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New Law Eases Strict Rules on PPP Loans

On Behalf of | Jun 12, 2020 | Employment Issues For Employers |

On June 5, President Trump signed the Paycheck Protection Program Flexibility Act of 2020.  As I previously blogged, Congress established the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  This $669 billion-dollar loan program was designed to help businesses negatively affected by COVID-19 continue to pay their employees.  Employers should familiarize themselves with the new law, which relaxes many of the program’s original requirements.

1. Increase in the Loan Percentage That May Be Used on Non-Payroll Expenses

Under the CARES Act, borrowers are eligible for up to 100% loan forgiveness if they spend their PPP funds on payroll, mortgage interest payments, rent, or utilities.  However, borrowers could only spend 25% of their loan on nonpayroll expenses.  The PPP Flexibility Act increases the percentage that may be spent on nonpayroll expenses to 40%.

2. Increase the Covered Period to 24 weeks

Under the CARES Act, borrowers are eligible for forgiveness on funds spent during the “Covered Period” – the 8-week period beginning on the fund disbursement date.  Under the new law, the covered period is expanded to 24 weeks after disbursement, or until the end of the year, whichever is earlier.

3. Increased Time to Pay Back Unforgiven Loans

Under the previous rules, borrowers had a minimum of two years to repay the unforgiven portion of their loans.  Under the PPP Flexibility Act, the minimum repayment period is extended to five years.   

4. Increase the Payment Deferral Term

Under the new law, borrowers do not have to make loan payments until the date the Small Business Administration (SBA) sends the borrowers’ loan forgiveness amounts to the borrowers’ lenders.  If a borrower does not apply for forgiveness, the deferral period lasts until 10 months after the covered period.  Under the old rules, borrowers would have had to make payments while still awaiting a decision on their loan forgiveness applications.

5. Protections for Borrowers Unable to Rehire Staff

Under the CARES Act, the portion of the PPP loan that is forgiven will be reduced if the employer reduced its headcount during the covered period.  However, an employer would be entitled to full forgiveness if they restored their headcount by June 30, 2020.  The PPP Flexibility Act extends this deadline to December 31, 2020.  Additionally, borrowers who reduced their headcount will now be eligible for full forgiveness, even if they do not rehire laid-off employees, if they can show one of the following:

  1. They were unable to rehire employees and were unable to hire similarly qualified replacements by December 31, 2020
  2. They were unable to return to the same level of business activity as February 15, 2020 due to COVID-19 related safety requirements.

6. Payroll Tax Deferrals

Under the CARES Act, borrowers with forgiven PPP loans weren’t eligible for the Act’s payroll tax deferral benefits.  The PPP Flexibility Act removes this prohibition.

While this is all good news for borrowers, two words of caution are in order:

  1. Although the Act gives borrowers more leeway to spend funds on nonpayroll expenses, it may come at a cost.  Previously, if a borrower spent more than 25% of their loan on nonpayroll expenses, this would simply reduce their forgiveness amount.  But under the new law, it is not clear whether a borrower who spends more than 40% on nonpayroll expenses will still be eligible for any   Under one interpretation, going over the 40% threshold will disqualify a borrower from getting any forgiveness.  Senator Marco Rubio, who wrote the original PPP bill, has said that “if you don’t spend 60% of your money on payroll, if you only spend 59.9%, you will get zero forgiveness.”  On the other hand, the SBA subsequently stated that “if a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness.”  Until an interim rule is published that clarifies this issue, borrowers should be careful not to spend more than 40% on nonpayroll expenses.
  2. The Act does not change the PPP loan application deadline, which remains June 30th, 2020.

If you have any questions related to the Paycheck Protection Program, or any other aspect of employment law, contact Thatcher Zavaro & Mani at 301-850-1246www.ThatcherLaw.com. Email me at [email protected].

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