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Key Changes to the Paycheck Protection Program

On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) was enacted, amending key provisions of the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).  Many of these changes are beneficial to borrowers of PPP loans and alter key parts of the Interim Final Rules implemented by the Small Business Administration (“SBA”) following the passage of the CARES Act.  The changes include:

  • Term of Loan Extended:  The Flexibilty Act includes a minimum 5-year maturity date for a PPP loan.  While the CARES Act permitted a maximum maturity of 10 years, the SBA’s Interim Final Rule issued on April 2, 2020, limited the maturity of a PPP loan to two years.  Now, the portion of PPP loans that are not forgiven will have a minimum maturity of five years.  While this new minimum maturity only applies to loans issued on or after June 5, 2020, lenders and borrowers are permitted to mutually agree to modify the 2-year maturity terms of existing PPP loans consistent with the minimum, longer maturity date.  

  • More Time to Use Loan Proceeds:  The Flexibility Act extends the “covered period” to permissibly use loan proceeds from June 30, 2020 to December 31, 2020.  Now, borrowers can use loan proceeds for authorized purposes (as defined in Section 1102 of the CARES Act) through December 31, 2020, regardless of whether the borrower is seeking loan forgiveness.  However, to be forgivable, the borrower must use PPP loan proceeds no later than the earlier of: (i) 24 weeks following the date of loan origination; or (ii) December 31, 2020.  A borrower that received a PPP loan prior to the enactment of the Flexibility Act can elect for the “Covered Period” of the loan to end after the original 8-week period. 

  • Extension of Time to Apply for a PPP Loan: The extension of the Covered Period through December 31, 2020 means that eligible borrowers will be able to apply for PPP loans after the original June 30, 2020 deadline.  Note, however, that loans continue to be offered on a “first come, first served” basis, and as of May 30, 2020, the SBA reported approved PPP loans totaling over $510B of the $659B allocated to the program.  As a result, companies still interested in applying for a PPP loan should do so without delay.

  • Changed Limitation on Use of Loan Proceeds for Non-Payroll Costs:  The Flexibility Act also changed the limitation in the SBA’s Interim Final Rule dated April 2, 2020 that “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.”  Instead, to be eligible for loan forgiveness, the Flexibility Act requires borrowers to use at least 60% of the covered loan amount for ”Payroll Costs,” and up to 40% may now be used to cover payments of interest on covered mortgage obligations, payment on covered rent obligations, and covered utility payments.  Note that the Flexibility Act did not expressly override the SBA’s requirement that 75% of PPP loan proceeds be used for payroll costs (regardless of whether or not the borrower seeks loan forgiveness).  However, at least for borrowers seeking loan forgiveness, it would be inconsistent to apply that 75% requirement in light of this new 60% requirement.

  • Additional Exemptions to Reductions in Loan Forgiveness:  The CARES Act provided that the amount of the PPP loan forgiveness for certain reductions in the number of full-time equivalent employees and/or wages and salaries during the forgiveness period.  The CARES Act provided that the reduction penalty will not apply to the extent a borrower that reduced headcount from February 15, 2020 through April 26, 2020 restores workforce count and salaries/wages to the level in effect on February 15, 2020 by June 30, 2020.  The Flexibility Act further extended this restoration deadline to December 31, 2020, so that the reduction penalty will not apply to the extent that, by December 31, 2020, the borrower restores their workforce count and salaries/wages to the level in effect on February 15, 2020.

    Additionally, the Flexibility Act added additional exemptions to the reduction in the amount of loan forgiveness.  Now, the amount of loan forgiveness will not be reduced based on a reduction in the number of full-time equivalent employees if the borrower, in good faith:

    • Can document that the borrower is (i) unable to rehire individuals who were employees of the borrower on February 15, 2020; and (ii) unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or

    • Can document an inability to return to the same level of business activity as that which existed prior to February 15, 2020, due to compliance with COVID-related health and safety guidance (e.g., standards for sanitation or social distancing) during the period from March 1, 2020 through December 31, 2020.

  • Extension of Deferral Period:  While the CARES Act provided that principal, interest and fees on a PPP loan would be deferred for at least six months, the Flexibility Act revised that to require principal, interest and fees to be deferred until the date on which the amount of forgiveness determined is remitted to the lender.  However, if a borrower does not apply for loan forgiveness within 10 months after the end of the forgiveness period, the borrower is required to start making payments of principal, interest, and fees at that time. Accordingly, taking the time necessary to evaluate and ensure that your paperwork and support for the Loan Forgiveness Application is in good order is encouraged.

  • Delay of Payment of Employer Payroll Taxes:  The Flexibility Act permits PPP borrowers who receive forgiveness to continue to delay the payment of employer payroll taxes, as described in Section 2302(a) of the CARES Act.  Originally, the CARES Act prohibited further deferrals for employers who obtained loan forgiveness under the PPP. 

For more information regarding the PPP and the SBA’s loan forgiveness application, please see the following posts:

© 2020 Foley & Lardner LLPNational Law Review, Volume X, Number 157

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