Paycheck Protection Program Guidance for Small Business: Third Update

by G. Wythe Michael

In response to criticisms of the original Paycheck Protection Program and interpretations of the program released by the SBA and the Department of Treasury, Congress passed in early June the “Paycheck Protection Program Flexibility Act of 2020” (H.R. 7010) (the “PPPFA”). The PPPFA contains significant updates to the original program. Summarized below are some of the changes to the program. For additional detail and summary of the Paycheck Protection Program please see our previous posts on April 1 and April 3. Please contact us if you have questions regarding these provisions.

PPPFA Updates

The PPPFA contains the following updates:

  • The PPPFA increases the “covered period” from 8 weeks to the earlier of 24 weeks from the date of first disbursement or December 31, 2020. This means that there is a much longer period of time during which expenses qualify for forgiveness. Most businesses will want to use the 24 week covered period (although a business is certainly allowed to use the original 8 week period set forth in the original act).
  • Another big change was made to the forgiveness calculation. Now, a company must use at least 60% of the loan amount on payroll costs (this is a change from 75% of the total amount forgiven).
  • Under the original program, a company that furloughed or laid off workers was required to rehire those workers and restore wages by June 30, 2020 or face a reduction in the forgiveness amount. Now, a company has until December 31, 2020 to rehire workers and restore wages.
  • The PPPFA also provides relief for reductions in the forgiveness amount under certain circumstances. The reductions in forgiveness will not apply if a company can demonstrate that (1) it is unable to rehire its workers or hire new workers by December 31, 2020 or (2) new federal safety standards make it unable to return to the same level of activity it was operating at on February 15, 2020. Prior guidance from Treasury provides that in connection with rehiring, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Also, the employer must notify the applicable state unemployment agency. The Virginia form of notice can be found here. 
  • The commencement date for loan payments has been extended from 6 months to 10 months.  If a company has not applied for loan forgiveness by the 10 month date, payments must begin at that time.
  • Certain employer payroll taxes for 2020 may now be deferred by companies until 2021/2022 even after loan forgiveness (originally this deferral would end upon loan forgiveness).
  • For companies that have not applied for a PPP loan, the PPPFA provides that applications may be made until December 31, 2020.  Based on reports, approximately $100 billion remains available under the expanded Paycheck Protection Program as of the date of this post.  Also, new loans qualify for a 5 year payback period for any amounts that are not forgiven (up from 2 years).
  • The SBA has announced that it will promptly issue rules and guidance, a modified borrower application form, and a modified loan forgiveness application implementing the amendments to the PPP made in the PPPFA.

Clarification Regarding Need for Loans

The original CARES Act required all applicants to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Through several public announcements and a FAQ that appeared on the US Department of Treasury web site, significant confusion developed regarding the satisfaction of this requirement and possible enforcement of this requirement by the SBA and Treasury. Finally, in mid-May, a new FAQ #46 was released that provides additional clarity.

For any company that borrows less than $2 million under the program, the FAQ provides the following safe harbor: “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

For any company that borrows $2 million or more, the following guidance applies:  “SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.”

We are available to answer your questions about these provisions.

This summary contains a general, condensed summary of the most recently available version of the CARES Act and the PPPFA for information purposes. It is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.