The Paycheck Protection Program (PPP) has been a topic of much frustration for borrowers as they navigate the COVID-19 pandemic. Aimed at helping small businesses with their payroll and operating expenses, the loan program allows loan forgiveness if the funds are used for the proper purposes and in the proper amounts.
On June 5, 2020, President Trump signed the PPP Flexibility Act, amending the initial PPP provided for in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and giving borrowers more time and options for spending the loan proceeds and benefiting from the forgiveness.
Key Points
- The “covered period” that was originally defined as the eight-week period after the origination of the loan has been extended to the earlier of 24 weeks beginning on origination of the loan or December 31, 2020.
- Given the extension of the covered period, the employment test has also been extended. Specifically, the number of full-time equivalent full time employees (FTEs) during the now 24-week period must not be less that the average number of FTEs during either February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020 in order to achieve full forgiveness. The borrower can elect to retain the old eight-week period if this test will create issues.
- The requirement that at least 75 percent of the PPP loan be spent on payroll costs has been lowered. Under the Flexibility Act, 60 percent of the PPP loan must be spent on payroll costs, meaning that up to 40 percent may be spent on other qualifying costs (i.e., rent, mortgage interest, or utility payments).
- The Flexibility Act repeals the provision that caused an employer’s ability to defer paying their share of social security taxes until December 31, 2021 and December 31, 2022 to cease if the PPP loan was forgiven.
- The maturity of PPP loans has been extended to five years. This extension applies to loans made on or after June 5, 2020 but does allow for lenders and borrowers to modify terms of previously disbursed loans to conform to the new five-year period.
- The deadline for applying for a PPP loan has been extended from June 30, 2020 to December 31, 2020.
- The deferral of principal and interest payments has been extended from six months to the earlier of the date a borrower submits their application for loan forgiveness or 10 months.
- The period in which an employer may rehire or replace an employee who was laid off between February 15, 2020 and April 26, 2020 or to restore reductions in compensation of greater than 25 percent has been extended to December 31, 2020.
- New sections have been added that provide an exemption from a reduction of loan forgiveness if an employer is unable to fully restore their workforce. Specifically, if an employer is either unable to hire qualified workers on or before December 31, 2020 or unable to return to the same operating level the business was operating at before February 15, 2020 due to complying with guidance issued by the Department of Health and Human Services secretary, the Centers for Disease Control director, or the Occupational Health and Safety Administration during the period from March 1, 2020 to December 31, 2020, this inability won’t count against satisfying the employment test.
If you have any questions regarding the content of this alert, please contact Roger Cominsky, Financial Institutions & Lending Practice Area chair, at rcominsky@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or Samantha Podlas, associate, at spodlas@barclaydamon.com.
We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.