PPP: These are not the loans you’re looking for

It is Monday, May the Fourth (Be With You), eight days after the deadline imposed under Section 1106(k) of the CARES Act for SBA to “issue guidance and regulations implementing” PPP forgiveness.  There are now more than 4 million PPP borrowers awaiting such guidance and regulations.

Amid a growing chorus that the PPP loans are not serving the intended purposes for many employers, SBA and Treasury released three new FAQ (#40-42) yesterday.   The first of these addresses one of those criticisms and actually does use the F word, albeit on one narrow issue. It also says that “SBA and Treasury intend to issue an interim final rule” on at least some forgiveness questions. In other instances, when they have addressed a question in a manner like this, the IFR has followed in pretty short order, so this creates a New Hope we will get this soon.  

FAQ #40 says that an employer who makes an offer to rehire a laid-off worker on his/her same pre-layoff terms, does NOT need to take that employee into account in calculating the reduction in its number of employees for purposes of the pro rata forgiveness reduction.

·         To qualify, “the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower.”

·         Recall that the amount of expenses that would count toward PPP forgiveness are reduced by a fraction:

o   The numerator is the average number of FTE per pay period during the 8-week forgiveness period;

o   The denominator is the average number of FTE per pay period during either (aa) Feb 15-June 30, 2019 or (bb) Jan 1 – Feb 29. 2020.

o   (No, we don’t yet know how to calculate FTE, but many people are predicting that the eventual IFR on this will use the Affordable Care Act standard of 30 hours per week, which seems logical.)

This FAQ also reminds both borrowers and their employees that “employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.”  This addresses a common problem that our clients are facing:  it doesn’t make sense for many employers to bring back employees during the 8-week forgiveness period

·         In many states, their employees are actually better off taking unemployment than getting rehired.  The CARES Act provided an additional $600  per week of unemployment payments for up to four months.  This means that many employees may make more by receiving the enhanced unemployment benefits than being rehired at their prior pay, especially if their hours or incentive or tip opportunities would be reduced.  Many personal finance websites are now counseling readers on how to choose between returning to work vs collecting unemployment.  If the employer makes an offer of employment, the latter option is thus eliminated.  (Of course, all of this is further complicated by state laws and the extended leave provisions of the FFCRA.)

·         On the other hand, the PPP loans are only forgivable for payroll costs paid during the first eight weeks after the loan is funded.  Thus employers now face thedifficult choice of either having to require that employees come back (on economically worse terms) or not make re-hire offers but lose the PPP forgiveness.  The situation is even more challenging for “consumer storefront” employers like restaurants , retailers, gyms, salons, who are still in a mandatory lockdown.  In order to get PPP loan forgiveness, they must hire back employees whom they literally cannot put to work at all.

As a result of these challenges, the restaurant industry and others are now lobbying for changes to the PPP program that would provide flexibility to employers to extend the 8-week forgiveness period and/or reduce the requirement that 75% of PPP proceeds be used for payroll in that period.  The AdministrationStrikes Back today at this idea, with Secretary Mnuchin saying that such a fix would require Congressional action and that Treasury can’t fix these requirements (EVEN THOUGH Treasury created the 75% requirement out of thin air).  

We noted yesterday that PE portfolio companies and others are joining public companies in returning these loans out of a fear of public backlash.  Now many commentators are suggesting that even for borrowers willing to keep the funds, these PPP loans are not the solution businesses are looking for, criticizing the PPP loans as “unforgivingtrying to solve the “wrong problem” or even as “useless.”  Some have suggested we should adopt Denmark’sapproach of simply having the government pay 75% of the salaries for employees of all employers, regardless of size, or even just include some version of “universal basic income” in Stimulus 4.0. (Call that idea the Return of Jedi (Master Andrew Yang)).

FAQ #41 simply reaffirms the prior guidance from IFR 5 that seasonal employers can use alternate time periods in calculating its maximum PPP Loan amount and still make the “required certifications” on the PPP application form.

FAQ #42 allows nonprofit hospitals who are tax exempt under Section 115 of the tax code to apply for PPP loans if “if the hospital reasonably determines, in a written record maintained by the hospital, that it is an organization described in section 501(c)(3) of the Internal Revenue Code. “ The CARES Act limits PPP eligibility to 501(c)(3) organizations and a few other exceptions that wouldn’t apply to these hospitals. Our tax team tells me that most of these hospitals could easily qualify as 501(c)(3) organizations but have no reason to apply for such qualification because they are already tax exempt. So, although this FAQ may seem to go beyond the authority of the CARES Act, it arguably just eliminates the formality of a hospital applying for such 501(c)(3) qualification. (But I’m neither a tax nor health care lawyer, so that is just my opinion, which might be a Rogue One.)