On April 24, the President signed into law The Paycheck Protection Program and Health Care Enhancement Act, H.R. 266 (the Enhancement Act), which appropriates approximately $484 billion in funding for coronavirus relief. The Enhancement Act amends the Coronavirus Aid, Relief and Economic Security (CARES) Act.

The additional funding includes:

  • $321 billion to fund the Paycheck Protection Program (PPP);
  • $60 billion reserved for the Emergency Economic Injury and Disaster Loan (EIDL) Program;
  • $100 billion to fund a Public Health and Social Services Emergency Fund; and
  • $2.1 billion for certain Small Business Association (SBA) salaries and expenses.

 

AMENDMENTS TO THE PPP

The Enhancement Act channeled approximately $321 billion to replenish PPP loan funding that ran out last week and $11.3 billion to cover administrative costs and fees; however, it changed no facet of the PPP’s operation.

On April 23, the U.S. Treasury Department issued new guidance, pointing out that although the CARES Act suspends the usual requirement (as propounded under the SBA) that borrowers be unable to obtain credit elsewhere, borrowers must still attest that their PPP loan request is necessary by certifying, “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account both their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. The guidance further states, “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith…”. The Enhancement Act does not address whether applicants currently in the queue will have to reapply, though it is assumed they will not have to.

The loan funding sets aside $60 billion to be provided by smaller insured depository institutions and credit unions, specifically those with less than $50 million in consolidated assets. Half of this amount ($30 billion) will be reserved for loans by those with assets between $10 and $50 million. The remaining $30 billion is reserved for loans by “community financial institutions” and those with assets under $10 million. The Enhancement Act defines “community financial institutions” to include minority depository institutions, development companies certified under title V of the Small Business Investment Act, and intermediaries as defined under section 7(m)(11) of the Small Business Act.

 

AMENDMENTS TO THE EMERGENCY INJURY DISASTER LOAN PROGRAM

The Enhancement Act provides an additional $60 billion for the EIDL Program, including:

  • $50 reserved for the cost of direct loans under the program; and
  • $10 billion reserved for emergency EIDL grants.

As with the PPP, the Enhancement Act makes no changes to the functioning of the EIDL Program.

The Enhancement Act further amends the CARES Act to enable agricultural enterprises, such as farming and ranching operations, with not more than 500 employees to apply for EIDL loans and emergency grants.

 

PPP LOAN FORGIVENESS REVISITED

PPP Loans that are not eligible, in whole or in part, for forgiveness accrue interest at the rate of 1% per annum and mature at the end of a two-year term.

However, the CARES Act allows PPP loan borrowers to have up to 100% of their PPP loan forgiven, provided that loan proceeds are expensed as follows, subject to certain reductions:

  • Not less than 75% of the loan amount is used for payroll costs, defined as compensation, payment for vacation, parental, family, medical or sick leave, payments required for the provision of group healthcare benefits, payments of any retirement benefits, and payments of state and local taxes assessed on the compensation of employees. Payroll costs do not include employee or owner compensation that is more than $100,000 annualized, taxes imposed or withheld under IRS Code Chapters 21, 22 and 24, compensation of employees whose principal place of residence is outside the U.S., and qualified sick and family leave for which a credit is allowed under Sections 7001 and 7003 of the Families First Coronavirus Response Act.; and
  • Not more than 25% of the remaining loan proceeds are used for:

rent or mortgage interest (not mortgage principal). Mortgage interest can include interest on loans for vehicles used for business purposes; and

utilities, all of which had to have been in effect prior to February 15, 2020.

The following requirements must also be met to qualify for forgiveness:

  1. The loan proceeds must be spent, in full, within eight weeks after the date the loan is funded; and
  2. Employment staffing levels and salaries/wages as of February 15 must either be maintained or restored to February 15 levels by June 30, 2020.

 

CALCULATING LOAN FORGIVENESS REDUCTION

The PPP loan program is intended to support employers to continue to pay their workers. The loan forgiveness amount will be reduced based on these calculations:

Loan Forgiveness Reduction Based on a Decrease to Employee Headcount

A reduction to the loan forgiveness will be made if the average number of full-time employee equivalents (FTEs) per month during the eight-week period is less than the average number of employees per month during the look-back period (which can be either February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020, at the borrower’s discretion). The average number of FTEs per month is calculated based on the average number of FTEs for each pay period within the month.

The reduction in loan forgiveness for headcount reduction can be avoided if any reduction in FTEs is restored by June 30, 2020. Keep an eye out for further guidance on this issue from the SBA.

Loan Forgiveness Reduction Based on Reduction in Salaries for Each Employee

There will be a reduction to the loan forgiveness amount for each employee who earned annualized wages during 2019 of less than $100,000 (or $8,333.33 per month) by the percentage reduction in annualized wages of more than 25% as compared to their most recent full quarter (i.e., Q1 2020).

The reduction in loan forgiveness for a reduction in wages can be avoided if the borrower restores by June 30, 2020 the same wages the employee was earning as of February 15, 2020. Keep an eye out for further guidance on this issue from the SBA.

Loan Forgiveness Reduction Based on Use of Funds – Payroll Costs vs. Non-Payroll Costs

Pursuant to U.S. Treasury and Interim SBA rules, at least 75% of the loan proceeds must be used for payroll costs. The PPP loan forgiveness amount will be reduced to the extent loan proceeds are used for qualified non-payroll costs in excess of 25% of the total amount eligible for forgiveness. It is currently unclear if the 25% cap is applied to the loan amount or the amount eligible for forgiveness.

The SBA opened the application process for the additional PPP loans on April 27 at 10:30. While the SBA has not explicitly stated a date/time for when new EIDL applications and loans will be available, as it has with the PPP, its website displays the following statement:

“With the additional funding provided by the new COVID-19 relief package, SBA will resume processing EIDL Loan and Advance applications that are already in the queue on a first-come, first-served basis.”

Based on the above, it appears EIDL applications will be processed beginning on April 27, but new applications are not available at this time. We will provide further information on the availability of the EIDL portal to receive new applications (including those from agricultural enterprises) as soon as possible. Further, based on recent guidance issued by the SBA, applicants whose EIDL application number begins with a “3” will not have to reapply. Those with an application number beginning with a “2” must reapply. This guidance may be found here.

 

CONTACT

If you have questions concerning loan relief that may be available to your small business, please contact a member of our Banking & Credit Practice.

 

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