PPPFA Creates New Guidelines for PPP Loans
On June 5, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) into law. Meaningful changes to the Paycheck Protection Program (PPP) include:
1. Extends covered period from eight to 24 weeks.
The PPPFA defines the “covered period” as “beginning on the date of the origination of a covered loan and ending the earlier of the date that is 24 weeks after such date of origination or December 31, 2020.” This extension gives borrowers a longer period to spend their PPP loan proceeds on allowable uses.
A PPP FAQ previously defined the covered period as beginning on the date the lender makes the first disbursement of PPP funds to the borrower. We assume this commencement date still applies, despite the extension of the length of the covered period. Additionally, the “alternative payroll covered period” allowing borrowers to align the covered period with their own payroll period was established via the PPP Loan Forgiveness Application, not by legislation. We await guidance and/or changes to the PPP Loan Forgiveness Application on whether or not borrowers can continue to use this alternative period.
2. Adjust spending limitations for forgiveness.
Previous guidance and the PPP Loan Forgiveness Application encouraged borrowers to spend 75 percent of loan proceeds on payroll costs and no more than 25 percent on non-payroll costs as part of what is required for 100 percent loan forgiveness.
However, the PPPFA states that borrowers “shall use at least 60 percent of the covered loan amount for payroll costs.” On June 8, the SBA and Treasury released at joint statement that clarified that if a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60% of the loan forgiveness amount having been used for payroll costs.
3. Moves safe harbor dates to December 31, 2020.
The CARES Act states that borrowers who had a reduction in full-time equivalent (FTE) headcount or average annual salary or hourly wages of employees between February 15 and April 26, 2020, could eliminate those reductions by June 30, 2020 and the corresponding reductions in forgiveness.
PPPFA changes the June 30, 2020 date in the safe harbor calculations to December 31, 2020. It is expected that the PPP Loan Forgiveness Application will be updated to reflect this legislative change.
4. Provides additional exceptions to FTE headcount.
The PPP FAQs, Loan Forgiveness Application, and Interim Final Rule on Loan Forgiveness indicated that borrowers would not be penalized by reductions in forgiveness for FTE reductions associated with employees that were fired for cause, voluntarily resigned, voluntarily requested and received a reduction in hours, or rejected an offer to be rehired at the same hours and rate of pay.
Borrowers would need to properly document these FTE reductions and would need to report employment rejections to the applicable state unemployment office. However, if all guidelines were followed, borrowers could count the FTE reduction (assuming they were not replaced by a new hire) as an “FTE reduction exception” and forgiveness would not be negatively affected.
The PPPFA adds other exceptions to the FTE count calculation. Forgiveness will not be reduced for the following situations:
- The Borrower’s inability to rehire individuals who were employees on February 15, 2020
- The Borrower’s inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020
- The Borrower’s inability to return to the same level of business activity as of February 15, 2020, due to compliance with guidance issued by the HHS, CDC, or OSHA between March 31 and December 31, 2020, related to sanitation, social distancing, or other safety measures applicable to employees or customers
5. Changes loan terms.
Most PPP loans were issued with 2-year amortization period. For loans issued after June 5, 2020, PPPFA indicates that loan amortization periods must have a minimum maturity of five years. Borrowers whose loans were issued before June 5 can negotiate with their lender to adjust their terms accordingly.
In addition, most loans were issued with six-month payment deferral periods. The PPPFA states that lenders must allow the deferral of principal, interest, and fees until the date on which the amount of forgiveness is remitted to the bank. If a borrower fails to apply for forgiveness within 10 months after the last day of their covered period, they will not be required to start payments of principal, interest, and fees until 10 months after the last day of that covered period.
6. Allows for deferral of employer payroll taxes.
Lastly, PPP borrowers found only a limited benefit from a provision in CARES Act Section 2303 allowing employers and self-employed individuals to defer payment of the employer’s share of Social Security tax (6.2 percent). However, PPP borrowers could only defer deposit and payment of the tax from March 27, 2020, through the date the lender issued a decision to forgive the PPP loan.
The PPPFA removes that restriction. Borrowers may now defer through December 31, 2020, regardless of whether or not they have had a loan forgiven. Half of the deferred tax must be paid by December 31, 2020; the other half by December 31, 2021.
We recommend that PPP borrowers watch for additional guidance, including an updated PPP Loan Forgiveness Application. In addition, borrowers are encouraged to ensure they are maintaining thorough employment and expense related records and documentation as suggested in current guidance and the Application.
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