Last updated June 8, 2020: On June 3, 2020, the Paycheck Protection Program Flexibility Act (PFA) passed the Senate and is on its way to the President for his signature. This Act fundamentally changes a lot of the requirements for loan forgiveness- and is very borrower-friendly.
This Act was in response to furious lobbying by small business groups- to make improvements in the PPP Loan Program of the CARES Act- passed on March 27th this year.
Both the House and the Senate had their own versions of changes to the PPP loan program. The House passed its version and sent it to the Senate- where it was signed without amendment (PFA). The Senate version- named Paycheck Protection Program Extension Act- is now essentially dead.
PPP Loan Program
To recap, the PPP loan program was launched- with plenty of hiccups- in March- in response to the severe economic hardship caused by COVID-19. The first tranche was $349 Billion. And it ran out in a few days that saw a frenzied rush to get in line for the loan.
A second round of $310 Billion was funded to meet the demand in mid-April. Most businesses in line for the loan application got funded with this additional funding. In fact, it appears that demand for the loan has been met and there is about another $80 Billion in funds remaining.
The deadline for PPP loan application remains June 30, 2020.
Both the terms and conditions of the loan as well as conditions for loan forgiveness have been moving targets since the launch of the program.
Let’s take a look at how the new law affects loan forgiveness.
Paycheck Protection Program Flexibility Act
- Changes the covered period for loan forgiveness from 8 weeks from the date of loan funding to 24 weeks from the date the loan is funded or December 31, 2020- whichever comes first. However, a business may choose to consider 8 weeks as their covered period.
- Originally, the law stipulated that for full forgiveness, 75% of the loan needed to be used for payroll expenses and only 25% for non-payroll expenses. That ratio has now been changed to 60-40.
However, as currently written, it appears that this new ratio is an all-or-none eligibility criterion: if a borrower does not spend at least 60% of loan proceeds on eligible payroll expenses, they do not qualify for any forgiveness.Treasury issued clarification on June 8 that if a business spends <60% on payroll, they are still eligible for partial forgiveness. - The individual salary cap at an annual $100,000 is still valid.
- Initially, you were able to defer payments for 6 months from when you received the loan. Now that has been changed to 6 months after a decision on your loan forgiveness has been made. If a borrower is not applying for forgiveness, payments can be deferred for 10 months after the end of the covered period.
- Loan repayment term has been increased from 2 years to a minimum of 5 years- but only for new loans that are made after PFA passes.
- The covered expenses that you are allowed to use loan proceeds for, remain unchanged.
- The new Act allows the employer to defer the costs related to employer portion of FICA up to December 31, 2020. Originally, it was until loan forgiveness was granted.
- Originally, any reductions in the head-count of FTE employees had to be made up by June 30, 2020. That has now been extended to December 31, 2020.
- Exceptions to FTE Reduction: A reduction in the employee head-count does not apply if (1) an employee refuses a good faith offer of re-employment by the employer; (2) if any employee is fired for cause or voluntarily resigns or voluntarily requests a reduction in work hours. The new Act expands upon this. If during the period extending from February 15-December 31, 2020- (1) an employer is unable to rehire his own employees or find suitably qualified employees to fill the remaining positions OR (2) the business cannot sustain the same number of employees due to reduced activity from following the various guidelines from governmental authorities, such as the CDC, HHS or OSHA. This is a very broad exception and should be helpful to business owners who experience a general decline in their business activity and revenue.
That’s it for now. As clarifications come up, and they will- judging from the roll-out of the loan program, I will attempt to stay updated.
Thank you for reading!