On December 27, 2020, following nearly eight months of negotiations, Congress approved a $866 billion stimulus package (the “Stimulus Act”) to address the continuing economic disruption caused by the COVID-19 pandemic, including a new Paycheck Protection Program, or “PPP”. On January 6, 2021, the Small Business Administration (the “SBA”), and U.S. Department of the Treasury (the “Treasury Department”) issued two interim final rules incorporating changes for outstanding PPP loans and establishing guidelines for the new PPP. Then on January 29, 2020, the SBA issued initial frequently asked questions in connection with the new PPP, noting that more FAQs would follow. This alert outlines some of the main provisions of the law and the subsequent interim final rules and FAQs, including the following:

• In addition to payroll and other previously permitted expenses, existing and new PPP loan proceeds may be used for business software and cloud computing services, HR and accounting needs, investments in facility modifications property damage related to public disturbances, goods essential to operations and supplier costs, and personal protective equipment
  
  
• A new PPP fund is authorized for businesses with 300 employees or less that suffered a 25% loss in any 2020 quarter or 2020 as a whole
  
  
• A one-page forgiveness certification was introduced for loans of less than $150,000
  
  
• Certain shuttered venue operators may be eligible to receive special grants
  
  
• New changes that impact retirements plans, medical surprise billings and flexible spending accounts

Background and Structure

In March 2020, Congress authorized up to $2 trillion under the “Coronavirus Aid, Relief, and Economic Security Act” (the “CARES Act”) to address the economic disruption caused by the COVID-19 pandemic. Our previous original client alerts on the CARES Act and legal implications of the pandemic can be found here, including alerts related to subsequent PPP regulations issued by the Treasury Department and the SBA. Among other things, the PPP provided fully forgivable loans to business concerns that generally qualified if they had 500 employees or less. The original PPP program created by the CARES Act is referred to in this alert as the “First Draw PPP.”

The Stimulus Act was attached to a larger federal appropriations bill which provided an additional $1.4 trillion in regular federal spending for 2021. The portion of the Stimulus Act specifically targeted at COVID-19 stimulus includes a new PPP program, which is referred to in this alert as the “Second Draw PPP.” The full text of the appropriations package is available here. Divisions A through L contain regular federal appropriations, Divisions M and N contain the materials that we refer to as the “Stimulus Act” and the remaining Divisions are policy riders. The Second Draw PPP is contained in Title III to Division N, referred to as the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act,” Pub. L. 116-260 (the “Economic Aid Act”). The SBA has since issued additional guidance in the form of interim final rules and frequently asked questions related to the Economic Aid Act and the PPP, which are also summarized in this alert. The full text of the guidance that covers pending First Draw PPP loans and First Draw PPP loans made under the Economic Aid Act is available here, the full text of the guidance that governs Second Draw PPP loans is available here and the FAQs related to the PPP are available here (with new responses at the end).

General Changes to the “First Draw PPP” and the “Second Draw PPP”

Specific Eligibility for All PPP Loans

Most business concerns that were eligible for First Draw PPP loans are also eligible for Second Draw PPP loans, with some additional restrictions discussed below. The Stimulus Act also names certain types of businesses as having increased or specific eligibility for both First Draw and Second Draw PPP funding. The following are now eligible or have slightly different rules applied to them:

• Housing Cooperatives with not more than 300 employees.
  
  
• Farm Credit Institutions or institutions of the Farm Credit System.
  
  
• On a temporary basis and subject to court approval, debtors in possession or trustees.
  
  
• Although seasonal employers were already included in the First Draw PPP (and therefore in the Second Draw PPP as well), the Stimulus Act defines and clarifies what a seasonal employer is.
  
  
• Destination Marketing Organizations and 501(c)(6) Entities.
  
  
  • Registered 501(c) entities or state and local governments engaged in (i) marketing and promoting communities and facilities to businesses and leisure travel or (ii) providing live events and derive a majority of the operating budged from such activities.
    
    
  • Nonprofit 501(c)(6) entities (i.e., associations such as business leagues, chambers of commerce, real estate boards and boards of trade) are eligible as long as they are not professional sports leagues or promote or participate in political campaigns.
    
    
  • Additionally, Destination Marketing Organizations and 501(c)(6) entities must:
    
    
    • not receive more than 15% of its receipts from lobbying;
      
      
    • not have lobbying activities that comprise more than 15% of total activities;
      
      
    • not have lobbying activities exceeding $1 million during the tax year ended prior to February 15, 2020; and
      
      
    • have 300 or fewer employees.
      
      
• Restaurants, Hotels, Accommodation and News Organizations. Although not directly referenced in the First Draw PPP legislation, SBA loans are subject to affiliation rules which aggregate employees of all affiliated entities of a company under common control. If these aggregated employees exceed a certain threshold, the borrower (which may otherwise qualify as a small business on its own) would be ineligible for PPP funds. Accounting for the fact that restaurants, hotels and franchises were some of 2020’s most hard-hit businesses, Congress provided two special exceptions in the First Draw PPP to permit them to maximize PPP funding. The Stimulus Act expanded on these exceptions to add certain news organizations as well.
  
  
  • Per Physical Location Exception. Businesses that were assigned a North American Industry Classification System (“NAICS”) code beginning with 72 (generally comprising hotels, traveler accommodations, RV parks, rooming and boarding houses, food and drinking places, caterers, and restaurants), and employed not more than 500 employees per physical location, were eligible for funding under the First Draw PPP. However, other than their own affiliated restaurants or hotels in other locations, these companies remained subject to the affiliation rules. As a result, a restaurant group with several locations under a single holding company could be eligible even if its overall headcount exceeded 500 employees. However, if the restaurant group was affiliated with any non-restaurant business, it could run afoul of the affiliation rules and may be ineligible for funding.
    
    
  • Affiliation Rule Exception. The second exception permitted funding for businesses assigned a NAICS 72 code that had not more than 500 employees in total. While these businesses were subject to an overall employee cap, they were not otherwise subject to the affiliation rules. As a result, a restaurant or hotel under this cap would be eligible even if it were owned by persons owning many other companies. The Affiliation Rule Exception could also be used by restaurant or hotel groups in which each restaurant or hotel was formed as its own legal entity, allowing each entity to apply for its own funding as long as each entity held its own tax identification (or EIN) number. Businesses operating as a franchise (not necessarily restaurant-specific) and businesses that received financial assistance under the Small Business Investment Act were also exempted from the affiliation rules.
    
    
  • Physical Location and Affiliation in the Second Draw PPP.
    
    
    • NAICS 72 entities that were eligible for either the Per Physical Location Exception or the Affiliation Rule Exception may take advantage of these exceptions for Second Draw PPP funding except that the 500 headcount threshold as applied in each exception was reduced to 300 and the business concern must also meet the 25% revenue reduction test applied to all Second Draw PPP applicants as described further below.
      
      
    • In addition to NAICS 72 entities, SBA guidance permits business concerns or stations broadcasting under an FCC license that have more than one physical location and employ not more than 300 employees per physical location to apply for Second Draw PPP funding. The borrower must be majority owned or controlled by a business that is assigned a NAICS 511110 (Newspaper Publishers) or 5151 (Radio and Television Broadcasting) code to apply. While the Stimulus Act stated that these news organizations were eligible if they had 500 employees per physical location, subsequent SBA guidance clarifies that this referred only to the First Draw PPP program that the threshold under the Second Draw PPP is 300 persons or below.
      
      While NAICS 72 entities were required to fit into either the Per Physical Location or Affiliation Rule Exception, the Stimulus Act applied a hybrid approach to news organizations. News organizations can apply the 300-employee test per location but are also exempt from the affiliation rules as a whole. The result is that each physical location of a news organization can apply for its own Second Draw PPP regardless of the number of employees of its affiliated ownership. Recent SBA FAQ responses further clarify that a public broadcasting station with no more than 300 employees is eligible for the news organization exception even if a college or university operates or holds the station’s FCC license and the station is not a separate legal entity.
      
      
    • Lastly, although publicly traded companies are ineligible from receiving funds under the PPP going forward, the Stimulus Act specifically disregards the effect of publicly traded companies serving as owners of news organizations receiving PPP funds under Per Physical Location and Affiliation Rule Exceptions described above.

Covered Period

The “Covered Period” refers to the period in which PPP funds can be used following disbursement from the lender. The original 8-week Covered Period established under the CARES Act was later expanded to 24weeks (if a borrower received its PPP funds on or before June 5, 2020, the borrower could choose between an 8-week or 24-week Covered Period, and if the borrower received its PPP funds after June 5, 2020, then the Covered Period was 24 weeks). However, the Covered Period was required to be completed no later than December 31, 2020. The Stimulus Act retained the ability to choose between a Covered Period of 8 weeks or 24 weeks and extended the December 31, 2020 cut off to March 31, 2021.

The deadline extension is important as First Draw PPP borrowers who returned funds or did not accept the full amount of their original loan are eligible to reapply or obtain the full amount as discussed further below. Additionally, because of this change, businesses who did not apply for a First Draw PPP loan are technically eligible to receive one, use it quickly, and then apply for a Second Draw PPP. Accordingly, the cut off for applying for any PPP loan is March 31, 2021 – whether for first time borrowers under the First Draw PPP, borrowers who need to reapply for the full amount of their First Draw PPP who returned the funds or did not accept the full amount, or borrowers who wish to tap into the Second Draw PPP.

Borrowers do not need to apply for forgiveness before the end of their applicable Covered Period and may continue to submit forgiveness applications up to 10 months after the Covered Period.

Expansion of Allowable and Forgivable Expenses

The CARES Act provided that PPP loan proceeds could be used to pay for payroll costs, group health care benefits during periods of paid sick, medical, or family leave, insurance premiums, employee salaries, commissions, or similar compensation, payments of interest on any mortgage obligation, rent, utility payments, and interest on debt obligations. The Stimulus Act expanded the definition of “payroll costs” to include payments for group life, disability, vision and dental insurance benefits and added the following additional permitted uses:

• Covered Operations Expenditures: Software or cloud computing services that facilitate business operations, product or service delivery, payment processing, payroll processing, human resources, sales and billing functions, and accounting or tracking of supplies, inventory, records and expenses.
  
  
• Covered Property Damage Costs: Property damage, vandalism or looting costs due to public disturbances in 2020 that were not covered by insurance or other compensation.
  
  
• Covered Supplier Costs: Supplier costs that are essential to the business at the time an expenditure is made and that are based on contractual obligations. Unless the underlying contract is for a supply of perishable goods, the contract must be in place prior to the Covered Period.
  
  
• Covered Worker Protection Expenditures: Employee protection expenditures to comply with public health directives.

Each of the expanded uses qualify as forgivable expenses during the applicable Covered Period and can be applied to First Draw PPP loans (provided that the borrower has not received forgiveness before the date of enactment of the Stimulus Act) and Second Draw PPP loans. Additionally, borrowers who returned a portion of their First Draw PPP funds may reapply for the full amount of the loan. For borrowers that did not accept the full amount of the First Draw PPP funds offered, the borrower is permitted to receive the full amount of the original loan, including any additional increase as a result of subsequent regulations during 2020. Accordingly, some borrowers who have submitted forgiveness applications may consider withdrawing them (as permitted by the lender) in order to maximize forgiveness. The ability to draw returned or unused funds is also key because a prerequisite to receiving a Second Draw PPP loan is the borrower’s use (or planned use) of all of its First Draw PPP loan by the time the Second Draw PPP loan is funded.

The Stimulus Act expressly prohibits any PPP loan proceeds from being used for lobbying activities, lobby expenditures related to state and local elections, and any expenditures designed to influence any legislation or executive orders.

EIDL Deduction

The SBA’s Economic Injury Disaster Loan (“EIDL”) program traditionally provided low interest loans to small businesses impacted by natural disasters such as hurricanes and floods. Considering all U.S. States and territories to be impacted by the COVID-19 pandemic, the CARES Act significantly expanded the ability of small businesses to draw funds under the program. The CARES Act also instituted emergency grants of up to $10,000. Although the grants were forgivable, if a borrower received both a grant and a PPP loan, the amount of the grant was deducted from the forgivable portion of the PPP loan so that borrowers could not “double dip.”

The Economic Aid Act provided a small windfall to many borrowers by removing the previous requirement that borrowers deduct EIDL advances from PPP forgiveness amounts, allowing the full amount of any EIDL grant and the PPP loan to be forgiven. Additionally, for borrowers who already submitted forgiveness applications in which an EIDL grant reduced the forgiveness amount under the PPP, any EIDL advance amounts previously deducted from a borrower’s forgiveness amount (plus interest) will be remitted to the lender. It also eliminated the provision requiring refinancing an EIDL loan, which does not apply to Second Draw PPP loans.

The Stimulus Act also reinstituted the EIDL grant program but limited it to businesses located in low income communities who previously received an EIDL advance for less than $10,000 or those who applied but did not receive a grant due to lack of program funding. Eligible grantees will be notified directly by the SBA if they are eligible.

Second Draw PPP

The Second Draw PPP mirrors the First Draw PPP in most respects but applies a lower cap on the amounts borrowers can receive and further limits eligibility. Borrowers may rely on the SBA’s previously published FAQs with respect to the First Draw PPP in connection with the Second Draw PPP except as otherwise superseded by the Economic Aid Act or the SBA’s related guidance. However, the SBA has stated that all of its existing PPP FAQs are being revised to reflect changes necessitated by the Economic Aid Act.

The First Draw PPP introduced a number of features unique to SBA loans which carry over to the Second Draw PPP, including no requirement to post collateral or personally guarantee the loan, the opportunity for 100% forgiveness and a low 1% interest rate at 5-year maturity for any portion that remains unforgiven.

Loan Amount: Similar to the calculation used in the First Draw PPP, the Second Draw PPP loan amount is based on 2.5x the borrower’s average monthly payroll costs. Average monthly payroll is calculated using, at the borrower’s election, the 12-month period prior to the date the loan is made or calendar year 2019. Subsequent regulations clarify that most borrowers are permitted to substitute “calendar year 2020” for the 12-month period prior to the date the loan is made because all Second Draw PPP loans will be made in the first quarter of 2021. Seasonal businesses have certain additional adjustments that apply to them.

While the First Draw PPP capped loans at $10 million, the Second Draw PPP caps loans at $2 million. Restaurant, hotels and other accommodation business can draw 3.5x of their average monthly payroll costs under the new program, but remain capped at $2 million.

The SBA’s regulations also include an overall cap of $4 million for each “corporate group” which is defined as businesses that “are majority owned, directly or indirectly, by a common parent.” The corporate group cap applies even in instances where affiliated borrowers are able to apply for PPP funds by way of an exception to the SBA’s affiliation rules for franchises and certain restaurant, hotel, accommodation and media businesses. According to the SBA, the purpose for the corporate group cap is to “promote the availability of PPP loans to the largest possible number of borrowers, consistent with the CARES and Economic Aid Act.” The First Draw PPP included a $20 million corporate group cap which was twice the $10 million cap applicable to each individual borrower. The $4 million Second Draw PPP cap was therefore selected as being twice the amount applicable to each individual borrower.

The SBA separately published documents summarizing how to calculate maximum loan amounts and what documentation to provide by business type. The guidance for calculating maximum loan amounts and documents applicable to First Draw PPP borrowers is available here and the guidance for calculating maximum loan amounts and documents applicable to Second Draw PPP borrowers is available here. Borrowers should expect to receive a disbursement of their Second Draw PPP loan within ten calendar days after loan approval.

Eligibility Requirements including 25% Revenue Reduction. In general, borrowers are eligible if they:

1. do not have more than 300 employees (the original PPP required no more than 500 employees),
   
   
2. suffered a 25% reduction in “gross receipts” in any quarter of 2020 (the original PPP had no similar requirement and only required that the PPP funds be “necessary” for the business),
   
   
3. received a First Draw PPP loan and on or before the expected date on which the Second Draw PPP loan is disbursed to the eligible entity, has used, or will use, the full amount of the First Draw PPP loan, and
   
   
4. are not considered an ineligible entity/person as discussed further below. Borrowers do not have to have applied for forgiveness for the First Draw PPP loan before applying for the Second Draw PPP loan.

• While the Stimulus Act does not define “gross receipts,” subsequent SBA regulation applies the same definition as provided under SBA size regulations. That regulation defines gross receipts to include:
  
  all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Generally, receipts are considered “total income”(or in the case of a sole proprietorship, independent contractor, or self-employed individual “gross income”) plus “cost of goods sold,” and excludes net capital gains or losses . . . .
  
  Gross receipts do not include the following:
  
  Taxes collected for and remitted to a taxing authority if included in gross or total income (such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees); proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.
  
  All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts.
  
  Additionally, any forgiveness from a borrower’s First Draw PPP is explicitly excluded from gross receipts.
  
  
• In calculating the 25% revenue reduction, SBA regulations allow a borrower to compare quarterly revenues between the same quarter of 2020 and 2019, or annual revenues between 2020 and 2019. If the borrower compares the entire 2020 calendar year to the 2019 calendar year, it may submit copies of its annual tax forms to corroborate the revenue decline. A borrower who was not in existence for all of 2019, but was operating on February 15, 2020, may meet the threshold of revenue reduction for a Second Draw PPP loan by comparing any quarter of 2020 to any quarter of 2019 in which the borrower was in business and demonstrates at least a 25% reduction from the revenue of the entity during the first quarter of 2020.
  
  
• Startups may have a more challenging time qualifying for the Second Draw PPP. One of the new aspects of Second Draw PPP is that borrowers need to show a revenue decline. “Gross receipts” under the Second Draw PPP eligibility rules refers to revenue in accordance with the borrower’s accounting method, derived from the borrower’s tax return (based on net income, plus cost of goods sold, minus net capital gains and losses). Without additional guidance from the SBA or the Treasury Department providing additional ways for companies without revenue to be eligible, pre-revenue companies are not currently eligible for loans under the Second Draw PPP.
  
  
• Absent an exception provided in the CARES Act or the Economic Aid Act, affiliates of a borrower are aggregated for purposes of determining the borrower’s headcount even though the same affiliates may not receive any of the actual borrower’s PPP funds. Likewise, under the Economic Aid Act and as clarified under subsequent SBA guidance, borrowers should aggregate gross revenue with the gross revenue of affiliates for determining whether the 25% reduction in gross receipts was met. The guidance also infers that NAICS 72 entities using the “Affiliation Rule Exception” as described above, and news organizations and non-profits using the general affiliation exceptions as described above, are not required to aggregate gross receipts when calculating the gross receipt reduction. Whether intentional or by inadvertent omission, the guidance does not mention NAICS 72 entities using the “Per Physical Location Exception” described above. Accordingly, to mitigate the risk that they do not meet the 25% gross revenue reduction test, these borrowers may want to cautiously run the test twice – once using its own revenue and separately aggregating its revenue with affiliates.
  
  
• Subsequent SBA regulations clarify that the language “has used, or will use,” means that the First Draw PPP funds need to be fully expended before the Second Draw PPP funds are released and that the First Draw PPP funds were spent only on eligible expenses.
  
  
• Borrowers applying for greater than $150,000 in a Second Draw PPP loan must submit documentation in connection with their application to support their determination of the 25% reduction in revenue relative to 2019, which could include annual tax forms or quarterly financial statement. Borrowers that apply for less than $150,000 in a Second Draw PPP loan must submit such documentation prior to applying for loan forgiveness.

Ineligible Entities/Persons. The following entities and persons are not eligible to apply for a Second Draw PPP loan, among others:

• those that are ordinarily ineligible for SBA loans under existing SBA regulations,¹ other than non-profit businesses and certain religious related businesses;
  
  
• those engaged in political or lobbying activities including think tanks;
  
  
• entities in which a 20% or greater owner is organized, or has significant operations, in China or the administrative regions of Hong Kong controlled by the Chinese government;
  
  
• entities that have a Chinese resident on their board of directors;
  
  
• registrants under the Foreign Agents Registration Act;
  
  
• those that receive a Shuttered Venue Operator grant (as described further below);
  
  
• publicly traded companies; and
  
  
• an entity that has permanently closed -- provided that an entity that has temporarily closed or temporarily suspended its business remains eligible.

The exclusion of publicly traded companies is especially noteworthy. Under the First Draw PPP, some public companies received funding based on their limited headcount but later had to address SBA regulations which narrowed the borrower’s certification that the funds are “necessary” for operations. As a result, many public company boards spent a significant amount of time analyzing whether to return their First Draw PPP funds in the face of potential legal and public relations scrutiny. The Stimulus Act removes this debate entirely and prohibits any publicly traded company from receiving funds under the new program.

Simplified PPP Loan Forgiveness for Small PPP Loans

Under the Stimulus Act, PPP borrowers now have access to a simplified loan forgiveness process for loans of $150,000 or less. The borrower only needs to submit a one-page certification to the lender that includes (i) the number of employees whose jobs were preserved because of the loan, (ii) the amount of loan proceeds spent on payroll costs, (iii) the total amount of loan, and (iv) an attestation that the borrower’s certification is accurate and in compliance with PPP loan requirements, including maintenance of records. The lender may require the borrower to submit documentation to support the loan forgiveness claim. Borrowers may submit a loan forgiveness application at any time after use of the loan proceeds up to 10 months after the Covered Period. A copy of the simplified loan forgiveness application can be found here.

Shuttered Venue Operator Grants

The SBA is authorized to grant $15 billion to live venue operators, promoters, theatrical producers, live performing arts organizations, museums, motion picture theatre operators or talent representatives that were fully operational on February 29, 2020 and had at least a 25% decline in revenue compared with the same quarter in 2019. These Shuttered Venue Operator Grants may be used for certain expenses that include rent, utilities, payroll and person protective equipment. Due to the overlap of uses, any entity that receives a Shuttered Venue Operator Grant will not be eligible to receive a PPP loan.

Retirement Plans

The Stimulus Act included several provisions that impact retirement plans. Several of those changes are summarized below.

Temporary Exemption from Partial Plan Termination Rules. Section 411(d)(3) of the Internal Revenue Code requires tax-qualified retirement plans, such as 401(k) and pension plans, to 100% vest the plan account or benefit of participants who are terminated when there is a partial termination of the plan. A partial plan termination is presumed to have occurred if there is a decrease of 20% or more of the active plan participants, generally, during a plan year.² The Stimulus Act provides that a retirement plan will not be treated as having experienced a partial termination during a plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active plan participants covered on March 31, 2021, is at least 80% of the number of active participants covered in the plan on March 13, 2020. We would expect guidance from the Internal Revenue Service (“IRS”) to explain how this provision will be implemented, in particular where an employer has already recognized a partial termination prior to the enactment date of the Stimulus Act.

Coronaviruses-Related Distributions Expanded to Money Purchase Pension Plans. The Stimulus Act amends the CARES Act to permit in-service coronavirus-related distributions (“CRDs”) of up to $100,000 from money purchase pension plans. The CRD period is the same period for money purchase pension plans as other eligible retirement plans in the CARES Act, which is January 1, 2020 through December 30, 2020.

Qualified Disaster Distributions. The Stimulus Act adds a new distribution option referred to as “Qualified Disaster Distributions” (“QDDs”). Similar to CRDs, a qualified individual may take a QDD of up to $100,000 from an eligible retirement plan. QDDs are not subject to the early distribution penalty or 20% withholding. The QDD may be taxed ratably over a 3-year period and may be recontributed to a plan or IRA as direct rollover during a 3-year period following the distribution. A QDD is available to a qualified individual on or after the first day of the qualified disaster and before June 25, 2021 (180 days after the enactment date of the Stimulus Act).

A “qualified individual” is an individual (1) whose principal place of abode is located in a qualified disaster area and (2) who suffered an economic loss as a result of the qualified disaster. A “qualified disaster” is an event occurring during the period beginning on December 28, 2019 and ending on December 27, 2020, the enactment date of the Stimulus Act, that is declared a disaster by the President under the Robert T. Strafford Disaster Relief and Emergency Assistance Act during the incident period beginning on January 1, 2020, and ending February 25, 2021 (60 days after the enactment date of the Stimulus Act). “Qualified disaster areas” are areas where a qualified disaster has been declared, excluding disaster areas due to the COVID-19 pandemic.

Disaster-Related Plan Loans. Under the Stimulus Act, an eligible retirement plan may allow qualified individuals to take plan loans in an amount or amounts up to $100,000 or 100% of the present value of the participant’s vested account balance (“disaster-related plan loans”). Repayment of a disaster-related plan loans may be delayed for up to one year (or up to 180 days after enactment date of the Stimulus Act, if longer) if loan repayments would be due during the period beginning on the first day of the disaster incident period and ending 180 days from the last day of such incident period. However, interest on the plan loan continues to accrue during the suspension period.

Option to Recontribute to Plan Certain Hardship Distributions for Principal Residences. Plan participants who received a hardship distribution to purchase a principal residence in a qualified disaster area, but later used those funds for a different purpose due to the qualified disaster have the option to recontribute the distributed funds to the participant’s plan account. To be eligible for this treatment, the hardship distribution must have been made no earlier than 180 days before, and no later than 30 days after, the qualified disaster incident, and the recontribution period ends on June 25, 2021 (180 days after enactment date of the Stimulus Act).

Amendment Timing. Generally, plan amendments for the changes described above are due by the end of the plan year beginning on or after January 1, 2021, or December 31, 2022 for a calendar year plan.

Welfare Benefit Plans

The Stimulus Act makes several changes that impact an employer’s welfare benefit plans which include, among others, the following:

Surprise Billings for Out-of-Network Medical Services. The issue of “surprise” billings has been in the cross-hairs of Congress for several years, resulting in a number of bills designed to address the issue in various ways. Basically, surprise or balance billings are charges that are generally for significant amounts - in the thousands - to a participant in an employer medical plan for services that are not in-network and for which there was no in-network option, and which are not covered by the plan. Examples of such changes are for air ambulances and anesthesiologists. Typically, the charge is a surprise as the participant doesn’t find out about them until after the services are provided and without information or consent provided in advance of the services. So, surprise!

At a high level, effective in 2022, balanced billing is no longer permitted without the participant’s consent in the case of urgent care services, air ambulance services (but not regular ambulance services) and, for non-urgent care situations at an in-network hospital. The Stimulus Act also provides procedures to challenge an “excess “charge, which includes through arbitration. We will know more about this new “surprise” billing provisions as guidance is provided by various government agencies, which ultimately will require changes to plan documents to comply.

Changes to Flexible Spending Accounts. The Stimulus Act makes severance changes to the rules for health and dependent care flexible spending accounts (“FSAs”) under a Section 125/cafeteria plan. The changes build on prior IRS guidance on FSAs and the pandemic.

First, employers may allow employees to carryover of unused 2020 FSA amounts to pay for qualifying expenses incurred in 2021 and unused 2021 FSA amounts to pay of qualifying expenses incurred in 2022. Second, employers may allow employees to make an election for 2021 or change a 2021 election prospectively for 2021 after the beginning of the year regardless of whether the employee has a change in status. Third, the Stimulus Act permits children who attain age 13 and thus dependent care expenses are no longer available under an FSA, to be eligible for an additional year. Finally, the Stimulus Act makes changes aimed at providing employees with better access to mental health treatment. The Stimulus Act itself generally provides that each group health plan and health insurance issuer must conduct an analysis of the nonquantitative restrictions on mental health and substance use disorder services in their plans and policies. However, we will not know what this analysis must entail until guidance is issued by the agencies.

Tax Updates

The Stimulus Act reiterates that amounts forgiven from PPP loans do not cause the borrower to recognize cancellation of indebtedness income. Additionally, if the borrower has not yet received loan forgiveness prior to the enactment of the Stimulus Act, then the following are excluded from gross income: (i) any PPP loan, (ii) any EIDL Grant, (iii) any subsidy for certain loan payments, and (iv) any Shuttered Venue Operator grants. In addition, the Stimulus Act reverses the guidance from the IRS that a PPP recipient is not entitled to tax basis or deductions even if the recipient has a reasonable expectation that its PPP loan will be forgiven. Under the Stimulus Act, taxpayers will be entitled to deductions, to the extent forgiven loan proceeds or grant proceeds are used to fund deductible expenses, and additional tax basis, to the extent such amounts are required to be capitalized.

In August 2020, President Trump issued a memorandum directing the Secretary of the Treasury to allow employers to defer the withholding and payment of certain employees’ U.S. federal payroll tax on wages and compensation paid between September 1, 2020 and December 31, 2020. In Notice 2020-65, the IRS determined that employers must withhold and pay any such deferred amounts to the Treasury Department by April 30, 2021. The Stimulus Act extended this deadline to December 31, 2021.

Preparation for First Draw or Second Draw PPP Forgiveness or Second Draw Funding

The SBA issued a flurry of guidance throughout 2020 to clarify and update certain aspects of the PPP. While not an exhaustive summary, the following are some of the key changes that came from this guidance and other announcements between the enactment of the CARES Act and the enactment of Stimulus Act. Some may be helpful for borrowers as they review their files in preparation for PPP forgiveness of either their First or Second Draw PPP loan or consider whether to apply for Second Draw PPP funding. Our prior alerts on the PPP can be found on our COVID-19 crisis response group website here.

Release of Data

In early July 2020, the Treasury Department publicly released the company names, addresses, demographic data and other information related to PPP borrowers that received over $150,000 in PPP funds. Then in December 2020, a federal judge required the SBA to release information on all borrowers who received PPP and EIDL funds including the name of the borrower, its address, the amount received, the number of people reported as being employed, and the bank issuing the loan. See this link for the details.

Inability to Rehire an Employee or Hire a New Comparable Employee

Previously, borrowers were penalized on the amount of PPP to be forgiven if they (i) reduced their headcount by any amount and/or (ii) reduced wages by more than 25%. An original exception to this rule provided that borrowers could still receive up to 100% forgiveness if they restored headcount and/or wages (as applicable) by June 30, 2020. This June 30, 2020 date was later extended to December 31, 2020 and then to the last date of the borrower’s selected Covered Period.

The SBA added another exception in cases where the borrower was unable to rehire employees (or return to the same headcount) as long as the borrower must be able to document in good faith:

• an inability to rehire individuals who were employees of the borrower on February 15, 2020;
  
  
• an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020; or
  
  
• an inability to return to a pre- February 15, 2020 level of business activity due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. The documents that borrowers should maintain to demonstrate compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.

Spending Funds and Forgiveness

In order to achieve 100% forgiveness, the SBA originally required at least 75% of a borrower’s PPP funds to be used for payroll costs. This percentage was lowered to 60%, giving borrowers more flexibility on their use of PPP funds. See Baker Botts’ client alert on this topic here.

• As an example, if a borrower received $100,000 in PPP funds and spent $54,000 on payroll and $46,000 on other forgivable expenses (e.g., rent and utilities), the borrower failed to reach the 60% threshold so their forgiveness would be reduced.
  
  
• The forgiveness amount is calculated as the amount in which payroll spending equals 60%. So, in this example, maximum forgiveness is $90,000 ($54,000 is 60% of $90,000).

Because the amount received under a PPP loan is based on average monthly payroll (capped at $100,000 per employee), the PPP also restricted the amount of PPP funds that borrowers can pay employees at the annual equivalent of $100,000 in order to maximize forgiveness. As a result, the maximum amount of PPP funds that borrowers can use to pay an individual employee is $46,154 ($100,000/52 weeks in a year x the 24 weeks that borrowers can use PPP funds). Bonuses and hazard pay are permitted “payroll” uses as are payroll paid to furloughed employees. Borrowers can still pay their employees more than $46,154 using their own funds.

One exception is the amount paid to owner-employees. Owners of a business receiving a PPP loan can only use PPP funds to pay themselves $20,833. The purpose of the owner compensation replacement cap was to encourage retention of employees and their paychecks, and prevent potential PPP windfalls to owners. Of course, this cap can also disadvantage small businesses. The SBA provided additional restrictions on owner/employees based on the type of business that they own (i.e., C¬-Corporations, S¬-Corporations, self-¬employed filers, general partners or LLC owners). See Baker Botts’ client alert on this topic here.

“Utility payments” (which are permitted and forgivable uses of the PPP) were defined in the CARES Act as “payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.” In turn, distribution of “transportation” was not clear for many borrowers, many of whom assumed that this included fuel costs, among other business transportation needs. However, the SBA since clarified that “transportation” has a very limited meaning tied to “transportation utility fees” assessed by some state and local governments, but not employee transportation costs like fuel. “Transportation utility fees” are a financing mechanism paid by both owners and renters on an ongoing monthly basis to cover the costs for roadway maintenance and other transportation needs established by the locality. The SBA also clarified that a borrower’s entire electricity bill is eligible for loan forgiveness, including electricity supply charges and electricity distribution charges, even if charged separately by the public utility.

Repayment of Loans

For borrowers that do not apply for forgiveness, or where a portion of the loan is not forgiven, the remaining PPP funds remain a loan. Repayment of PPP loans was previously deferred for 6 months. This was changed to provide that as long as a borrower submits its loan forgiveness application within 10 months of the Covered Period, the borrower is not required to make any payments until the forgiveness amount is sent to the lender by SBA. If the loan is fully forgiven, the borrower is not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, any remaining balance due on the loan must be repaid by the borrower on or before the maturity date of the loan. The maturity date for repayment of PPP loans was also extended from 2 years to 5 years.

“Necessity” and New Questionnaire for $2 million+ Borrowers

Borrowers may recall the requirement in the PPP application that the applicant certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” and that borrowers must make this certification 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. Some borrowers questioned whether they could make this certification in good faith without more information on what “necessary” means. In response to this, the SBA that any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. This “safe harbor” is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. See Baker Botts’ prior alert regarding the necessity certification here.

A borrower who received funds (together with its affiliates) of $2 million or more is required to submit questionnaire responses to the SBA. The form for for-profit borrowers is here and the form for non-profit borrowers is here. However, the SBA is also sending this questionnaire directly to $2 million+ borrowers. The form will be used by the SBA to evaluate the borrower’s previous good-faith certification that economic uncertainty made the loan request “necessary.” Publicly traded companies are now prohibited from obtaining PPP loans following enactment of the Economic Aid Act.

Mergers and Acquisitions

The SBA issued guidance outlining the required procedures for borrowers who will be acquired by another entity, which is summarized in Baker Botts’ client alert here. Potential buyers of a company with a PPP loan should consider the impact of the PPP loan on the acquisition, particularly in the diligence and negotiation process, and can review Baker Botts’ client alert on that topic here.

Felony Convictions

The PPP previously prevented an applicant from applying if he or she has been convicted of a felony within the last five years (or an applicant with a 20% or greater owner who was convicted). The 5-year period was reduced to 1-year for felonies that do not involve fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance. The application also eliminates pretrial diversion status as a criterion affecting eligibility.

FAQs

The SBA’s list of frequently asked questions on the PPP are located here and the PPP forgiveness FAQs here.

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¹For example, life insurance companies, lending businesses, gambling related businesses, among others. See Section 120.110 of title 13, Code of Federal Regulations.
²See IRS Rev. Rul. 2007-43.

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