New PPP Rules Provides Updates on Loan Forgiveness Processes

Regulation | June 25, 2020 | by Brendan Flinn

SBA and Treasury issue further rulemaking following the enactment of the Flexibility Act.

On June 22, the Small Business Administration and the Department of the Treasury issued an updated Paycheck Protection Loan rule related to the Flexibility Act.  

Many of these updates are technical to conform with the Flexibility Act- changing mentions of the 75% rule to say 60% of funds must go to payroll, extending the deferral period from six months to 10 months, and similar. Additional updates were more substantive and/or provided new clarity to PPP borrowers, as summarized below.

Forgiveness Safe Harbor and Regulatory Compliance

The Flexibility Act allows borrowers a safe harbor from losing loan forgiveness if they reduce their full-time equivalent (FTE) count because of an inability to return to their pre-COVID-19 level of business activity due to complying with CDC, HHS (including CMS) or OSHA regulation or guidance related to the pandemic. The updated rulemaking that extends this exemption to include compliance with state and local regulation and guidance. The idea behind this, per the update, is that many of these were sourced from the federal agencies.

This may provide help to LeadingAge members who are subject to state regulation. For example, state regulation that required closure of adult day center would have a negative impact on an adult day center’s level of business activity.

Applying for Forgiveness Early

The Flexibility Act’s extension of the loan period from 8 weeks to 24 weeks provides borrowers who received a loan before June 5 the option of keeping their 8 week period or extending their loan period to 24 weeks. Borrowers receiving loans after June 5 automatically have a 24 week loan period.

Under the updated rule, borrowers can apply for loan forgiveness before their 24 week period ends. Borrowers should note that applying for forgiveness early could lead to the loss of a safe harbor with respect to cuts to staff salaries/wages for those earning less than $100,000 per year. Under the PPP, borrowers may reduce salaries/wages by up to 25% and still have the loan fully forgiven. Cuts beyond this level are reduced from the amount of loan funds forgiven.

A safe harbor exists, however, if borrowers who cut staff salaries restore them to pre-loan levels by December 31. If a borrower made such salary cuts and applies for early forgiveness, they lose this safe harbor and would have their forgiveness reduced by the amount of salary cut for the full 8 or 24 week loan period.

If a borrower did not reduce staff salaries/wages by more than 25%, they should be able to apply for forgiveness early without running into this issue.

Using Loan Funds under the Extended Loan Period

Additional updated rulemaking from SBA clarifies how borrowers can use loan funds if they had an 8 week loan period and extended it to 24 weeks following the Flexibility Act.

Notably, while the Act extended the loan period, it did not change the basis of the loan: 2.5 months of payroll. While borrowers would not receive additional PPP dollars, they are able to use loan funds for the full 24 week period if they extend the loan period.

In the updated rule, SBA established the following as limits for how much loan funds can be used per employee over the 8 and 24 week periods. For loans spent over 8 weeks, the limit per employee is $15,385. For loans with a 24 week period, the employee-level maximum is $46,154. These maximums apply to employees who do not own the borrowing organization. The vast majority of staff in not-for-profit aging services (including executives) fall into this category.

Further Updates and Next Steps

The government issued further rulemaking related to loan eligibility in situations where a borrowing organization is owned in part by a person with a criminal history. Because of how not-for-profits are structured, this likely does not apply to LeadingAge members.

LeadingAge will continue to monitor PPP regulatory updates and keep members apprised.