Congress Relaxes Key Provisions of the Paycheck Protection Program
On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Act”) became law, overhauling certain aspects of the existing Paycheck Protection Program (“PPP”). Below we have highlighted the Act’s revisions of the PPP, which provides increased flexibility to borrowers.
Before the date of the Act’s enactment, loans issued under the PPP had mandated two-year maturities. The Act amends this provision to stipulate that all loans issued under the PPP on or after June 5, 2020 shall have a minimum maturity of five (5) years and a maximum maturity of ten (10) years.
The Act further allows borrowers and lenders to modify, upon their mutual agreement, the maturity terms of existing PPP loans to conform to the new minimum maturity requirements in the Act. Consequently, if a borrower received a PPP loan prior to June 5, 2020, upon agreement with the lender, the maturity could be extended to five (5) to ten (10) years from the date of such loan’s origination.
Covered Period for Expenditure of Forgivable Amounts
As originally enacted, the PPP allowed each borrower to receive loan forgiveness on amounts spent on qualifying uses during the first eight (8) weeks, beginning on the date of origination of the loan. The Act extends this eight (8) week period to the earlier of (x) a twenty-four (24) week period or (y) a period that ends on December 31, 2020 (the “covered period”). The new forgiveness period also begins on the date of the origination of the loan. This covered period applies to both existing PPP loans and PPP loans originated after the date of the Act. However, a borrower that received its PPP loan before the date of the Act may still use the original eight (8) week loan forgiveness period at its election.
Deferment of Loan Payments
Under the PPP, borrowers are not required to make any loan payments for the first six (6) months after the date of origination. The Act extends this deferment from six (6) months to the date on which the loan forgiveness amount relating to the loan is remitted by the SBA to the borrower’s lender. If a borrower does not apply for forgiveness within ten (10) months after the covered period, then such borrower shall be required to start making payments beginning on the day that is not earlier than ten (10) months after the last day of the covered period.
Allocation of Expenditure Between Payroll Costs and Non-Payroll Costs
On April 3, 2020, the Small Business Administration (the “SBA”) issued an interim final rule requiring each borrower to allocate the use of at least 75% of its PPP loan proceeds to payroll costs and no more than 25% of its PPP loan proceeds to non-payroll costs (utilities, mortgage interest and/or rent). Additionally, the PPP required at least 75% of the forgivable amount to be allocated to payroll costs and no more than 25% to non-payroll costs.
The Act revises this allocation with respect to loan forgiveness. Now, at least 60% of the forgivable amount must be expended on payroll costs and no more than 40% may be expended on non-payroll costs. Based on the wording of the Act, it is likely that this 60% threshold for loan forgiveness is a hard threshold. If a borrower does not allocate at least 60% of its loan proceeds to payroll costs, it will not be eligible for loan forgiveness.
Safe Harbor for Full-Time Equivalent Employees and Salary/Wages of Employees
Under the PPP, there are two methods/tests for reducing the amount of loan forgiveness available to a borrower: (1) the reduction of full-time equivalent employees compared to the borrower’s chosen previous benchmark period and (2) the reduction of the salary or wages of particular employees beyond 25% of the average salary or wages such employee made in the previous full quarter of employment. The PPP included a safe harbor pursuant to which any reduction in full-time equivalent employees or reduction in salary or wages that occurred between February 15, 2020 and April 26, 2020 can be cured if such number of full-time equivalent employees or levels of salary or wages are restored by June 30, 2020. The Act extends this outside date for curing such reductions to December 31, 2020. If such a reduction is cured by December 31, 2020, the upshot is that those reductions will not adversely affect a borrower’s loan forgiveness amount.
The Act provides a further safe harbor in the event a borrower is unable to restore the number of its full-time equivalent employees by December 31, 2020 to its February 15, 2020 level. If the borrower is (x) able to document that it was either unable to rehire former employees who were employees of the borrower on February 15, 2020 or unable to hire similarly qualified employees on or before December 31, 2020 or (y) able to document that such borrower could not return to the same level of business activity existing before February 15, 2020 due to requirements established or guidance issued by the Secretary of Health and Human Services (HHS), the Director of the Centers for Disease Control and Prevention (CDC) or the Occupational Safety and Health Administration (OSHA) between March 1, 2020 and December 31, 2020 pertaining to sanitation, social distancing or other worker or customer safety requirements related to COVID-19, then such a reduction shall not count against the loan forgiveness amount. The Act requires that each borrower availing itself of this safe harbor to do so in good faith.
Payroll Tax Deferment Expansion
Under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), of which the PPP is a constituent part, a borrower was required to choose between (a) payroll tax deferral and (b) seeking forgiveness for its PPP loan. The payroll tax deferral provision of the CARES Act allows employers to defer the payment of payroll taxes for the portion of the 2020 year beginning on March 27, 2020 until (i) December 31, 2021 for 50% of such payroll taxes and (ii) December 31, 2022 for the remaining 50% of such payroll taxes. The Act no longer requires a borrower choose between availing itself of the payroll tax deferment and seeking loan forgiveness for its PPP loan. A borrower is now free to do both.
The Act’s revisions to the PPP, as the program was set forth in both the CARES Act and the interim final rules issued by the SBA, relax several key restrictions that will increase the likelihood that each borrower will be able to maximize the amount of its loan forgiveness under the PPP. It is anticipated that the SBA will continue to issue additional guidance under the PPP, thus it is important that borrowers continue to stay abreast of these further developments as the date for applying for loan forgiveness approaches.
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