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Important PPP Update: June 4, 2020

**Note: The original text of this article has been updated as of June 18, 2020 to reflect subsequently issued guidance, including the June 16, 2020 Interim Final Rule and the updated Loan Forgiveness and EZ Loan Forgiveness applications and instructions. 

On Wednesday, June 3, 2020 the United States Senate unanimously passed the House version of the Paycheck Protection Flexibility Act, which was aimed at amending certain provisions of the Paycheck Protection Program authorized under the CARES Act.  This legislation, which was signed into law by the President on June 5, provided significant relief to Borrowers by extending the covered forgiveness period, providing additional “safe harbors” for FTE reductions, easing use of funds requirements, and lengthening the loan’s payback period.  As expected, the SBA and Treasury Department to have subsequently issued new guidance and clarifications, including updated loan forgiveness applications, to help implement the new changes.

Listed below are the key changes to the Paycheck Protection Program authorized under the new legislation and updated guidance.

  • The covered period has been changed from eight to 24 weeks, with covered periods ending no later than December 31, 2020.
    • Borrowers, however, may still elect to maintain an eight-week covered period for loans issued prior to June 5, 2020.
    • Additionally, under both the 8-week and 24-week period, Borrowers may continue to utilize an Alternative Payroll Covered Period for payroll and payroll related expenses only.  This period begins on the first day of the Borrowers first pay period following the receipt of PPP loan funds.
  • Borrowers must now spend a minimum of 60% of loan funds on payroll and related payroll benefits in order to receive loan forgiveness.  Under the Paycheck Protection Flexibility Act, loan forgiveness became subject to an “all-or-nothing” threshold, whereby the Borrower would receive no forgiveness if the 60% minimum was not met.  Almost immediately, the Treasury Department indicated that they would issue an administrative change to eliminate the “all or nothing” interpretation.  To remain consistent with prior guidance under the old 75%/25% rule Borrowers will now face a reduction in forgiveness if the 60% threshold is not met, not a loss in total forgiveness.
    • In practice, Borrowers should be able to easily meet this requirement due to the extension in the covered period.  Additionally, borrower’s with higher rent and utility costs will benefit from the expansion of loan funds available for non-payroll expenses.
  • Payroll caps have also been changed to correspond with the increase in the length of the covered period.
    • For Borrowers using a 24-week covered period:
      • Eligible compensation paid to individual employees is capped at $46,154 (the 24-week equivalent of $100,000 per year)
      • Eligible compensation paid to owners, owner-employees, self-employed individuals, or general partners is capped at $20,833 (the 2.5-month equivalent of $100,000 per year) or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower.
    • For Borrowers using an 8-week covered period:
      • Eligible compensation paid to individual employees is capped at $15,385 (the 8-week equivalent of $100,000 per year)
      • Eligible compensation paid to owners, owner-employees, self-employed individuals, or general partners is capped at $15,385 (the 8-week equivalent of $100,000 per year) or the 8-week equivalent of their applicable compensation in 2019, whichever is lower.
  • Borrowers now have until December 31, 2020 to remedy any reductions in FTE headcount and salary/wages to the levels in place as of February 15, 2020.  Previously, these remedies were required to be made by June 30, 2020.
  • Additional “good faith” exemptions were added to aid Borrowers who are having difficulty rehiring their workforce.  Loan forgiveness calculations will now disregard FTE reductions in situations where the Borrower is able to document in writing:
    • The inability to rehire individuals who were employees on February 15, 2020;
    • The inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
    • The inability to return to a pre-February 15, 2020 level of business activity due to compliance with social distancing and sanitation 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.
    • In addition, FTE reductions for employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours will not harm the Borrower’s loan forgiveness.
  • The loan payment deferral period has been extended.  Previously, loan payments were deferred for six months after the Borrower's loan origination date.  Now, Borrowers will be allowed to defer loan payments until the date on which the loan forgiveness application is submitted to their Lender, up to a maximum of 10 months from the end of the Borrower’s covered period.
  • The repayment period for unforgiven loan proceeds is now extended from two to five years.  The 1% interest rate remains unchanged.
  • Section 2301 of the CARES Act is now amended to allow PPP Borrowers to take full advantage of the allowed deferral of the employer portion of Federal payroll taxes.  This change enables Borrowers to defer payment of employer portion of Social Security payroll taxes until December 31, 2020.  Payment of the deferred taxes will be required in equal installments in 2021 and 2022.  Previously, PPP Borrowers were only eligible to defer employer Social Security payroll taxes up to the point a decision on loan forgiveness was made.

The extension of the covered period from eight to 24 weeks, coupled with the reduction in required payroll expenses necessary to receive loan forgiveness, will likely result in a situation where loan funds will be easily spent.  As a result, decisions regarding which payroll and non-payroll expenses are eligible under the Act will become less important, while the tracking of FTE headcount and calculations for salary/wage reductions will receive greater attention.

WEC will continue to monitor for new guidance and rule changes related to the Paycheck Protection Program and the associated loan forgiveness calculations.  Please bookmark WEC’s Media Hub to stay informed of all PPP updates.