On March 27th, 2020 President Trump signed into law the coronavirus stimulus bill known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act. One of the cornerstones of the CARES Act was the establishment of a new loan program to assist small business known as the “Paycheck Protection Program,” or the “PPP.” One of the most important aspects of the Program is that all or a portion of a PPP loan can be forgiven under certain circumstances.
The initial round of $349 billion that Congress approved for the PPP was all distributed in just 13 days. About $130 billion remains from the second round of $320 billion subsequently allocated to the Program.
When the CARES Act was initially enacted, Congress was focused on providing various types of immediate liquidity. One of the unintended consequences is that an increase in federal unemployment coverage of $600 per week was directly in conflict with the purpose of PPP loans to bring employees back to work. Some employees have been making more on unemployment than when they were employed. As a result, this has caused problems for employers seeking to rehire their employees with PPP money.
The New Law:
On June 3rd, Congress passed the Paycheck Protection Program Flexibility Act which is expected to be signed by the President. This new law provides much needed flexibility and relief to small businesses, including a more realistic timeline to get the help they need while they bring back employees. The significant revisions to the PPP made by the Paycheck Protection Program Flexibility Act include the following:
- Current PPP borrowers can now choose to extend the current 8 week “covered period” to spend the loan proceeds to 24 weeks, or they can keep the original 8 week period. New PPP borrowers will have a 24-week covered period, but the covered period cannot extend beyond December 31, 2020. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
- Shortly under the CARES Act was passed, the SBA added a requirement by regulation that at least 75% of the loan proceeds must be spent on payroll costs to achieve full forgiveness of the loan. Under the language in the Paycheck Protection Program Flexibility Act, the payroll expenditure requirement drops to 60% from 75% but is now a cliff, meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven. Currently, a borrower is required to reduce the amount eligible for forgiveness if less than 75% of eligible funds are used for payroll costs, but forgiveness is not eliminated if the 75% threshold is not met. Various members of Congress have indicated that the new law intended this sliding scale to remain in effect at 60%, so hopefully a correction will be made to the wording of the law to provide for such a sliding scale.
- Borrowers can use the 24 week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by December 31, 2020, a change from the previous deadline of June 30, 2020.
- Borrowers will now have the ability to achieve full loan forgiveness even if the workforce is not fully restored in the event the borrower cannot find qualified employees, good faith offers to rehire employees are rejected, or business operations cannot be restored to February 15, 2020 levels due to COVID-19 operating restrictions.
- For future borrowers only, the minimum term for loans (to the extent they are not otherwise forgiven) has been extended from 2 years to 5 years. Terms for existing PPP loans can be extended up to 5 years if the lender and borrower agree. The interest rate remains at 1%.
- The deadline for applying for new PPP loans has been extended from June 30, 2020 to December 31, 2020.
- There was a restriction on PPP borrowers utilizing the CARES Act provision to defer payment of the employer share of the Social Security payroll tax through the earlier of the date of loan forgiveness or December 31, 2020. This restriction has now been eliminated, and employers with PPP loans can continue to defer this tax through December 31, 2020, which deferral is then payable 50% on December 31, 2021, and 50% on December 31, 2022.
There will undoubtedly continue to be new rules and regulations in the coming weeks relating to PPP loans. We will continue to follow these ongoing developments.
Questions: We are Here to Help and Assess Your Situation
If you have any questions as to how the new law affects your business, please contact Jon Samel, chair of our Business Law department at (215) 661-0400 or
JSamel@HRMML.com or any other member of our Team.