Major Changes to Loan Forgiveness Rules Under the Paycheck Protection Program

Attorney Keith T. Zimmet

Keith T. Zimmet | President, Managing Shareholder

June 4, 2020

As of June 4, 2020

On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which is an approximately $2 trillion stimulus and economic relief package. One principal feature is the loan program known as the Paycheck Protection Program (“PPP”), to be administered by the Small Business Administration (“SBA”). On April 24, 2020, the President signed into law the Paycheck Protection Program and Health Care Enhancement Act, providing additional funds for the PPP (the “Enhancement Act”). The most significant feature of a PPP loan is if the borrower complies with certain requirements, some or all of the PPP loan will be forgiven.

Congress has now passed and the President is expected to sign into law today, June 4, 2020, the Paycheck Protection Flexibility Act of 2020 (the “Flexibility Act”), which amends the CARES Act to provide greater flexibility to Borrowers in qualifying for Loan Forgiveness, including the following major changes:

1. Reduction in Percentage Which Must Be Spent on Payroll Costs; Possible All or Nothing Condition.

Reduces the percentage of PPP loan proceeds which must be spent on payroll from 75 percent to 60 percent. This will permit greater uses of PPP Loan proceeds for such non-payroll items as rent, mortgage interest, and utilities.

NOTE: Previously, if a Borrower did not meet the 75 percent threshold, the Borrower could still be eligible for partial forgiveness of the PPP Loan. Under the Flexibility Act, as technically written, it appears that if the Borrower does not meet the 60 percent payroll threshold, then no portion of the PPP Loan may be forgiven. We are awaiting additional SBA guidance on this issue as some Senators have already stated that this was not the intent.

2. Extends Period of Time to Use PPP Loan Proceeds.

To qualify for forgiveness, PPP loan proceeds must be used to pay permissible costs during the “Covered Period”. The Flexibility Act defines the “Covered Period” as the period of time commencing on the date the PPP loan is funded and ending on the earlier of: (a) twenty-four-weeks (168-days) thereafter(previously this was an eight-week (56-day) period), or (b) December 31, 2020.

NOTE: The Flexibility Act gives the Borrower the option to choose the eight-week (56-day) period if the Borrower received the PPP Loan prior to the enactment of the Flexibility Act.

3. Extends Safe Harbor for Rehiring Employees.

Extends the deadline to rehire workers from June 30, 2020 to December 31, 2020, as follows:    

A. FTE Reduction Safe Harbor. Under the Flexibility Act, if the Full Time Equivalent (“FTE”) employee headcount was reduced between February 15, 2020 and April 26, 2020 (the Safe Harbor period) but the Borrower eliminates those reductions by December 31, 2020 (previously June 30, 2020) or earlier, the Borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees.

B. Compensation Safe Harbor. Under the Flexibility Act, if certain employee salaries and wages were reduced between February 15, 2020 and April 26, 2020 (the Safe Harbor period) but the Borrower eliminates those reductions by December 31, 2020 (previously June 30, 2020) or earlier, the Borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in salaries and wages.

4. New Safe Harbors Relating to FTE Reductions.

The Flexibility Act provides the following two new Safe Harbors exempting a Borrower from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees:

A. Inability to Rehire. During the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness shall be determined without regard to a proportional reduction in the number of FTE employees if an eligible Borrower, in good faith, is able to document: (i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.

B. Inability to Return to Same Level of Business. The exemption also applies if the Borrower, in good faith, is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established 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 during the period beginning on March 1, 2020 and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

5. Extends the Maturity Date on Unforgiven PPP Loan.

With respect to any PPP Loan originating on or after the enactment of the Flexibility Act, the Flexibility Act extends the maturity date for repayment of any unforgiven PPP Loan to five years from the date of funding (previously this was two years).  With respect to any PPP Loan which originated prior to enactment of the Flexibility Act, the Flexibility Act permits, but does not require, a Borrower and its lender to modify the terms of such PPP Loan to provide for such extended maturity date.

6. Extends Deferral Period Before Repayments Required.

Extends the period of time in which a Borrower may defer interest and principal payments on the PPP Loan from six months after funding to either: (a) the date on which the amount of forgiveness is determined, or (b) ten months after the last day of the Covered Period if the Borrower fails to apply for forgiveness within ten months.

7. Permits Borrowers to Defer Payroll Taxes Even if PPP Loan is Forgiven.  

Section 2302 of the CARES Act permits employers to defer the payment of the employer portion of federal payroll taxes (i.e., Social Security Tax and certain Railroad related taxes) that would otherwise be due from March 27, 2020 through December 31, 2020, without penalty or interest charges; provided that the employer must pay 50 percent of the deferred amount by December 31, 2021, and the remainder by December 31, 2022. Prior to the Flexibility Act, once a Borrower received a decision from its lender that its PPP loan was forgiven, the Borrower was no longer eligible to continue to defer such payroll taxes. Under the Flexibility Act, even after a Borrower receives a decision from its lender that its PPP loan is forgiven, the Borrower will still be eligible to take advantage of Section 2302 and continue to defer such payroll taxes through December 31, 2020.

Keith T. Zimmet is the Chair of our Commercial Finance Practice Group, and President and Managing Shareholder of our firm.

This information provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact or situation.

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