Paycheck Protection Program - Potential Extension

Covered Period

Under the existing version of the CARES Act legislation authorizing the PPP and related SBA rulemaking to date, loan proceeds used to meet payroll and other qualified expenses are eligible for forgiveness only if incurred within an eight-week “covered period,” which generally begins on the date of loan disbursement.  The loan forgiveness application released by the SBA on May 15 added some flexibility to the covered period with respect to payroll expenses, by allowing employers who pay wages on a bi-weekly (or more frequent) basis to use an alternative period for such expenses, with that period beginning on the first day of the first pay period following loan disbursement. The application also clarified that expenses need not have been paid during the covered period to be eligible for forgiveness so long as they were incurred during the covered period and paid before the subsequent payroll or billing date. Although U.S. Treasury Secretary Steven Mnuchin has publicly alluded to a potential for further administrative changes to lengthen the covered period, it is difficult to envision how that could be accomplished without legislative action, as an eight-week covered period is prescribed by the CARES Act.  In any case, as the PPP program began on April 3, the covered period for the earliest borrowers could end as soon as this Friday, May 22, absent further legislation or rulemaking.

Potential Extension

Key members of Congress from both parties have signaled a desire to quickly move on legislation to extend the covered period.  On Monday, May 18, Senator Marco Rubio, the Republican chairman of the Senate’s small business committee tweeted his hope to lengthen the covered period “before the first wave of #PPP loan recipients reach the 8 week point.”  The preceding Friday, May 15, the Democrat-controlled House of Representatives passed a broad relief bill that would extend the period to 24 weeks, but Senate Republicans vowed to block it for other reasons.  Then, this week, Democratic House Speaker Nancy Pelosi announced an intent to reintroduce the legislation’s PPP amendments as a stand-alone bill.  The White House has also signaled support for an extension.

Employee Headcount and Wage Safe Harbor

In accordance with the CARES Act, the portion of a PPP loan eligible for forgiveness generally is reduced if the borrower has cut employee wages (by over 25% for any particular employee) or headcount, but there is a safe harbor if levels are restored by June 30, 2020.  The broad bill passed last week by the House would have extended this date to December 31, 2020, giving relief to business owners now faced with the choice of either paying employees who they cannot yet usefully engage or forgoing a portion of potential PPP loan forgiveness.  It is unknown whether this provision will be included in the reintroduced bill or, if it is, whether it will become law.  However, it seems likely that the deadline to qualify for the safe harbor will be extended to at least the end of the extended covered period.  It is worth noting as well that the SBA’s loan forgiveness application fleshes out earlier guidance to the effect that employers may take credit for good-faith but unsuccessful attempts to retain or rehire employees in the event that they were not otherwise able to fill the position by hiring a new employee.  Specifically, the application allows employers to include in their headcount numbers any positions for which the employer made a good-faith, written offer to rehire during the covered period that was rejected and any employees who, during the covered period, were fired for cause, voluntarily resigned or requested and received a reduction in hours.

The SBA Focus Group of the COVID-19 Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the PPP loan program is implemented.

Elizabeth Webb Bucilla is an associate in the Corporate & Securities Department at Klehr Harrison.