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Are We There Yet? SBA Issues Revised Guidance to Harmonize PPP with Flexibility Act Changes

Corporate and Securities Alert | June 23, 2020
By: Ryan J. Udell and Adam J. Chelminiak

The Payroll Protection Program Flexibility Act of 2020 (Flexibility Act), enacted on June 5, 2020, made a series of significant changes to the Paycheck Protection Program (PPP) that were designed to accommodate borrowers who were unable to return to normal business activities in the timeframe required to preserve eligibility for full loan forgiveness.

We discussed the Flexibility Act in detail here. But to quickly recap, the Flexibility Act made the following material changes to the PPP:

  • The covered period during which loan amounts could be used for forgivable purposes was extended from eight weeks to 24 weeks.
  • 60% of the loan must be used for payroll costs, and up to 40% can be used for permitted non-payroll costs (earlier guidance mandated a 75% payroll/25% non-payroll allocation).
  • Added new statutory exemptions to the reductions in loan forgiveness amount based on FTE reductions in circumstances where the borrower is unable to rehire employees or the borrower is unable to return to prior levels of business activity due to compliance with health and safety requirements.
  • The maturity for the balance of any PPP loans that were made after June 5, 2020 and are not eligible for forgiveness was extended to five years.

Following the enactment of the Flexibility Act, the U.S. Small Business Administration (SBA) and the U.S. Department of the Treasury (Treasury) released updated guidance in the form of interim final rules, revised loan forgiveness applications and public statements intended to amend and synchronize prior PPP guidance with the recently-enacted evolution of the PPP. This alert summarizes the most significant changes made in the various forms of revised guidance.

Maximum Per-Employee Payroll Costs

Prior to the enactment of the Flexibility Act, the maximum amount of PPP loan proceeds that could be used for the cash compensation of any single employee was $15,385 (i.e., eight weeks’ worth of a maximum annual salary of $100,000). The maximum “owner compensation replacement” amount payable to any owner-employee,[1] a self-employed individual or general partner was similarly capped at an eight-week equivalent amount. But when the Flexibility Act extended the covered period to 24 weeks, it was broadly assumed that these maximum amounts might increase as well.

A new SBA interim final rule, as well as the new forgiveness applications, now confirm that the maximum cash payroll costs payable to any individual employee during a 24-week covered period is $46,154. The maximum “owner compensation replacement”, however, is capped at a two and a half-month equivalent of 2019 net profit (up to $20,833) in order to prevent windfalls to business owners that Congress did not intend when seeking to keep employees on payroll.

From a practical perspective, the maximum per-employee amount of $46,154 will only be fully forgivable if the borrower is able to rely on an exemption to forgiveness reduction based on FTE or salary/wage reductions. Because the PPP loan amount is equal to two and a half months’ worth of payroll costs, the borrower would only be able to pay the maximum cash payroll costs over a 24-week period if it had reduced the hours worked or compensation paid to other employees.

Revised Forgiveness Applications

The SBA released two new versions of the loan forgiveness application, both of which are intended to make the process of receiving loan forgiveness easier and more efficient. The new full forgiveness application (Full Application) is a streamlined version of the previously-released forgiveness application. The new Full Application is largely designed to conform to the changes to the program made by the Flexibility Act. It does, however, explicitly answer the open question left by the Flexibility Act by stating that reinstatement of FTE or salary/wage reductions can be made by either December 31, 2020 or the earlier date that Full Application is submitted. The original forgiveness application fixed the reinstatement deadline at a particular date (June 30, 2020).

In addition to the Full Application, SBA released a new short-form Form 3508EZ (EZ Application) that can be used by any borrower in one of the following categories:

  • The borrower is a self-employed individual, independent contractor or sole proprietor who had no employees and did not include any employee salaries in its computation of average monthly payroll in the PPP application;

OR

  • (1) The borrower did not reduce the annual salary or hourly wages of any employee by more than 25% during the Covered Period (or Alternative Covered Period) compared to January 1, 2020 – March 31, 2020 and (2) the borrower did not reduce the number of employees or average paid hours of employees between January 1, 2020 and the end of the Covered Period (or Alternative Covered Period).

OR

  • (1) The borrower did not reduce the annual salary or hourly wages of any employee by more than 25% during the Covered Period (or Alternative Covered Period) compared to January 1, 2020 – March 31, 2020 and (2) the borrower was unable to operate during the Covered Period (or Alternative Covered Period) at the same level of business activity as before February 15, 2020 due to compliance with the requirements established, or guidance issued, between March 1, 2020 – December 31, 2020 by the Secretary of Health and Human Services (HHS), the Center for Disease Control and Prevention (CDC) or the Occupational Safety and Health Administration (OSHA) related to the maintenance of standards of sanitation, social distancing or any other work or customer safety requirement related to COVID-19.[2]

The EZ Application does not require calculations or reductions of the forgiveness amount based on the borrower’s reductions in full-time equivalents and/or salary or hourly wages paid to employees during the Covered Period (or Alternative Covered Period). Instead, the borrower is required to certify that it satisfies one of the forgoing criteria. If eligible, the borrower is required to provide less supporting documentation make fewer calculations compared to the Full Application.

Both the Full Application and the EZ Application give the borrower the option to elect to use the original eight-week covered period in which the borrower is able to use funds and be eligible for forgiveness if the borrower’s loan was made before June 5, 2020.

Disclosure of PPP Recipients

Following protracted negotiations with members of Congress seeking greater transparency, the SBA and the Treasury announced plans to publicly release a data set identifying recipients of PPP loans. Under the bipartisan compromise announced on June 19, 2020, the SBA will disclose the business name, address, NAICS code, zip code, business type, demographic data and number of jobs supported of each borrower that received a PPP loan of $150,000 or more. The disclosure will not reveal the exact dollar amount of the loan, but instead will identify the amount as being within one of the following ranges:

  • $150,000 – $350,000
  • $350,000 – $1,000,000
  • $1,000,000 – $2,000,000
  • $2,000,000 – $5,000,000
  • $5,000,000 – $10,000,000

Recipients of PPP loans less than $150,000 will not be identified.

Felony Eligibility

SBA’s first interim rule provided that an applicant is ineligible to receive a PPP Loan if an owner of 20% or more of the applicant’s equity has been convicted of a felony within the past five years. Under revised guidance, however, this five-year lookback period now only applies to certain felonies.

Any owner of 20% or more of the equity of the applicant has been convicted of (i) a felony involving fraud, bribery, embezzlement or a false statement in a loan application or application for federal financial assistance in the last five years or (ii) any other felony within the last year.

The rule that applicants are ineligible if a 20% or more owner is incarcerated, on probation, on parole or presently subject to an indictment, criminal information, arraignment or other means by which formal criminal charges are brought in any jurisdiction has not been changed.

If you have questions or would like more information, please contact Ryan J. Udell (udellr@whiteandwilliams.com; 215.864.7152), Adam J. Chelminiak (chelminiaka@whiteandwilliams.com; 215.864.7078) or another member of the Corporate and Securities Group.

As we continue to monitor the novel coronavirus (COVID-19), White and Williams lawyers are working collaboratively to stay current on developments and counsel clients through the various legal and business issues that may arise across a variety of sectors. Read all of the updates here.


[1] The SBA has not clearly defined the meaning of “owner-employee.” The term is not used in the CARES Act and was instead introduced in an SBA interim final rule on loan forgiveness that described “owner-employee” as a type of owner (along with “Schedule C filer” and “general partner”) that is subject to a separate cap on payroll compensation than employees. There is a solitary reference to “owner-employees of an S-corporation” in the instructions for PPP Schedule A on the loan forgiveness application, but the term is otherwise used without clear context or explanation. This suggests that the term may be intended to refer specifically S-corporation owners, but further confirmation from the SBA and the Treasury is required.

[2] We are still waiting for clarification from the SBA as to whether the “unable to operate” at the same level of business activity is available based on compliance with state or local requirements or is strictly limited to guidance at the federal level from HHS, CDC and/or OSHA.

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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