Congress Provides Relief to Paycheck Protection Program Borrowers

On Friday, June 5, 2020, President Trump signed H.R. 7010 – the Paycheck Protection Program Flexibility Act (“PPPFA”) – into law. The PPPFA amends certain provisions of the Paycheck Protection Program (PPP) and provides greater flexibility to borrowers with respect to loan terms and loan forgiveness.

Loan Maturity

PPP loans entered on into or after June 5, 2020 will have a minimum maturity of five years, and a maximum maturity of ten years. With regards to loans entered into on before June 5, 2020, borrowers and lending institutions may mutually agree to extend the maturity terms.

Covered Period Expansion

The PPPFA extends the loan forgiveness period from eight weeks following loan disbursement to 24 weeks following loan disbursement, provided such new loan forgiveness period may not extend past December 31, 2020. However, borrowers who received loans before June 5, 2020 can choose to use their original eight-week period instead of utilizing the extended period set out in the PPPFA. By extending the covered period for purposes of forgiveness, the PPPFA also extends this period of time during which a borrower must maintain employee headcount and compensation levels. The PPPFA also extends the deadline to rehire full-time equivalent employees from June 30 to December 31, 2020.

Exemptions for the Failure to re-hire Employees

Under the PPPFA, the failure to re-hire employees will not reduce the loan forgiveness amount if the borrower, in good faith, can document:

• its inability to rehire individuals who were employees of the borrower on February 15, 2020, and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
• 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 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.

Payroll Costs

The PPPFA reduces the percentage of loan proceeds required to be spent on “payroll costs” from 75 percent to 60 percent. In other words, borrowers must use at least 60 percent of their PPP loan proceeds for covered -payroll costs, in order to be eligible for full loan forgiveness.

Payroll Taxes

The Coronavirus Aid, Relief, and Economic Security Act (The “CARES Act”) permits businesses to delay payment of employer payroll taxes through December 31, 2020, with payments due over the following two years. However, the CARES Act also explicitly excluded borrowers who received loan forgiveness from taking advantage of this benefit. The PPPFA removes that prohibition and allows borrowers to delay payment of their payroll taxes like other businesses.

Payment Deferral Date

Under the PPP, loan payments could be deferred for between six to twelve months, as agreed to between the borrower and its lender. The PPPFA allows borrowers to defer payment until the date that the amount of loan forgiveness is remitted to the lender. However, if borrower fails to apply for loan forgiveness within ten months of the end of the applicable covered period, then the payment deferral ceases at the end of such ten month period.

SBA’s Interim Final Rule

In order to implement the PPPFA, the Small Business Administration revised its first PPP interim final rule. Notably, the revised rule reduces from five years to one year the look-back period to determine eligibility for applicants, or owners of applicants, who, for non-financial felonies, have (1) been convicted, (2) pleaded guilty, (3) pleaded nolo contendere, or (4) been placed on any form of parole or probation (including probation before judgment).

The look-back period remains five years for felonies involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance. 

The SBA has published new Borrower, Lender applications and EZ Forgiveness applications. The EZ forgiveness application applies to borrowers that are (1) self-employed and have no employees; or (2) did not reduce the salaries or wages of their employees by more than 25 percent, and did not reduce the number or hours of their employees; or (3) experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25 percent.

Action

The PPPFA provides more control over the use of PPP funds and eases the requirement for forgiveness. As of June 6, 2020, $130 billion remained available from the $320 billion second round that Congress approved for PPP. The loans are eligible for forgiveness based on the borrower maintaining or quickly rehiring employees and maintaining salary levels.

In light of the PPPFA, potential borrowers should decide whether it would be more beneficial to use an eight-week or a 24-week covered period. Borrowers should evaluate their clients demand and costs before opting for a longer covered period. Entrepreneurs with PPP loans funded before enactment of the PPPFA should consider contacting their lenders to discuss a potential extension of the maturity date of their PPP loan.

Finally, the Congressional Record letter states that the PPPFA amendments are not intended to extend the deadline to apply for a PPP loan beyond June 30, 2020. Thus, any employer that is considering applying for a PPP loan should do so by the June 30, 2020, deadline.