020.
- Inability to Restore Workforce or Resume Business. The Flexibility Act stipulates that the amount of loan forgiveness will be determined without giving consideration to the reduction in the number of full-time equivalent (“FTE”) employees if the borrower can document either (A) its inability to rehire individuals previously employed on February 15, 2020, and its inability to hire similarly qualified employees on or before December 31, 2020, or (B) its inability to return to the same level of business on which it was operating as of February 15, 2020, due to compliance with certain government requirements or guidance related to COVID-19.
- Extended Maturity Date. The minimum maturity date of all new loans is five years. For existing loans, borrowers and lenders can mutually agree to extend the maturity date to meet the 5-year minimum.
- Timing of Loan Repayment. With respect to any portion of the loan that is not forgiven, the payment deferral period is changed from six months to the date on which the determined amount of forgiveness is remitted to the lender. If the borrower does not seek loan forgiveness, the deferral period is 10 months from the last day of the forgiveness period.
Interim Final Rule on Loan Forgiveness
The interim final rule on loan forgiveness answers numerous questions raised after the release of the forgiveness application form. A substantial portion of the rule reiterates and clarifies aspects of the application instructions. Notable points of guidance are listed below.
- Commencement of Forgiveness Period. Borrowers can choose that their forgiveness period commence on either of the following dates: (1) the date borrower’s PPP loan is disbursed by the lender; or (2) the first day of the first payroll cycle in the covered period.
- Timing of Costs (Payroll and Non-Payroll). Costs that are either paid or incurred during the forgiveness period are eligible for forgiveness. In other words, costs that were incurred prior to the forgiveness period but paid during the forgiveness period are eligible. Similarly, costs that were incurred during the forgiveness period but paid after the forgiveness period are also eligible as long as such costs are paid on or before the next regular payroll date (for payroll costs) or the next regular billing cycle (for non-payroll costs). Payroll costs are considered paid on the day paychecks are distributed or an ACH credit transaction is initiated. Payroll costs are considered incurred on the day the employee worked and earned the applicable pay.
- Furloughed Employees, Bonus, and Hazard Pay. Compensation paid to furloughed employees, hazard pay, and bonuses are eligible for forgiveness. The compensation limit of $100,000 per employee continues to apply.
- Owner-Employees and Self-Employment. The amount of loan forgiveness for owner-employees and self-employed individuals’ payroll compensation is limited to the lesser of (1) 8/52 of 2019 compensation or (2) $15,385 per individual in total across all businesses. Notably, the term “owner-employee” is not defined, leaving room for uncertainty.
- Reductions in FTE Employees. The interim rule restates that the loan forgiveness amount may be reduced as a result of reductions in the borrower’s FTE employees. If the average number of FTE employees during the covered period is less than the number in the selected reference period, then the forgiveness amount is proportionally reduced. For example, if a borrower had 20 FTE employees during the reference period and only 15 FTE employees during the covered period, only 75 percent (75%) of otherwise eligible expenses would be available for loan forgiveness.
An employee who was paid for 40 hours or more on average each week has a full-time equivalency of 1.0. Employees paid for less than 40 hours of work on average each week have full time equivalencies equal to either of the following, at borrower’s election and uniformly applied to all such employees: (1) the ratio of the average number of hours paid during the covered period divided by 40 (e.g., an employee paid for 10 hours would have a full time equivalency of 0.25); or (2) an equivalency of 0.5.
- Reductions in Salaries and Wages. The interim rule also restates that the loan forgiveness amount may be reduced dollar for dollar with respect to any salary or wage reductions in excess of 25 percent for each employee. Importantly, borrowers will not be penalized twice for salary or wage reductions to the extent attributable to FTE reductions. In other words, the forgiveness reduction attributable to salary and wage reductions is only applicable to salary and wage reductions that are independent of FTE reductions.
- Rejection of Offer to Rehire or Restore Hours. The forgiveness amount will not be reduced for any FTE employee who is terminated or has their hours reduced if such employee rejects an offer from the borrower to rehire such employee or restore such employee’s hours. In order to qualify for this exception with respect to any employee, the following requirements must be satisfied: (1) the borrower made a good faith, written offer to rehire or restore hours during the covered period; (2) the offer was for the same compensation and same number of hours as previously provided; (3) the offer was rejected; (4) the borrower has maintained records documenting the offer and rejection; and (5) the borrower informed the applicable state unemployment insurance office of such rejected offer within 30 days of the rejection.
- Terminations for Cause and Resignations. The forgiveness amount will not be reduced as a result of employees who are fired for cause, voluntarily resign, or voluntarily request a reduced schedule during the covered period. For purposes of determining the forgiveness reduction, the borrower may maintain the same full-time equivalency for any such employee as was in place prior to the applicable FTE reduction event.
- Restoration Safe Harbor. The interim rule reiterates that the borrower can restore forgiveness amounts by rehiring employees or reversing reductions in salaries or wages, in each case on or before the restoration deadline (December 31, 2020). It remains unclear how long a rehired employee needs to remain employed for purposes of this safe harbor.
- When to Seek Loan Forgiveness. Borrowers can apply for loan forgiveness as early as eight weeks following the date of disbursement of their loan.
Interim Final Rule on Review Procedures and Responsibilities
The interim final rule on review procedures and responsibilities provides additional guidance with respect to forgiveness timing, the loan and forgiveness review procedure, and determinations of ineligibility. Key highlights are set forth below.
- Timing of Forgiveness. Lenders are required to issue a decision on forgiveness within 60 days of receipt of the completed forgiveness application. A lender’s decision may take the form of an approval (in whole or in part), a denial, or (if directed by the SBA) a denial without prejudice due to a pending SBA review. Subject to the SBA’s review and approval, the SBA will remit the appropriate forgiveness amount to the lender, plus accrued interest, within 90 days after the lender’s decision.
- SBA Review. The SBA has the right to review any forgiveness application and assess borrower eligibility, the loan amount, use of proceeds, and the forgiveness amount. The SBA may undertake a review of any loan at any time, regardless of loan size. Borrowers must retain PPP documentation for at least six years after the date the loan is forgiven or repaid in full and must allow authorized representatives of the SBA to access such files upon request.
- Determination of Ineligibility. If documentation indicates that the borrower may be ineligible to receive a PPP loan or the claimed amount of loan forgiveness, the SBA will require the lender to contact the borrower or may contact the borrower itself for additional information. If it is determined that a borrower was ineligible for the PPP loan (in whole or in part, as applicable) or the claimed loan forgiveness amount, then the loan may not be forgiven (in whole or in part, as applicable), and the SBA may seek repayment of the outstanding loan balance or pursue other remedies. The borrower has the right to appeal any determination of ineligibility. The details of the appeal process will be provided in future SBA guidance.
- Lender Responsibilities. For each forgiveness application, lenders must confirm a variety of information and matters pertaining thereto, as more fully described in the interim rule. Although lenders are entitled to rely on borrower representations, lenders are expected to perform a good-faith review, in reasonable time, of the calculations and supporting documents concerning loan forgiveness. We encourage lenders of PPP loans to carefully review the interim rule (and other interim rules issued by the SBA), which contains numerous requirements, expectations, scenarios, and examples applicable to lenders. Notably, lenders are not eligible to receive processing fees from any PPP loans that the SBA determines were made to ineligible borrowers, and any such fees are subject to remittance to the SBA. Similarly, if lenders fail to satisfy their obligations with respect to any PPP loan, the SBA may require repayment of the processing fees therefrom and decide that such loan will not be guaranteed.
The Flexibility Act certainly appears to be a big step in the right direction for PPP loan borrowers. But is this “act” too little too late? For example, the extension of the forgiveness period from 8 weeks to 24 weeks is extremely helpful for recent or new borrowers, but can the same be said for borrowers who have already burned through their PPP loan funds in reliance on the original 8-week forgiveness period? Such borrowers may have expended funds and conducted business much differently – perhaps with more long-term planning in mind – had they been afforded a forgiveness period of 24 weeks at the onset.
Similarly, although the new interim rules answer many questions concerning PPP loan forgiveness and the review process, uncertainty remains with respect to key issues. For instance, determining whether an individual constitutes an “owner-employee” for purposes of loan forgiveness could be difficult since the term “owner-employee” is not defined. Additionally, for purposes of the restoration safe harbor, it’s unclear how long a rehired employee must be retained beyond the restoration deadline.
This article is intended to serve as a general overview of the Flexibility Act and the aforementioned interim final rules. If your business has obtained or plans to obtain a PPP loan, we recommend also reviewing more detailed and comprehensive sources, such as the SBA’s PPP webpage, the U.S. Treasury’s PPP webpage, the links and sources listed therein, and the sources used to write this article described below. Should you have any questions or need assistance regarding your PPP loan, please contact Jack Gannon Jr. at 214-954-6808 or firstname.lastname@example.org, or reach out to any other attorney of our firm.
The information set forth in this article was primarily obtained from the following sources: (i) the text of the PPP set forth in Sections 1101 – 1114 of the CARES Act; (ii) the text of the Paycheck Protection Program Flexibility Act of 2020; (iii) the SBA’s Interim Final Rule on loan forgiveness; (iv) the SBA’s Interim Final Rule on loan review procedures and related borrower and lender responsibilities; (v) Frequently Asked Questions concerning the PPP provided by the SBA as of May 27, 2020; and (vi) the PPP Information Sheet provided by the U.S. Treasury.
This article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions. The information contained herein is current as of the date of this article.