Additional Challenges for Borrowers Under the Paycheck Protection Program

By Rose B. Sorensen and Christina LaBarge

On March 27, 2020, the United States House of Representatives passed the Coronavirus Aid, Recovery and Economic Security Act ("CARES Act"). The CARES Act included the Paycheck Protection Program ("PPP"), overseen by the U.S. Small Business Administration ("SBA") that made available on a “first-come, first-served” basis forgivable loans of up to $10 million during the covered period of February 15, 2020 to June 30, 2020 if the business retains its employees and meets other requirements. For further details, see Snell & Wilmer’s Legal Alert, “Covid-19 Stimulus Bill Includes Small Business Loan Programs,” published March 27, 2020. The CARES Act included approximately $350 billion for PPP loans, all of which was exhausted by April 16, 2020.

On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act ("PPPHCEA") was enacted, making an additional $310 billion for loans available under the PPP. For further details on the PPPHCEA, see Snell & Wilmer’s Legal Alert, “New Paycheck Protection Program and Health Care Enhancement Act Adds Billions to PPP and EIDL Programs,” published April 24, 2020. As of May 6, 2020, the SBA has guaranteed just shy of about 2.5 million loans under this second round of funding for a total of approximately $184 billion approved.

Possibly due to the rapidity with which the CARES Act was drafted and signed into law, numerous issues have arisen with the administration of the PPP and the anticipated ability of small businesses to meet the criteria for loan forgiveness. To provide additional guidance and clarification, the SBA and the U.S. Treasury Department ("Treasury") are issuing and continually updating Interim Final Rules, fact sheets, summaries of rules, and responses to certain Frequently Asked Questions (the “FAQs”).

Borrowers under the PPP should stay on top of the rapidly changing requirements of the PPP, as some of these changes have retroactive effect causing borrowers to re-evaluate their eligibility to participate in the PPP. If applicants have been approved for a PPP loan and have received PPP money, they should be aware of the following potential issues. These are by no means exhaustive and guidance is constantly changing and evolving; therefore, borrowers should consider checking for updated guidance, and/or consult with legal counsel and professional advisors before making any decisions.

Changes to Certification Requirement

Applicants for PPP loans were required to certify in their applications that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” In FAQ #31 (published April 23, 2020), and FAQ #37 (published April 28, 2020), the SBA indicated that although the CARES Act waives the “credit elsewhere” requirement of the Small Business Act (Sec. 3(h)),  all borrowers must still be able to make this certification of economic necessity “in good faith, taking into account 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.” For example, the SBA indicated that a large public company with “substantial market value and access to capital markets,” or a private company with adequate liquidity to support ongoing operations, would be “unlikely” to be able to make that certification in good faith.

The SBA has created a safe harbor for borrowers that do not feel they can make this certification in good faith. Any borrower that applied for a PPP loan prior to April 23, 2020 may repay the loan in full. In doing so, that borrower “will be deemed by SBA to have made the required certification in good faith.” The deadline for repayment has recently been extended from May 7, 2020 to May 14, 2020 (FAQ #43, published May 5, 2020).

75 Percent of Loans Must Go to Payroll Costs

At least 75 percent of the expected forgiveness amount of a PPP loan must go towards payroll costs over an eight-week period, which begins on the date that the lender makes the first disbursement of the PPP loan to the borrower (FAQ #20, published April 8, 2020). This requirement is proving problematic for many borrowers. In many instances, PPP loans have been disbursed to borrowers while they are still unable to operate their businesses due to federal, state, and/or local shelter-in-place orders, so they cannot begin incurring the payroll costs needed to satisfy the 75 percent threshold.

In addition, some workers may currently be more highly compensated by unemployment benefits than by returning to their former employment. While the SBA has indicated that employees who refuse a good-faith, written offer of re-hire at the same salary / wages and same number of hours will be excluded from the payroll costs calculation, the borrower may still have difficulty meeting the 75 percent threshold if enough employees refuse to return to work (FAQ #40, published May 3, 2020).

Borrowers may also find that their payroll costs have been reduced because of unanticipated lower health insurance costs. The general postponement of elective procedures and non-critical medical care means that self-insured employers may encounter yet another obstacle to meeting the 75 percent threshold.  

The SBA has indicated that it believes 75 percent is an “appropriate percentage in light of the Act’s overarching focus on keeping workers paid and employed.” (SBA Interim Final Rule, 85 FR 20811, 20814). Hotel and restaurant groups have lobbied to lower the threshold to 50 percent.¹  On May 4, Treasury Secretary Mnuchin rejected these requests, but House of Representatives Speaker Nancy Pelosi indicated that she would be open to revising the threshold.²  Lawmakers are continuing to discuss these issues as the Senate has reconvened this week. Borrowers should stay tuned to learn if the continuing pressure on focusing the PPP benefits on small business results in additional guidance from the SBA and the Treasury that may resolve these issues.

Review of Loans Greater than $2 Million

On April 28, 2020, U.S. Treasury Secretary Steven T. Mnuchin and U.S. Small Business Administrator Jovita Carranza issued a joint statement that the SBA will review all loans greater than $2 million to ensure that PPP loans are limited to eligible borrowers.³ Further regulatory guidance implementing the review procedure is anticipated. On May 4, 2020, the Department of Justice ("DOJ") indicated that it is currently conducting a criminal review for fraud in borrowers’ applications under the PPP. The DOJ has already charged two men in Rhode Island with fraudulently seeking more than $500,000 in stimulus loans for their alleged dozens of employees, when in fact they had no employees.⁴

Given the unique circumstances that employers are being forced to address in response to COVID-19, borrowers may want to consider preparing to respond to these anticipated reviews.  In addition to staying informed about all the changing provisions under the CARES Act, documentation will likely be key. 

Other CARES Act Relief

Despite the attractiveness of the loan forgiveness component of the PPP, other tax benefits may need to be weighed against the benefits of the PPP loan, and should be considered before the May 14 deadline.

For example, if you repay a PPP loan in full by May 14, 2020, you are still eligible for the Employee Retention Credit ("ERC"), and will be treated as though you had not received a PPP loan for the purposes of the ERC (FAQ #45, published May 6, 2020).  At a very high level, under certain circumstances, the ERC makes available a refundable payroll tax credit for 50 percent of qualified wages (up to $10,000 per employee), which are paid or incurred by employers to employees for the period from March 13, 2020 through December 31, 2020 if a COVID-19 shut-down order caused the complete or partial suspension of such employer’s operations or if there was more than a 50 percent decline in gross receipts compared to the same quarter in the prior year.

Another provision under the CARES Act allows employers to defer the deposit and payment of the employer’s share of Social Security taxes for the periods from March 27 through December 31, 2020. The deferral amounts must be repaid 50 percent by December 31, 2021 and the remainder by December 31, 2022. The deferral is interest free. 

Conclusion

The CARES Act was passed in an unprecedented fashion and remains a work in progress.  For that reason, employers may want to be cautious as to how they evaluate their PPP eligibility in light of the changing requirements aimed to refocus the assistance to small businesses. While the PPP is an attractive form of assistance, it is not without challenges.  Employers may want to consider exploring all available forms of relief under the CARES Act to select the relief that provides for maximum benefit over the duration of the economic crisis.