Amendments to CARES Act Paycheck Protection Program

June 4, 2020

On May 28, 2020, the House of Representatives passed H.R. 7010, which effects a number of amendments to the CARES Act impacting the Paycheck Protection Program (PPP) term and forgiveness provisions. Late on June 3, 2020, the Senate also passed H.R. 7010 without revision, and H.R. 7010 is expected to be signed into law by President Trump, according to media reports.

H.R. 7010 makes a number of important changes to the PPP and a related change to the payroll tax deferral in Section 2302(a) of the CARES Act, some of which are given retroactive effect and all of which are summarized below.

Section 2 of H.R. 7010 (Prospective Effect)

  • Extension of Covered Period to a Minimum of Five Years: Section 2(a) of H.R. 7010 prospectively creates a minimum term of five years for all new PPP loans made after the effective date of the law. Currently, Section 7(a)(36)(K)(ii) of the Small Business Act (which was established by Section 1102 of the CARES Act) specifies only a maximum term of 10 years, and subsequent SBA guidance limited the term of all PPP loans to two years. After the effective date of H.R. 7010, all new PPP loans must have a term of at least five years. (This amendment in H.R. 7010 does not make it clear whether the five-year term is intended to commence on the date of forgiveness, which is when the maximum 10-year term would commence, or could commence earlier, such as on the origination date.) Additional Treasury Department and SBA guidance will be required to implement this change, since H.R. 7010 alters existing guidance establishing a two-year term for all PPP loans.
  • Effect on Existing PPP Loans: Section 2(b) of H.R. 7010 provides that, with respect to PPP loans in existence prior to the effective date of H.R. 7010, PPP lenders and borrowers are not prohibited from renegotiating the term of the existing PPP loan to conform the term to the minimum five-year and maximum 10-year term provided for new PPP loans, but the provision does not require lenders or borrowers of existing PPP loans to do so.

Section 3 of H.R. 7010 (Retroactive Effect)

Section 3 of H.R. 7010 makes a number of important changes to the PPP, each of which is retroactively effective as though included in the original CARES Act.

  • Availability of PPP Loans: Section 3(a) of H.R. 7010 amends Section 7(a)(36) of the Small Business Act (which is the PPP provision established pursuant to Section 1102 of the CARES Act) to extend the defined term “covered period” for purposes of Section 7(a)(36) of the Small Business Act, from June 30, 2020, to Dec. 31, 2020.

This makes new PPP loans available until the first of the following to occur: Dec. 31, 2020; and the date the funds allocated to the program run out. However, Section 3(b)(1) of H.R. 7010 also establishes Dec. 31, 2020, as the outside date for use of PPP loans to obtain forgiveness (see more details below). As a result, the practical outside date for issuance of a PPP loan most likely will be some time prior to Dec. 31, 2020, as is sufficient to provide a PPP borrower enough time to use the PPP loan funds for forgivable purposes prior to Dec. 31, 2020.

That said, a compromise with Sen. Ron Johnson (R-Wis.) to obtain unanimous consent of the Senate to H.R. 7010 resulted in Senate Majority Leader Mitch McConnell (R-Ky.) “along with the leaders of the Senate and House small business committees sign[ing] a letter clarifying that an extension of the Paycheck Protection Program to the end of December would apply only to spending and not extend the application deadline the small business committees of the House and the Senate are expected to submit.” (See June 3 Roll Call article.) Further guidance from Treasury and SBA is required to confirm implementation of this concept, notwithstanding the express provisions of H.R. 7010 to the contrary.

In addition, as of June 1, 2020, according to a report the Treasury Department published on its website, just under $90 billion in PPP loan funds remain available, and it is unclear whether or the extent to which these amendments will result in renewed demand for the remaining available funds.

  • Forgiveness Amendments: Section 3(b) of H.R. 7010 amends several provisions of Section 1106 of the CARES Act, which established the forgiveness requirements for PPP loans.

    • Extension of Forgiveness Covered Period to 24 Weeks. Section 3(b)(1) of H.R. 7010 extends the “covered period” for purposes of forgiveness of PPP loans under Section 1106 of the CARES Act to the earlier of (a) 24 weeks from the date of origination of the PPP loan and (b) Dec. 31, 2020. This replaces the current forgiveness covered period of eight weeks from the date of origination. Although this change is retroactively effective for all PPP loans, under Section 3(b)(3) of H.R. 7010, existing PPP borrowers may elect to keep the original eight-week covered period for forgiveness.

    • Extension of Rehire and Compensation Safe Harbors. Section 3(b)(2)(A) of H.R. 7010 retroactively extends the date by which a borrower must demonstrate that it has eliminated any reduction in full-time equivalent employee head count and/or reduction in cash compensation to any employee in accordance with Section 1106(d)(5)(B) of the CARES Act, from “not later than June 30, 2020” to “not later than December 31, 2020.” There is also an additional rehire exemption, which is discussed in the next bullet point.

      Note that no provision of H.R. 7010 permits existing PPP borrowers that elect to retain the original eight-week “covered period” for purposes of forgiveness to also elect to use June 30, 2020, as the date for determination of whether these safe harbors apply. Furthermore, if Dec. 31, 2020, is the only measurement date for determination of whether the safe harbors apply, then many forgiveness applications that will rely on these safe harbors for maximum forgiveness cannot be submitted until after Dec. 31, 2020, significantly pushing out the forgiveness calculation period for many PPP borrowers. SBA has previously interpreted the phrase “no later than” June 30, 2020, to mean “as of” June 30, 2020, for purposes of forgiveness, but SBA and the Treasury Department appear to have leeway under H.R. 7010 to interpret “no later than” more broadly to eliminate undue delays in the forgiveness process. Additional guidance from the Treasury Department and SBA is necessary to understand how the safe harbors will be implemented after giving effect to H.R. 7010.

    • New Rehire Exemption. Section 3(b)(2)(B) of H.R. 7010 creates a new clause (7) to Section 1106(d) of the CARES Act providing that each PPP borrower may determine the forgiveness amount of its PPP loan without regard to the proportional reduction in the number of full-time equivalent employees if and to the extent such reductions result from (a) a documented inability to rehire employees who were employed on Feb. 15, 2020, or to rehire similarly qualified replacement employees by Dec. 31, 2020, due to (b) a documented inability to return to the same level of business activity as before Feb. 15, 2020, due to compliance with federal (but not state or local) health and safety requirements or guidance (including from the Department of Health and Human Services, the Centers for Disease Control and Prevention, and OSHA) issued between March 1, 2020, and Dec. 31, 2020, that was related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

      Additional guidance from the Treasury Department and SBA will be necessary to confirm whether they interpret this new exemption to apply only to the full-time equivalent head count reduction or also to the compensation reduction portion of the forgiveness calculation. An updated borrower forgiveness application also must be provided to implement the H.R. 7010 amendments to the forgiveness provisions of the CARES Act.

    • Limitation on Forgiveness. Section 3(b)(2)(B) of H.R. 7010 also inserts a new clause (8) to Section 1106(d) of the CARES Act that overrides existing guidance requiring that at least 75 percent of the forgiveness amount must be for eligible payroll costs, replacing that guidance with a requirement that PPP borrowers “shall use at least 60 percent of the covered loan amount for payroll costs, and may use up to 40 percent of such amount for any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), any payment on any covered rent obligation, or any covered utility payment.”

      Sen. Marco Rubio (R-Fla.) previously indicated that he understands that “the way the Treasury has told us they are going to interpret that bill — if you don’t spend 60% of your money on payroll, if you only spend 59.9%, you will get zero forgiveness.” (See this June 3 MarketWatch article.) But Rubio subsequently indicated that he and “other senators hammered out an understanding with the Trump administration about interpreting and implementing the law in a way that avoids the all-or-nothing threshold.” (See this June 3 Law360 article.) Updated Treasury Department and SBA guidance will be necessary to confirm that no all-or-nothing approach to the 60 percent payroll cost requirement will be implemented.

    • Existing PPP Borrower Eight-Week Election. Section 3(b)(3) of H.R. 7010 creates a new clause (l) to Section 1106 of the CARES Act that permits existing PPP borrowers to elect to use a forgiveness period of eight weeks “after the date of origination” of the existing PPP loan, rather than the new 24-week covered period. However, current guidance permits borrowers with biweekly or more frequent pay periods to elect an eight-week period that begins on the first pay period commencing after the origination date of its PPP loan. Further guidance will be needed to confirm whether that alternate covered period for payroll costs will remain in effect after giving effect to this amendment.

    • Extension of Deferral Period to Forgiveness Remittance Date . Sections 3(c)(1) and (2) of H.R. 7010 amend Section 7(a)(36)(M) of the Small Business Act to replace the six-month deferral period for principal, interest and fees of PPP loans with a deferral period for principal, interest and fees, that commences on the date of origination and ends on the date that the determined forgiveness amount has been remitted to the applicable PPP lender . Many lenders used PPP loan notes that expressly included the original six-month deferral period, so terms of those notes may need to be amended to reflect this retroactive change to the deferral period.

    • 10-Month Deferral Deadline. Section 3(c)(3) of H.R. 7010 amends Section 7(a)(36)(M) of the Small Business Act to add a new clause (v) that provides that if a borrower fails to apply for forgiveness within 10 months after the last day of the forgiveness covered period (as amended, either 24 weeks after loan origination or Dec. 31, 2020, whichever occurs first), then such borrower must start making payments of principal, interest and fees on such PPP loan beginning on the date that is “not earlier than the date that is 10 months after the last day of such covered period.” There is no indication in H.R. 7010 whether SBA would continue to accept forgiveness applications after the end of that 10-month period.

Section 4 of HR 7010 (Retroactive Effect)

Finally, Section 4 of H.R. 7010 amends Section 2302(a) of the CARES Act to retroactively eliminate the previously established prohibition on tax deferral for federal employment taxes for any taxpayer that had PPP debt forgiven under Section 1106 of the CARES Act. As a result, PPP borrowers that obtain forgiveness of PPP loans are no longer ineligible to continue deferring federal employment taxes in accordance with Section 2302(a) of the CARES Act.

McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.

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