New Law Adjusts Several Paycheck Protection Program Requirements
On Friday, June 5, 2020, a new law was passed modifying certain requirements of the Paycheck Protection Program (PPP), a $349 billion loan program that was passed into law earlier this year as part of the $2.2 trillion stimulus relief and economic aid legislation known as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
The CARES Act was adopted to provide economic relief to Americans and American businesses in response to the ravaging economic effects of the coronavirus (COVID-19) throughout the United States. Under the CARES Act, PPP loans have been made to eligible small businesses, sole proprietors, independent contractors and other self-employed individuals under the Section 7(a) loan guaranty program of the Small Business Administration (SBA).
The new act, the Paycheck Protection Program Flexibility Act (PPPFA), was passed, in part, in response to concerns expressed by loan recipients and lenders that certain existing provisions of the PPP were too restrictive for recipients to comply with in order to obtain some of the intended benefits of the loans.
One of the more significant benefits of PPP loans is the potential for loan forgiveness when the loans are used for certain specified purposes in accordance with the Cares Act. The PPPFA modifies certain requirements of the PPP by, among other things, providing employers with more time and flexibility in using the proceeds of their PPP loans without jeopardizing forgiveness of these loans.
Extension of Covered Period for Use of Proceeds
PPP loans are eligible for forgiveness of an amount equal to the sum of payroll costs, mortgage interest payments, rent and utilities for what initially was the eight week period following the first disbursement of a PPP loan to a borrower. As a condition to forgiveness, the PPP required employers to use the proceeds of the PPP loans they received within the eight week period following the date of disbursement of the PPP loan proceeds to them. The PPPFA now allows employers up to 24 weeks from the date of disbursement of PPP loan proceeds to use these funds (but in no event later than December 31, 2020) without jeopardizing forgiveness.
Proportionate Use of PPP Loan Proceeds
One of the primary purposes of the PPP loans is to aid employers in meeting their payroll requirements. The PPP previously required employers to use 75% of the proceeds of their PPP loans for payment of payroll expenses as a condition to subsequent forgiveness. The PPPFA now permits employers to use 60% of the proceeds of their PPP loans for payment of payroll expenses and to use the balance (40%, up from 25%) of the PPP loan proceeds for mortgage interest, rent, utilities and other permitted costs without jeopardizing forgiveness.
Extension of Covered Period for Rehire
The PPP also provided that the amount of funds eligible for forgiveness would be reduced for employers who terminated employees and reduced salaries or wages during what was the original eight (8) week covered period. The provisions of the PPP required employers who previously laid-off (or furloughed) employees to re-hire (or otherwise replace) those employees by June 30, 2020 to continue to qualify for forgiveness.
Under the PPPFA, employers now have until December 31, 2020 to rehire or replace these employees without being penalized. It should be noted that there continues to be no requirement that the loan recipient rehire the same employees; hiring full-time equivalent employees is sufficient.
Extension of Loan Maturity Date
For balances of PPP loan proceeds not forgiven that remain owed by loan recipients following loan forgiveness, if any, the PPPFA extends the maturity date for repayment thereof from two to a minimum of five years. The maximum maturity of 10 years remains a part of the PPP. For loans made prior to June 5, 2020, lenders and borrowers may mutually agree to extend the terms from two years to conform with the extended repayment period requirements under the PPPFA.
The PPPFA extends the deferral period for PPP loans, allowing loan recipients to defer payments until the amount of forgiveness determined under Section 1106 of the CARES Act is remitted to the lender. Under the PPPFA, loan recipients who do not apply for forgiveness now have ten (10) months from expiration of the covered period to begin making payments under their PPP loans. In addition, loan recipients are now entitled to defer payroll taxes even if they have been granted loan forgiveness.
Continued Compliance and Monitoring
Loan recipients should continue to comply with the requirements of the PPP and, given the ever-changing environment, should continue to monitor developments relating to the CARES Act, including the PPP and the PPPFA.
More Information on the PPPFA
The full text of the PPPFA may be found at: https://www.congress.gov/bill/116th-congress/house-bill/7010.
U.S. Treasury Department guidance may be found at: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf.
U.S. Small Business Administration guidance may be found at: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
Victoria Baylin helps emerging growth, development stage, and established companies to thrive by representing them in all aspects of general corporate and business law matters throughout Maryland and the District of Columbia. For more information, you can reach her at 301-657-0151 or firstname.lastname@example.org.