PPP Lending Update: Paycheck Protection Program Flexibility Act Signed Into Law | Dechert LLP

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On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”). The PPP Flexibility Act makes a handful of significant changes to the Paycheck Protection Program (“PPP”) that may impact businesses facing challenges in complying with previously existing cancellation rules PPP loans. It is important to note that these amendments are retroactive to the date of enactment of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and, therefore, apply to all outstanding PPP loans, regardless of their origin. The main changes implemented by the PPP Flexibility Act are described below.

EXTENSION OF THE PERIOD COVERED FOR FORGIVENESS

  • Under the CARES Act, the “covered period” in which PPP loan proceeds must be used for those funds to be eligible for forgiveness is limited to the first eight weeks after the PPP loan is disbursed.
  • Under the PPP Flexibility Act, borrowers can now obtain a forgiveness of the amount of PPP loan proceeds used between the loan disbursement date and the earliest of the following dates between (i) 24 weeks after and (ii) on December 31, 2020. This extension of the covered period gives borrowers much more flexibility to use PPP loan proceeds in accordance with program objectives after many businesses expressed concern that the eight-week period was too restrictive.

CHANGES TO FORGIVENESS LIMITATIONS

  • Rules and guidelines for PPP loans previously issued by the Small Business Administration (“SBA”) and the United States Department of the Treasury provide that the amount of forgiveness for a PPP loan depends on the portion of the proceeds used during the period. covered for payroll purposes. in relation to other permitted purposes (e.g. mortgage interest payments, rent and utilities). For a PPP loan to be fully repayable, at least 75% of the loan proceeds should be used for payroll costs, and up to 25% could be used for other permitted purposes.
  • The PPP Flexibility Act provides that, to qualify for loan forgiveness, a borrower must use at least 60% of loan proceeds for payroll costs and can use up to 40% for other permitted purposes. While this gives borrowers much more flexibility to use the proceeds for permitted purposes outside of paying payroll which may be essential to sustaining their business during the COVID-19 pandemic, it also retroactively imposes a new requirement. that all borrowers must meet for any portion of their PPP Loan to be canceled – any borrower who uses less than 60% of their PPP loan proceeds for payroll costs will not be eligible for cancellation.

RELAXATION OF THE IMPACT OF WORKFORCE REDUCTIONS

  • Under the CARES Act, the portion of a PPP loan eligible for forgiveness will be proportionately reduced by the amount of (i) any reduction in full-time equivalent employees during the covered period relative to the average number of equivalent full-time employees per month during certain historical periods prior to the COVID-19 pandemic and (ii) certain wage or salary reductions during the Covered Period. However, borrowers have the option of remedying these reductions by rehiring employees who were terminated between February 15, 2020 and April 26, 2020 and reinstating the salaries or wages of employees whose salary was reduced during this period. by June 30, 2020.
  • The PPP Flexibility Act provides that the discount will not be reduced for workforce reductions between February 15, 2020 and December 31, 2020 if the borrower is able to document that: (i) they are unable to rehire persons who were employees on February 15, 2020 and is unable to hire similarly qualified employees for vacant positions by December 31, 2020, or (ii) is unable to return at the same level of activity as before February 15, 2020 following direction from the Secretary of Health and Human Services, Director of the Centers for Disease Control and Prevention or the Safety and Health Administration at work regarding COVID-19 safety (including due to compliance with sanitation standards, social distancing and other worker or customer safety conditions). In addition, the period to remedy the reductions in staff, wages and salaries is extended from June 30, 2020 to December 31, 2020.

IMPACT OF PPP LOAN FORGIVENESS ON PAYROLL TAX DEFERRAL

  • The CARES Act gives employers the ability to defer payment of the social security component of employers’ payroll taxes (“OASDI”) due on wages during the period beginning March 27, 2020 and ending December 31, 2020, with 50% of deferred taxes being due on December 31, 2021 and the remaining 50% being due on December 31, 2022. However, the CARES Act also provides that this deferral is not available to any employer receiving loan forgiveness in respect of a PPP loan.
  • The PPP Flexibility Act eliminates the exclusion of borrowers with PPP loan forgiveness, making all PPP loan borrowers eligible for OASDI deferral under the CARES Act.

EXTENSION OF THE DEFERRAL PERIOD

  • Under rules issued by the SBA, principal and interest payments on PPP loans are deferred for a period of six months from the date the PPP loan is disbursed.
  • The PPP Flexibility Act extends the deferral period until the date the lender receives the applicable canceled amount from the SBA. Further, it clarifies that if a borrower does not apply for forgiveness within 10 months of the end of the covered period, the deferral period for that loan will end on the date that falls 10 months after the last day of the covered period. .

EXTENDED MATURITY OF NEW LOANS

  • Under rules issued by the SBA, existing PPP loans have a two-year term that would apply to any unforgiven amounts.
  • PPP loans issued after the enactment of the PPP Flexibility Act will have a minimum tenor of 5 years.
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