On June 3, 2020, Congress passed the Paycheck Protection Program Flexibility Act (the Act) that is currently awaiting signature by President Trump. Among the other benefits discussed below, the Act provides borrowers with additional flexibility when it comes to spending loan funds and rehiring employees in order to receive full loan forgiveness.
Extended Repayment Term
Under the previous Interim Rules issued by the SBA, Paycheck Protection Program (PPP) Loans were granted under a two-year repayment term. The new Act changes to a repayment term of 5 years for all new loans and allows borrowers who have already received a PPP loan to adjust the repayment term up to 5 years as long as their lender agrees to the modification.
Extended Covered Period for Spending Loan Funds
Under the original terms of the CARES Act, PPP loan funds were only forgivable if used during the 8-week covered period immediately following loan origination. The Act extends that covered period from 8 weeks to 24 weeks. Now the covered period ends on the earlier of 24 weeks following loan origination or December 31, 2020.
Reduced Required Portion of Loan that Must be Used for Payroll Costs
SBA’s Interim Rules required borrowers to use at least 75% of PPP loan funds toward payroll costs. This requirement met scrutiny as it was not included in the original language of the CARES Act. Under the new Act, this requirement is reduced from 75% to 60%. This means that borrowers can now use up to 40% of their PPP funds for other eligible—and forgivable—expenses such as covered mortgage interest, rent, and utilities.
Extended Time to Rehire Employees and Avoid Forgiveness Reduction
PPP loan forgiveness can be reduced either due to employee layoffs or reductions in employee wages or salaries. The CARES Act provided some exceptions to these reductions when borrowers restore certain salaries, wages, and employment levels prior to June 30, 2020.
The new Act provides some additional exceptions to the forgiveness reduction “based on employee unavailability.” If the borrower can document that it was unable to rehire individuals employed on February 15, 2020 and unable to hire a similarly qualified employee to fill that position prior to December 31, 2020, no forgiveness reduction will be applied for that position. The exact documentation and circumstances required to establish this inability to rehire are not yet clear. Additionally, the forgiveness reduction will not be applied if a borrower can document that it did not restore its original number of full-time equivalent employees due to imposed safety requirements resulting from COVID-19. Specifically, this exception applies if CDC, HHS, and OSHA standards for sanitation, social distancing, or other worker or customer safety prevented the borrower from returning to the same level of business activity as before February 15, 2020.
Extended Deferred Payment Period
Under the previous Interim Rules, borrowers were not required to make principal and interest payments on their PPP loans for at least six months. Under the new Act, this deferment period has been extended until the date on which the amount of forgiveness can be determined. Do note that if a borrower does not apply for loan forgiveness within 10 months after the covered period ends, deferment will end and the borrower will be required to begin making principal and interest payments at that time.
Delayed Payment of Social Security Payroll Tax
Under the new Act, borrowers who receive PPP loan forgiveness are now eligible to defer their portion of the social security payroll tax (6.2%) otherwise due between March 27, 2020 and December 31, 2020. Half of the deferred amount will be due December 31, 2021, and the other half will be due December 31, 2022.
What’s Up Next
The PPP Flexibility Act will not take effect until President Trump signs the bill, so we look forward to that date. Following that signing, the SBA will also prepare and present its rules on implementing the Act.