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Paycheck Protection Program + FLEXIBILITY ACT OF 2020 – H.R.7010

Paycheck Protection Program + FLEXIBILITY ACT OF 2020 – H.R.7010

This bill was passed in the House on Thursday, May 28, 2020, and the Senate on Wednesday, June 3, 2020. Once the President signs the bill, it will become law; it is anticipated the President will sign the bill. The below commentary contains Lutz’s interpretation of the updates. Note, the below may change upon the SBA’s implementation of the bill.

CHANGES TO THE PPP IN H.R.7010 

  • PPP Loan Maturity: Updated to 5-year term from a 2year term (needs to be mutually agreed upon with the lender). 
  • Extension of the covered period. The borrower may select: 
    • Earlier of 24 weeks after PPP loan proceeds received or December 31, 2020, OR
    • Currently defined 8week covered period 
  • FTE Reduction and Salary/Hourly Wage Reduction Safe Harbor Date: Updated to December 31, 2020 from June 30, 2020.
  • FTE Reduction Test – Exemption based on employee availability: 
    • For employee reductions made between 2/15/20 – 12/31/20, these reductions will not be considered so long as the Borrower makes a good faith certification and documents that:
      • Borrower is unable to rehire the employees who were employed as of 2/15/20 AND unable to hire similarly qualified employees for those positions by 12/31/20, OR
      • Borrower is unable to return to same level of business activity that such business was operating at before 2/15/20 due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, Director of the Centers for Disease Control and Prevention, or Occupational Safety and Health Administration during the period from 3/1/20 – 12/31/20, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19
  • Payroll Requirement: reduced to 60% from 75% (amount of forgiveness that must have been spent on payroll). 
  • Deferral of Principal, Interest and Fees: Any payments are now deferred until forgiveness application is remitted to the lender from the SBA. 
  • If the borrower does not apply for forgiveness before ten months from the last day of the Covered Period, payments of principal, interest and fee will start on the date that is ten months after the last day of the Covered Period. 
  • Deferral of Payroll Taxes: PPP borrowers can delay payroll taxes per Section 2302(a) of the CARES Act.

 

FORGIVENESS CALCULATION UNCERTAINTIES AS A RESULT OF H.R.7010 

As can be expected, changes in the bill resulted in confusion as it relates to existing PPP provisions. Below is a list of the questions that will need to be clarified by the SBA. 

  • For the Salary Reduction Test: Is the average salary still determined based on the average over the entire covered period? Issues could arise for borrowers who temporarily laid employees off but now must average those salaries over the entire 24-week period. 
  • Will more clarity be provided on the FTE exception based on the compliance requirements established by the three named government entities? 
  • Does the 60% payroll requirement rule act as a cliff, in that if 60% of total forgiveness is not made up of payroll, the entire portion is non-forgivable? This would go against prior guidance in the forgiveness application. We do not believe it was intended for this 60% rule to act as a cliff. 
  • Does the Alternative Payroll Covered Period now extend 24 weeks? 
  • If a borrower chooses to maintain an 8-week covered period, will they be subject to the same 12/31/2020 Reduction Safe Harbor date? It would likely be more beneficial for these borrowers to measure at 6/30/2020. 

The next step in this process will be implementation guidance provided by the SBA. The application for forgiveness will likely change considering this new bill, and other key provisions could materially change. 

 

ADDITIONAL LUTZ GUIDANCE AS IT RELATES TO FTE REDUCTION TESTS 

The FTE reduction test was intended to reduce the amount of loan forgiveness afforded to recipients of PPP funds who still furloughed or laid off employees due to COVID-19. The FTE Reduction Safe Harbor test was implemented to relieve borrowers of this reduction in forgiveness if they increase headcount as of 6/30/20 (now 12/31/20) to 2/15/20 levels. 

The FTE Reduction and safe harbor test were well-intended and reasonable on paper. However, issues arose given reductions in employees (FTEs) for nonCOVID-19 reasons. To account for these nonCOVID-19 reductions in FTEs, the SBA added two exceptions when the application for forgiveness was released: 

FTE Reduction Exception #1: 

Any positions for which the borrower made a good-faith, written offer to rehire an employee during the covered period (or APCP), which was rejected by the employee. 

FTE Reduction Exception #2: 

Any employees who during the covered period (or APCP): 

  • Were fired for cause, 
  • Voluntarily resigned, or 
  • Voluntarily requested and received a reduction of their hours. 

Exceptions #1 and #2 apply only if the position in question was not filled by a new employee 

Similarly, bill H.R.7010 passed in both the House and the Senate provided two further “exceptions” for a reduction in FTEs. During the period beginning on 2/15/20 and ending on 12/31/20, the amount of loan forgiveness shall be determined without regard to a proportional reduction in the number of FTEs if a Borrower in good faith is able to document:  

FTE Reduction Exception #3: 

An inability to rehire individuals who were employees of the borrower on 2/15/20; and an inability to hire similarly qualified employees for unfilled positions on or before 12/31/20. 

FTE Reduction Exception #4: 

An inability to return to the same level of business activity as such business was operating at before 2/15/20, due 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 3/1/20, and ending 12/31/20, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19. 

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