On June 5, 2020, the President signed into law the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”).
This new law provides eligible employers with greater flexibility in achieving Paycheck Protection Program (PPP) loan forgiveness and repayment.
1. Employers are now allowed to use up to 40% of their PPP loan amounts on non-payroll qualifying expenses
SBA rules had required that employers use 75% of PPP loan funds on qualifying payroll expenses. The PPPFA requires that 60% of PPP loan funds be used on qualifying payroll expenses in order to achieve forgiveness. This allows eligible employers to spend up to 40% of PPP loan funds on qualifying non-payroll expenses such as eligible rent and utilities expenses. However, a word of caution is in order. An eligible employer’s failure to spend at least 60% of the PPP loan funds on qualifying payroll expenses may have the effect of negating any loan forgiveness. This is a topic of continuing debate and such interpretation is likely to change. However, for now, employers should use at least 60% of PPP loan amounts on qualifying payroll expenses in order to maximize forgiveness of the PPP funds.
2. Employers are now allowed to spend PPP loan funds over a 24-week period rather than an 8-week period
Originally, PPP loan funds were required to be spent in the eight-week period following receipt of the loan funds in order to be eligible for forgiveness. Now, employers may choose to spend such funds over a 24-week period. However, the loan forgiveness rules require that PPP loan funds be spent no later than December 31, 2020. Employers may choose to spend the PPP loan funds over the original 8-week period, if they wish. This flexibility allows eligible employers who have been out of operation due to governmental orders or restrictions to expend PPP loan funds on payroll after they are allowed to re-open for business. This change also has the potential to allow eligible employers to spend PPP loan proceeds on non-payroll eligible expenses (such as eligible rent and utilities) over a longer period of time than originally allowed—up to the 40% limit discussed above.
3. The deadline to re-hire employees and receive forgiveness has been extended to December 31, 2020
The PPP required employers to hire back employees by June 30, 2020 in order to have any portion of their eligible compensation count towards forgiveness. The PPPFA allows rehiring to occur by the end of this year.
4. Additional Safe Harbor for Rehiring of Full-Time Equivalents
The PPPFA states that, during the period of February 15 – December 31, 2020, the amount of loan forgiveness shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if the employer, in “good faith” can document:
- An inability to rehire employees who were employed by the employer on February 15, 2020; and
- An inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
Thus, if an eligible employer can document that, in good faith, it attempted to rehire employees employed on February 15, 2020 and, failing that, attempted to hire similarly qualified employees and the positions remained unfilled through the end of the year, loan forgiveness will not be impacted.
Likewise, loan forgiveness will not be impacted if an eligible employer is able to show “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” certain federal governmental guidance related to “maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.” For example, if a business experienced a downturn in business for the period of February 15, 2020 – December 31, 2020, due to compliance with CDC guidelines for sanitation and social distancing, loan forgiveness would not be reduced for such reason. For these safe harbor provisions, the amount of necessary documentation and required proof is currently unclear.
5. Extension of Repayment Deferral
Originally, repayment of principal and interest on PPP loans was to begin 6 months after the loan was funded. Under the PPPFA, deferral on repayment is extended “until the date on which the amount of forgiveness . . . is remitted to the lender.” In other words, repayment of any loan funds is deferred until a determination on loan forgiveness is remitted by the SBA to the lender. If an employer fails to apply for loan forgiveness, repayment of principal and interest begins 10 months after the covered period ends—i.e., 10 months after the 24-week period in which the PPP loan funds may be spent ends. The PPPFA effectively extends the deferral periods of any portion of PPP loans to be repaid.
6. The maturity of a PPP loan has or may be changed
For PPP loans made on or after June 5, 2020, the maturity date of such loan is now 5 years. For all PPP loans disbursed prior to June 5, 2020, the maturity date of the loan remains 2 years. However, the lender and borrower are “not prohibited” from agreeing to a loan modification of the maturity date to 5 years.
***Please keep in mind that the governmental guidance on COVID-19 related employment issues changes rapidly.
If you’re an employer and have questions about labor and employment law, including matters related to the Paycheck Protection Program Flexibility Act, consider calling on the attorneys at Kainen, Escalera & McHale in Connecticut. We do one thing and one thing only – we are exclusively an employer defense law firm – in fact, we are one of the largest employer defense law firms in the region. What’s more, each of our attorneys has over 25 years of experience in employment and labor law matters and can provide your business with comprehensive legal counsel ranging from assistance with necessary preventive measures to trial advocacy. Please call us if we can help you.
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