May 1, 2021HHS limits the use of guidance documents in civil enforcement actions
June 5, 2020
This week the Senate passed the Paycheck Protection Program Flexibility Act of 2020 (the “Act”). Once signed into law by the President, the Act will make significant and welcome changes to the Paycheck Protection Program (the “PPP”). This Alert highlights those changes and provides updates to our prior Alert.
As a refresher, the CARES Act’s Paycheck Protection Program established a new loan program for small businesses (500 or fewer employees) to pay for certain payroll, mortgage interest, rent, and utility payments during the COVID-19 crisis. Under the original rules, if you sought forgiveness of your PPP loan, you were required to use these funds in a short 8-week period and only 25% of your forgiveness amount could be used on non-payroll costs. Under these restrictions and due to a slowdown in operations, some small business have found it difficult to use all of their PPP loan proceeds before the 8-week forgiveness period expired. As discussed below, the Act eases these restrictions and permits you additional flexibility in managing and maintaining your business during the pandemic.
Under the CARES Act, PPP loan proceeds used by a small business to pay for approved expenses (discussed below) during the 8-week period following the origination date of the PPP loan (the “Forgiveness Period”) are eligible for forgiveness. The Act extends the Forgiveness Period to 24-weeks after the date the loan is disbursed. However, you can still to use the 8-week period. If you are able to use 100% of your PPP loan on approved expenses during the original 8-week period, you are still permitted to submit your forgiveness application and don’t have to wait until the expiration of the 24-week period to apply.
Your PPP loan forgiveness amount is measured over the 24-week period after the loan is disbursed (or if you elect, the 8-week period). Under the CARES Act, at least 75% of your forgiveness amount had to be used on “payroll costs.” As explained in detail in our prior Alert, payroll costs include up to $100,000 in annual cash compensation for each employee ($15,385 per employee over the eight-week period), including:
The Act reduces the “payroll cost” requirement from 75% to 60%. You can now claim forgiveness on up to 40% of your PPP loan proceeds for non-payroll costs such as mortgage interest, rent, and utilities.
As a reminder, earlier guidance issued by the Small Business Administration (the “SBA”) allows you to simplify your tracking by choosing to start your Forgiveness Period with the first day of the first pay period following your PPP loan disbursement (known as the “Alternative Payroll Covered Period”). This same Alternative Payroll Covered Period will continue to be available in determining the start of the 24-week period.
The Act also makes significant changes to how you calculate a reduction in your forgiveness amount. Under the CARES Act, your PPP loan forgiveness amount would have been reduced if, during the Forgiveness Period, you reduced wages of any employee earning salary or wages of $100,000 or less by more than 25% (determined by annualizing salary or wages during the Forgiveness Period) or you reduced your full-time equivalent employee (“FTE”) count. These reductions could be avoided to the extent that you restored wage levels or rehired FTEs by June 30, 2020. The Act now extends this deadline for restoring wage levels and rehiring employees to December 31, 2020.
The Act also provides a welcome safe-harbor if you are not able to rehire FTEs by December 31, 2020. You are not required to count FTEs who are not rehired by December 31, 2020, if in good faith you can document:
This safe-harbor leaves a lot of room for interpretation, so we anticipate that the SBA will need to issue further guidance clarifying how you will demonstrate your inability to rehire an FTE or your inability to return to normal operations. Similar to guidance issued by the SBA in its forgiveness application form, we expect that one example of a situation where you may claim that you are not able to rehire an FTE will be if you can document a written offer of rehire (at the same compensation levels) and the employee’s rejection of that offer, and perhaps an unfilled job posting for that position. We also believe that guidance would be welcomed as to whether your inability to return to your pre-February 15, 2020 business activity levels could also be as a result of state or local orders relating to COVID-19.
Note that in determining any FTE reductions, you will be permitted to ignore reductions due to an FTE who was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours.
Under the CARES Act, only employers and self-employed individuals who did not seek PPP loan forgiveness were permitted to delay payment of their employer share (6.2%) of Social Security taxes (not the Medicare tax portion) that they otherwise would owe in 2020. Fifty-percent of the deferred Social Security taxes were due December 31, 2021, and the remainder were due December 31, 2022. This relief was not available to you if you or your affiliates intended to claim any PPP loan forgiveness.
The Act removes this restriction. Effective for tax payments due after March 27, 2020, PPP loan recipients who plan to claim loan forgiveness can also choose to delay payment of their Social Security taxes.
The Act does not make any changes to the forgiveness application form released by the SBA on May 15, 2020. However, we anticipate that the SBA will release a revised application form to reflect the changes made by the Act. As a reminder, this application is only a form, so each financial institution may create its own version of the application. If you have already reached out to your PPP lender and obtained its application form, you should ask the lender if it will be updating the form and when that updated version will be available. If you have not yet reached out to your lender for a copy of its application form, you should do so in order to ensure that you are gathering the documentation and other information that you will eventually need to obtain your lender’s approval of your forgiveness application. Note that the SBA still has not issued guidance on the deadline for submitting a forgiveness application.
One rule that has not changed is that if you or any of your affiliates received a PPP loan (and did not repay it by May 14, 2020), you are prohibited from taking advantage of the employee retention credit (“ERC”) under the CARES Act. As a reminder, the ERC is a fully refundable payroll tax credit that is based on certain qualified wages (including qualified health expenses) that eligible employers pay to their employees between March 13, 2020, and December 31, 2020. The Act does not make changes to this restriction.
The Act also provides the following relief:
The Nelson Mullins Employee Benefits Group is ready to assist with questions or compliance steps. Please contact one of our Employee Benefits attorneys or the Nelson Mullins attorney with whom you work. For additional information on COVID-19 related issues, please visit the Nelson Mullins COVID-19 resource page.
These materials have been prepared for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel.