Easing Path To Loan Forgiveness, ‘Flex Act’ Modifies Paycheck Protection Program

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On June 3, 2020, the Senate unanimously approved H.R., 7010, the Paycheck Protection Program Flexibility Act of 2020, or Flex Act, modifying certain provisions of the CARES Act relating to loan forgiveness under the Paycheck Protection Program (PPP).

The Flex Act, which the House of Representatives approved on May 28, 2020, expands the time during which borrowers can spend PPP proceeds and ultimately makes it easier for borrowers to obtain full forgiveness. The Flex Act will become effective if it is signed by President Trump.

The Flex Act modifies the PPP by:

INCREASING

  • the maximum percentage of loan proceeds a borrower can spend on eligible non-payroll costs to 40% (currently 25%).

REDUCING

  • the amount a borrower must spend on payroll costs to 60% (currently 75%). If less than 60% is spent on payroll costs, there might be no loan forgiveness.

EXTENDING

  • for new loans only, the maturity date is extended from 2 years to 5 years. However, existing PPP loans can be extended up to 5 years if the lender and borrower agree.
  • the “covered period” during which a current borrower may use PPP proceeds can be extended from 8 weeks to the earlier of (i) 24 weeks following disbursement or (ii) December 31, 2020. A current borrower still can elect to use the original 8 week period. A new borrower is not bound by the 8 week period.
  • the payment deferral period for a PPP loan until the amount of loan forgiveness is determined or, for borrowers who do not seek forgiveness, is extended to 10 months.

PERMITTING

  • PPP loan borrowers also may defer certain payroll tax payments even if there is loan forgiveness

The Flex Act also extends the “Safe Harbor” date for rehiring employees from June 30, 2020 to December 31, 2020. Specifically, the law states that, 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 full-time equivalent employees if an eligible recipient, in good faith:

(a) is able to document (i) an inability to rehire individuals who were employees of the borrower on February 15, 2020 and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020;

or

(b) is able to document an inability to return to the same level of business activity as such business was operating at or 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 customary safety requirements related to COVID-19.

Key Takeaways

What does this mean for borrowers? It should be easier to achieve loan forgiveness because a smaller amount of the loan (only 60%) needs to be used for payroll forgiveness, the time to use loan proceeds is extended and the need to bring all workers back may be waived in certain circumstances.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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