Changes to the Paycheck Protection Program
Updated: Jul 22, 2020
By Sarah Everhart
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In early April I posted about the Paycheck Protection Program (PPP). The PPP, a forgivable loan program meant to provide financial assistance during the COVID-19 pandemic, was part of the Coronavirus Aid, Relief, and Economic Security Act (CARES). On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) into law (H.R. 7010). The PPPFA is an attempt to address many of the concerns about the PPP expressed by the small business community. This post will provide an overview of some of the legislative changes to the PPP.
Extension of the Period to Use PPP Funds
According to the terms of the PPP, the Small Business Administration (SBA) will forgive loans if all employees are kept on the payroll for eight weeks. The PPPFA extends the covered period for loan forgiveness from eight weeks after the date of loan disbursement to the earlier of 24 weeks from the date the PPP loan is originated or Dec. 31, 2020. Borrowers who received their loans before June 5th can elect to use either an 8-week period or a 24-week period, however, borrowers who receive their loan after June 5th borrowers are required to use the 24-week period. Businesses will still need to spend the money on payroll and authorized expenses (rent, mortgage payments, utilities, and interest on loans) but they now have an extended period in which to do so.
Adjustment of Allowable Percentage Spent on Payroll
One of the major concerns about the PPP, particularly for businesses unable to operate due to COVID-19, was the requirement to spend 75% of the loan on payroll-related expenses. The 75% requirement meant employers who received PPP funding and wanted full loan forgiveness were forced, in some situations, to pay workers who were not actually working. The PPPFA reduces the percentage of the loan proceeds required to be spent on payroll from 75% to 60%. If a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness period, the borrower will be eligible for a reduced amount of loan forgiveness.
Amendment to FTE Employee Retention Requirements
The purpose of the PPP was the retention of full-time employees (FTE) and, to be eligible for full loan forgiveness, businesses were required to rehire the same number of FTE as they had prior to the onset of COVID-19 by June 30, 2020. The PPPFA extends the rehire date to December 31, 2020. According to this article, the PPPFA also creates an exception if the business is able to demonstrate it:
is unable to rehire an individual who was an employee of the eligible recipient on or before February 15, 2020;
is able to demonstrate an inability to hire similarly qualified employees on or before December 31, 2020; or
is able to demonstrate an inability to return to the same level of business activity as the business had prior to February 15, 2020.
Extension of the Deferral Period and Maturity Date
According to the PPP, loan payments were deferred for a minimum of six months, but not to exceed one year. The PPPFA replaces this period with deferral time frames tied to forgiveness of the loan. Payments are deferred until the date on which the amount of forgiveness determined is remitted to the lender. If a borrower does not submit to his/her lender a loan forgiveness application within 10 months after the end of the loan forgiveness covered period (either the 8 or 24 week period referenced above), the borrower must begin paying principal and interest after that period.
For loans made before June 5, 2020, the maturity is two years; however, borrowers and lenders may mutually agree to extend the maturity of such loans to five years. According to the PPPFA, for loans made on or after June 5, the maturity is five years. A loan is considered to be made when the SBA assigns a loan number to the PPP loan.
Application and Regulations
The PPPFA confirms that June 30, 2020, is the last date on which a PPP loan application can be approved. On June 12, a new PPP application was released. On June 11, 2020, the SBA published revisions to its First Interim Final Rule on the Paycheck Protection Program. These regulations are a good source of information for how the PPPFA amends and impacts the PPP.