And Implications of the New Paycheck Protection Program Flexibility Act

The Paycheck Protection Program (PPP) is a component of the CARES Act, which was signed into law on March 27, 2020.  It offers small businesses meeting specific criteria the ability to apply for low interest loans.  These loans can be forgiven if guidelines are properly followed.  Loans are available for the lesser of up to $10 million or 2.5 times the average monthly payroll of the business, subject to certain limits.  Costs that can be forgiven include payroll, business mortgage interest payments, business rent or lease payments and business utilities that are made in the first eight weeks following the date that the first loan proceeds are received, subject to MANY rules.

The intention of the PPP is to keep employees on payroll and the specific rules are vague and have left many business owners concerned if they are properly meeting loan requirements.  Some guidelines were provided by the SBA (Small Business Administration) on May 15th when they issued the Loan Forgiveness Application and other guidance continues to be provided.  Now the rules may be changing as the Paycheck Protection Program Flexibility Act passed the House on May 28th and the Senate on June 3rd and is heading to President Trump for his signature. 

The “Covered Period” can either be the 8 weeks (56-days) following the receipt of the first PPP loan money or the “Alternative Payroll Covered Period” which starts on the first day of the borrower’s first pay period following the receipt of the first PPP loan money.  Some employers may need to change their payroll procedures from monthly or semi-monthly to bi-weekly to better meet the PPP’s regulations.  If signed, the Paycheck Protection Program Flexibility Act would change the 8 weeks to 24 weeks.

The PPP includes the 75% Rule which states that 75% or more of the loan amount must be spent on payroll, health insurance and pension costs and 25% or less can be spent on eligible non-payroll costs in order to qualify for total loan forgiveness.  If less than 75% is spent on eligible payroll costs, then the percentage of forgiveness is reduced.  The Paycheck Protection Program Flexibility Act is looking to change the 75% Rule to a 60% Cliff Rule which would allow a greater portion of the loan to be used for non-payroll costs and still qualify for loan forgiveness.

As the purpose of the PPP is to keep employees on payroll, the rules require that all full-time equivalent employees (FTEEs) stay on payroll or are rehired by June 30th.  Some employers have laid-off some employees who later refuse to be rehired, which can make some or all of the PPP loan unforgivable.  The SBA and the Department of the Treasury have provided employers with guidance on how best to proceed.  They require the employer to provide a written offer of rehire for the same number of hours and at the same wage/salary to the laid-off employees and the employer must document the employee’s rejection of the written offer.  This process may however preclude the former employee from collecting unemployment benefits.  As you can see, there may be conflicts as to the employer working to follow the PPP rules and former employees looking to receive enhanced unemployment benefits.

PPP loans are administered by approved SBA lenders and the deadline to apply is June 30, 2020, unless new laws change this deadline.  For amounts that are not forgiven, PPP loans are 2-year loans at 1% interest.  The Paycheck Protection Program Flexibility Act would change the repayment period from 2-year loans to 5-year loans.  There is a 6-month deferral of repayment, but interest accrues during this deferral period.

As the regulations for PPP loans and forgiveness are complex and continue to change, it is best to work with your lender and accountant to ensure you are following the rules.  We are happy to work with you through this process.