Important Update to the Cares Act "PPPFA"

UPDATE of CARES ACT – Paycheck Protection Program Flexibility Act of 2020 “PPPFA”:

On Friday, June 5, 2020, the President signed into law the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”). This Act modifies aspects of the Paycheck Protection Program created by the CARES Act to provide relief to small businesses impacted by the COVID-19 pandemic. The purpose of the PPPFA is to ease some of the requirements imposed by the Small Business Administration in its implementation of the PPP loan program, and the PPPFA certainly accomplishes that.

Highlights of the PPPFA are (author Steven Goldstein, reprint from Sacks Tierney):

  • Extends the covered period for a PPP loan to the earlier of 24 weeks from loan origination, or December 31, 2020. Previously, proceeds from a PPP loan had to be spent within the eight-week period from loan origination.  This will allow businesses who are just now reopening, such as restaurants and bars, to have more time to spend their PPP loan proceeds, since many were closed and did not have payroll costs during the shorter covered loan period under the CARES Act.
  • Changes the requirement that 75% of the PPP loan proceeds must be used for payroll purposes in order to qualify for loan forgiveness. That requirement now is set at 60%. The other 40% must still be used for payment of a mortgage, rent, or utilities.
  • Under the CARES Act, eligibility for full loan forgiveness was based in part on a comparison of full-time employees (“FTEs”) as of June 30, 2020, to those employed during a prior comparison period. Loan forgiveness is reduced proportionately if the borrower’s FTEs are less at that time than during the comparison period. Thus, if a borrower could rehire workers to have a sufficient number of FTEs to allow it to avoid this proportionate reduction, the borrower needed to do this by June 30, 2020. The PPPFA extends until December 31, 2020, the time to rehire employees in order to avoid this proportionate reduction in loan forgiveness.
  • Changes the method of determining whether a borrower qualifies for loan forgiveness based on the number of employees it has retained. If the borrower can document in good faith that it is unable to rehire one or more employees for certain reasons, the amount of loan forgiveness will not be reduced based on those employees not being rehired. The reasons for failing to rehire under this exception are:
  • An inability to rehire an employee who was employed as of February 15, 2020, or an inability to hire a similarly qualified individual. This would prevent a borrower from being penalized if an employee chooses to not come back to work, due to the employee’s fear for his/her safety, for example; or
  • The borrower is unable to reopen to the same level as before the crisis due to it having to comply with requirements for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19. However, this exception is limited 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. Thus, an inability to reopen due to a need to comply with a state requirement, such as a Governor’s Executive Order, would not qualify for this exception, unless that state requirement is incorporating the federal requirement or guidance.
  • Extends the deferral of the loan repayment obligation to the date when the SBA determines the borrower’s eligibility for loan forgiveness and remits that determination to the lender. However, if the borrower fails to apply for loan forgiveness within ten months after the end of the loan’s covered period, then payments will start at that time. Even this provision results in an extension because the covered period has been extended under the PPPFA to December 31, 2020. Previously, loan repayment was deferred for a minimum of six months but not more than one year.
  • Allows recipients of PPP loans to be eligible for the deferral of payroll taxes that was included in the CARES Act. That deferral provision of the CARES Act allows businesses to defer the employer portion of their 2020 Social Security payroll tax obligations, so that one-half is payable on December 31, 2021, and the remaining one-half is payable on December 31, 2022. Previously, a business could not take advantage of that benefit if it received a PPP loan.
  • Extends the maturity date for repayment of a PPP loan to five years, from the previous loan term of two years. This provision only applies to new PPP loans issued after the passage of the PPPFA. The language of the PPPFA specifically permits (but does not require) lenders to mutually agree with borrowers of existing PPP loans to extend the maturity date on their loans.

Brief Summary of the Payroll Protection Program Portion of the CARES ACT:

(BBB webinar 3/29/20 Jonathan Gallagher, DEO, Shelley Adday. CHRO)

How it can benefit your business:

Paycheck Protection Program “PPP”, $350B loan program for businesses.  The intention is to provide unsecured (and forgivable) loans to small businesses with the goal to keep employees on the payroll.

  • Term period is 2/15/20 through 6/30/20
  • 100% government guaranteed
  • Can be 100% forgivable if utilized for specific expenses
  • Retroactive back to 2/15/20.  If the business laid-off employees, they can be rehired with no penalty and potentially include the number of employees into the forgivable calculation.

Who can apply for the loan:

  • Any business with less than 500 employees
  • Includes sole proprietors
  • All businesses that could qualify for an SBA loan before the COVID-19 crisis

Loan Details:

  • The loan amount is the lesser of $10M or 2.5X your average monthly payroll expenses.
  • Interest is capped at 4% and payments can be deferred up to 6 – 12 months
  • No credit check, no personal guarantee
  • Must have been in business and paid employees before 2/15/20

PPP – Loan Forgiveness for funds used within the 8 weeks following the loan origination:

The loan may be forgiven UP TO 100%.  which includes:

  • Payroll costs (during the 8 weeks following the origination date)
  • can include mortgage interest on commercial properties purchased before 2/15/20
  • if renting (must have signed the lease before 2/15/20) can add the rents for the 8 weeks following the origination of the loan
  • All utility payments (during the 8 weeks following the loan origination).

PPP – Calculation for maximum loan amount:

The loan application is based on the prior 12 months:

Add together:

  • Payroll costs – wages to employees and certain independent contractors (if acting like regular employees), employee’s income cannot exceed $100,000 annually
  • employer contributions to health insurance
  • Employer contributions to retirement

Above payroll costs divide by 12 = monthly “payroll costs”

Monthly payroll costs X 2.5 = maximum loan amount

Valuation of Forgiveness of the Loan:

Valuation shall be in the immediate 8 weeks following the origination of the loan.  Assume there will be a requirement to support payments.

EIDL Loan (Economic Injury and Disaster Loan) and PPP loan

The Economic Injury Disaster Loan Program (EIDL) can provide up to $2 million of financial assistance (actual loan amounts are based on amount of economic injury) to small businesses or private, non-profit organizations that suffer substantial economic injury as a result of the declared disaster, regardless of whether the applicant sustained physical damage.

You caan apply for both, but you cannot double dip, that means you cannot use both funds for the same purpose.

public service student loans

Resources:

Better Business Bureau webinar: CARES Act and Families First Cononavirus Response Act

US Senate Committee on Small Business & Entrepreneurship – The Small Business Owner’s Guide to the CARES Act.

US Chamber of Commerce – Coronavirus EMERGENCY LOANS, Small Business Guide and Checklist

MUSINGS FROM DIANE:

Whenever there is new law, or a new interpretation of an existing law – SLOW DOWN.  The truth is no one really knows what it means or what the consequences will be if you act.  The process is the following: new law is created (either through the legislative process or the courts), creative lawyers decide to apply the new law to certain facts, the court may or may not agree with the lawyer’s interpretation and come out with a decision that does or or does not follow the new law.  One of the parties may appeal and the case goes up to a higher court.  Years later there is a “final” decision until the law changes again.
When it comes to the new law dealing with COVID-19, no one, including the people who wrote the law, really know how that law will be interpreted and applied.  Many times you can ask the drafters of the law and they will give opposing opinions on what something means.  So, be very cautious in taking the advice from anyone, including a lawyer, how to interpret this extremely complicated law, and the others that will definitely follow.  Take is slow before acting.