This blog is intended to supplement our prior guidance regarding Paycheck Protection Program (PPP) loan forgiveness, found here. On June 3, 2020, following the House of Representatives’ approval, the U.S. Senate passed bill H.R. 7010 (i.e., the Paycheck Protection Program Flexibility Act of 2020 (the “Bill”)). Subsequently, President Trump signed the Bill into law on June 6, 2020. The Bill relaxes requirements related to PPP loans and forgiveness to further aid struggling, small businesses. Below is an overview of the Bill’s modifications to the PPP.
- Minimum Maturity Period
The Bill amends the Small Business Act (SBA) to provide a minimum maturity period of five (5) years for a PPP loan with a remaining balance. Previously, the SBA only provided that covered loans had a maximum maturity of ten (10) years. This amendment simply added a minimum maturity period to the SBA. Note that lenders and borrowers are permitted to mutually agree to modify the maturity terms of a covered loan.
- Extended Covered Period
The Bill extends the covered period for a borrower to use PPP funds from eight (8) weeks to twenty-four (24) weeks. Note that the covered period extends from the date of origination of a covered loan and ends on the earlier of (a) twenty-four (24) weeks after such date of origination or (b) December 31, 2020. Note that borrowers that received a PPP loan prior to enactment of the Bill may choose whether to apply the original 8-week covered loan period.
- Non-Payroll Expenses Extension
Importantly, the Bill raises the portion of the PPP loan to be used for non-payroll expenses from 25% up to 40%. Therefore, for a borrower to be eligible for loan forgiveness, they must use at least 60% of the PPP loan to cover payroll costs. Non-payroll expenses include payments for mortgage, rent and utilities. However, note that payment on the principal on a mortgage is not included as a non-payroll expense.
- Period to Rehire Employees and Exemption Based on Employee Availability
The Bill extends the deadline for employers to rehire employees to qualify for loan forgiveness from June 30, 2020 to December 31, 2020. As discussed in our previous blog, a decrease in full-time equivalent (FTE) employees (i.e. employees that work 40+ hours/week) will result in a reduction of the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. Therefore, so long as the borrower is able to rehire employees (or hire new employees for unfilled positions) to return to the same level of business activity (i.e., have the same percentage of FTE employees) it had on February 15, 2020, the borrower’s amount of loan forgiveness will not be reduced.
The Bill also establishes an exemption based on employee availability. The exemption establishes that loan forgiveness will not be determined with regard to a proportional reduction in the number of FTE employees if the borrower can document, in good faith, an inability to: (a) rehire individuals it employed on February 15, 2020, or (b) hire similarly qualified employees. As discussed in our prior blog, employers should document when employees refuse an offer of re-employment or voluntarily resign. Such documentation will assist the borrower to demonstrate an inability to rehire employees it employed on February 15, 2020. The exemption also applies to borrowers that can demonstrate an inability to return to the same level of business activity on February 15, 2020 due to compliance with established requirements or guidance issued by the Department of Health and Human Services (HHS), the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OSHA) between March 1, 2020 and December 31, 2020. For example, borrowers may be unable to return to the same level of business activity due to social distancing requirements established by the CDC.
- Deferral Period
The Bill revises the deferral period for PPP loans. Initially, PPP loans had a deferment period of no less than six (6) months, nor greater than one (1) year. The Bill revises this period to permit deferment of a PPP loan’s principal, interest, and fees until the date on which the amount of forgiveness is remitted to the lender. Note that if a borrower fails to apply for forgiveness within ten (10) months after the final day of the covered period, the borrower will be required to make payments on the principal, interest and fees of the PPP loan beginning on the date that is ten (10) months after the final day of the covered period.
- Payroll Tax Payments
Lastly, the Bill also eliminates the provision of the PPP which rendered a borrower ineligible to defer payroll tax payments. As such, borrowers are now able to seek payroll tax deferral for their PPP loan.
For any questions regarding the Bill or changes to the PPP, please contact your regular HLP attorney, or Partners@thehlp.com, or call (212) 734-0128 or (248) 996-8510.