New Federal Law Makes Important Changes To Paycheck Protection Program
Stites & Harbison, PLLC, Client Alert, June 5, 2020
The Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), which is intended to address problematic elements of the Paycheck Protection Program (“PPP”), was signed into law by the President on June 5, 2020. Highlights of the Flexibility Act include the following:
Loan Application Period. Although the Flexibility Act extends the “covered period” during which eligible borrowers may receive PPP loans under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) from June 30, 2020 to December 31, 2020, a statement of legislative intent, signed by certain members of Congress, has been entered into the Congressional Record stating that this change was not intended to permit the Small Business Administration ("SBA") to continue accepting PPP loan applications after June 30, 2020. In addition, in a joint statement issued on Monday, June 8, 2020, the SBA Administrator and the U.S. Treasury Secretary said that new rules will be issued confirming that no PPP loan applications will be approved after June 30, 2020. Accordingly, we would advise parties interested in obtaining PPP loans to apply by June 30, 2020.
Covered Period for Loan Forgiveness. The Flexibility Act provides that the covered period for loan forgiveness shall begin on the loan origination date and continue until the earlier of (i) 24 weeks after such date, or (ii) December 31, 2020. However, for existing loans, borrowers may elect for such covered period to end eight weeks after the loan origination date.
Eligible Costs for Loan Forgiveness. The SBA requirement that at least 75 percent of loan proceeds shall be used for payroll costs, which was not mandated by the CARES Act but effected through subsequent SBA guidance, has been changed. The Flexibility Act provides that at least 60 percent of the loan amount shall be used for eligible payroll costs, and up to 40 percent may now be used for eligible non-payroll costs.
Safe Harbor for Rehiring Employees. The safe harbor for rehiring employees has been extended from June 30, 2020 to December 31, 2020. The Flexibility Act provides that, during the period beginning on February 15, 2020 and December 31, 2020, the amount of loan forgiveness will be determined without regard to a proportional reduction in the number of full-time equivalent employees if the eligible recipient in good faith:
- is able to document (a) an inability to rehire individuals who were employees on February 15, 2020, or (b) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
- is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, 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 on 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.
Payment Deferral. The current six-month payment deferral period for PPP loans has been modified such that the deferral continues until the forgiveness amount has been remitted to the lender. If a borrower does not apply for forgiveness within 10 months after the last day of the covered period applicable to the borrower’s PPP loan, then the loan will begin to amortize at that time.
Loan Maturities. Previously, SBA guidance provided that PPP loan maturities would be two years. Under the Flexibility Act, for new PPP loans, minimum loan maturities will be five years.
Payroll Taxes. The Flexibility Act eliminates certain provisions of the CARES Act that make a taxpayer who receives loan forgiveness under a PPP loan ineligible for the deferral of certain payroll tax payments.