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June 4 2020

Changes Coming to PPP Program Following Passage of the Paycheck Protection Program Flexibility Act

By: Michael J. Huff

On Wednesday, June 3, the United States Senate passed by unanimous consent the Paycheck Protection Program Flexibility Act (the “Act”).  While the Act awaits the President’s signature, it serves to revise and expand certain terms of the Paycheck Protection Program (“PPP”) as created by the CARES Act and implemented by various rulemaking and guidance from the Department of Treasury and Small Business Administration (“SBA”).

I.  Loan Term

Under current SBA rulemaking, unforgiven balances on PPP loans mature within two years of the origination date of the loan.  Recognizing the economic uncertainty continuing to face many businesses, Congress is extending the loan term so it is for a minimum of five years, effective for loans applied for on or after the effective date of the Act (the effective date is to be determined as it awaits the President’s signature).  Lenders and borrowers of loans already issued may mutually agree to extend the loan term consistent with the Act.

II.  Extension of Covered Period for Purposes of Loan-Making and Forgiveness

The Act provides that PPP loans may now be made until December 31 instead of June 30, although certain of the Act’s sponsors included a letter sent to the SBA encouraging it to only extend loans through June 30.

Notably, the covered period for use of loan proceeds was significantly expanded.  Previously, loan proceeds needed to be used within eight weeks of loan origination, a major challenge for employers which were subject to stay-at-home orders and employers whose employees refused to return to work.  An employer will now have up to 24 weeks to use their PPP loan proceeds, provided all proceeds must be used on or prior to December 31, 2020.  An employer may still elect to use an 8-week covered period for the loan instead of the 24-week period if it wishes.

III.  Flexibility in Use of Loan Proceeds

The Act significantly increases flexibility in the use of loan proceeds.  Under the Act, an employer now must use at least 60% of its PPP proceeds on payroll expenses, as opposed to the 75% requirement previously implemented through SBA’s rulemaking.  As a result, employers will now be eligible for loan forgiveness even if they used up to 40% of their PPP proceeds on covered mortgage interest, rental, or utilities expenses.

IV.  Extended and Additional Safe Harbors for Rehiring Employees

The Act now permits employers until December 31, 2020, as opposed to June 30, 2020, to eliminate any reduction in full time equivalents or any reduction in the salary or wages of an employee which would result in a reduction of loan forgiveness if not cured.

Additionally, the Act provides a safe harbor which protects employers against the inability to eliminate a proportional reduction in the number of full-time equivalent employees if the employer, in good faith, can demonstrate that it was unable to rehire individuals who were employees prior to February 15 and such employees could not be replaced by a similarly qualified employee on or before December 31, 2020.  Additionally, an employer will not be required to eliminate a proportional reduction in the number of full-time equivalent employees if the employer can document that it was unable to return to its prior level of business activity as a result of requirements established by or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration.

V.  Payroll Tax Deferral

As a result of the Act, an employer will no longer be prohibited from deferring payroll taxes under Section 2302 of the CARES Act if it has received forgiveness of a PPP loan.

For more information regarding the Payroll Protection Program, to assure employer operations are conducted in compliance with currently effective Executive Orders and other applicable laws, or to address other business and legal issues related to COVID-19 contact Nikole Canute, Scott Dwyer, or Nate Wolf.