New Law – Risks, Opportunities and Major Changes to the Paycheck Protection Program (PPP)

Note: This article was originally published on 6/5/2020 and was last updated on 6/8/2020.

On June 3, 2020, the Senate passed H.R. 7010 entitled the Paycheck Protection Program Flexibility Act of 2020 (the “PPPFA”). On June 5, 2020, President Trump signed the PPPFA into law. The PPPFA significantly changes a number of provisions in the Paycheck Protection Program (PPP) loan program enacted as part of the CARES Act.

Loan Maturity Changes

Even though the CARES Act provided for a maximum loan maturity of 10 years, the Small Business Administration (SBA) decided that PPP loans would have a 2-year maturity. The PPPFA extends the minimum maturity of PPP loans to 5 years. The new loan maturity period applies to any PPP loan made on or after the enactment of the PPPFA. Although lenders and borrowers are not required to modify PPP loans to provide for a longer payment period, they may mutually agree to modify the maturity terms of prior-disbursed PPP loans. In order for borrowers with an existing PPP loan to take advantage of the new law, their lenders have to agree to the 5-year maturity period. It seems unlikely that lenders will be thrilled to extend maturity of these low-interest loans.

Forgiveness Changes

Covered Period

Under the new law, the covered period for PPP loan forgiveness will extend from 8 weeks from the date of origination to the earlier of 24 weeks from the origination date or December 31, 2020. If you received a PPP loan before the enactment of the PPPFA, you may choose to continue using the 8-week covered period set forth in the CARES Act. The new law provides more time for borrowers to spend PPP funds, which means borrowers have more time to spend the loan on allowed payroll and non-payroll expenses.[1]

The new covered period also increases the amount of time a borrower has to hire or re-hire employees in order to avoid a reduction in loan forgiveness. By hiring employees back before the end of 2020, borrowers will be able to increase their loan forgiveness amount.

The PPPFA also makes it easier for borrowers to maintain their wages/salaries levels, and presumably avoid reduction in loan forgiveness. The PPP loan amount was calculated by multiplying one month of 2019 payroll by 2.5, which equaled approximately 10 weeks of payroll. With the increased covered period, borrowers now have the flexibility to spend 10 weeks of payroll until the end of 2020.[2] This will make receiving complete loan forgiveness more likely.

Reduction in FTEs

The PPPFA adds a new exemption regarding hiring or re-hiring full-time equivalent (FTE) employees to qualify for full loan forgiveness. The current PPP loan forgiveness rules contain a provision which reduces loan forgiveness in proportion to the reduction of a borrower’s employees during the 8-week period, provided that the borrower fails to hire or rehire the same number of employees by June 30th.

The PPPFA states that the amount of loan forgiveness will not be reduced due to a reduction in the number of FTE employees if a borrower, in good faith, documents (i) the inability to rehire individuals who were employees on February 15, 2020; and (ii) the inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.

Moreover, the amount of loan forgiveness will not be reduced due to a reduction in the number of FTE employees if a borrower, in good faith, documents the inability to return to the same level of business activity at which the borrower operated on or before February 15, 2020, due to compliance with federal governmental requirements or guidance (DHHS, CDC or OSHA) issued between March 1, 2020, and December 31, 2020, relating to standards of sanitation, social distancing, or other worker or customer safety requirements due to COVID-19.

Requirement to Spend 75% on Payroll

Currently, in order to be eligible for full loan forgiveness, the SBA requires that a borrower spend at least 75% of the PPP funds on payroll expenses.

Under the PPPFA, borrowers must use 60% of the PPP funds for payroll expenses, and may use up to 40% for permitted mortgage, rent, utilities, and interest on secured debt to receive loan forgiveness. As currently drafted, the PPPFA requires borrowers to spend at least 60% of PPP funds to receive any loan forgiveness. This means that if at least 60% of the PPP funds are not spent on payroll, borrowers will not be eligible for loan forgiveness. This is a major change from the 75%/25% rule created by the SBA, which reduced the amount of loan forgiveness if less than 75% of the PPP funds was used to cover payroll expenses.

Payment Deferral

The PPPFA replaced the 6-month deferral of payments due under PPP loans with deferral until the date on which the amount of forgiveness determined under the CARES Act is remitted to the lender. If a borrower does not apply for forgiveness, the borrower must begin making payments 10 months after the covered period ends (the new covered period is the earlier of 24 weeks from loan origination or December 31, 2020 for all current PPP borrowers).

Payroll Tax Deferral

Lastly, the PPPFA allows all employers to take advantage of the CARES Act deferral of the 6.2% employer portion of social security payroll taxes, regardless of whether they have had a PPP loan forgiven.[3]

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[1] See https://www.wendel.com/news/covid-19-cares-act-guidance/ for a definition of allowed payroll and non-payroll expenses.

[2] Section 1106(d)(3)(A) of the CARES Act states that the amount of loan forgiveness will be reduced by the amount of any reduction in total employee salary/wages during the covered period, if that reduction exceeds 25% of the total salary/wages of the employee during the most recent full quarter during which the employee was employed before the covered period. The PPPFA amends the term “covered period.” Now, it should not be a problem for most borrowers to spend at least 75% of payroll of one quarter throughout the rest of this year. This may be an unintended consequence that will be rectified down the road, but at least for now, it is the law.

[3] CARES Act Section 2302(a)(3) required borrowers who received PPP loan forgiveness to cease the deferral of payment of employer old age, survivors and disability insurance (OASDI).