On Friday, June 5 President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act) into law. The PPP Flexibility Act modifies the Paycheck Protection Program (PPP) that was contained in the CARES Act in several significant ways and provides PPP borrowers (Borrowers) with additional time and flexibility to achieve maximum forgiveness of their PPP loans.
Here are the key features of the PPP Flexibility Act that Borrowers should know:
Extension of PPP Covered Period and Outside Rehire/Salary Restoration Date to December 31, 2020: The PPP Flexibility Act extends the end of the “covered period” for spending PPP loan proceeds and the deadline for restoring the number and salaries of applicable full-time equivalent employees (FTEs).
Covered Period Extension. The end of the covered period is extended from June 30, 2020 to December 31, 2020. This gives Borrowers until the end of the year to spend their PPP loan proceeds. Businesses that have not yet received PPP loan proceeds should note, however, that the PPP Flexibility Act does NOT extend the June 30 outside authorization date for funding of and federal guarantee of PPP loans. Therefore, potential Borrowers must have their applications submitted and approved before June 30th.
Outside Rehire/Salary Restoration Extension. The outside rehire/salary restoration date is also extended from June 30, 202o to December 31, 2020. Under PPP loan forgiveness rules, a Borrower’s loan forgiveness is reduced if the Borrower reduces applicable FTEs and/or salary/wages during the forgiveness period relative to a pre-COVID-19 comparison period, subject to several “safe-harbors,” including one that allows Borrowers to disregard these forgiveness reductions if the reduction in FTE and/or salary/wages are eliminated by the outside rehire/salary restoration date.
The extension of the covered period and outside rehire/salary restoration date to December 31, 2020, allows Borrowers to better manage spending and rehiring during the ramp-up period as businesses re-open after the loosening of COVID-19 related public health restrictions.
Extension of PPP Forgiveness Period to 24 Weeks: The PPP limits the period during which Borrower expenditures are eligible for forgiveness to 8 weeks after the loan disbursement date. The PPP Flexibility Act extends the forgiveness period to the earlier of (i) 24 weeks after the loan disbursement date, or (ii) December 31, 2020. This change also allows Borrowers that reopen gradually over an extended period of time to have more of their PPP loan eligible for forgiveness.
Option to Retain the 8 Week Forgiveness Period: Borrowers with pre-existing loans outstanding as of the effective date of the PPP Flexibility Act can opt-out of the extended PPP forgiveness period and, at their option, elect the 8-week forgiveness covered period measured from their PPP loan disbursement date. This feature was added to ensure that Borrowers that maintained their FTE and salary/wage levels and spent their PPP loans over the original 8-week forgiveness period but are not able to reopen, or fully reopen and need to reduce headcount or wages following expenditure of PPP loan funds are not prejudiced by the new, longer forgiveness period.
Additional Exemptions to FTE Based Forgiveness Reduction. The PPP Flexibility Act adds an additional safe harbor exception to the FTE-based reductions in forgiveness: a Borrower’s loan forgiveness will not be reduced due to a reduction in FTE headcount if the Borrower can document in good faith that it was (i) (a) unable to rehire individuals who had been employees as of February 15, 2020, and (b) unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or (ii) if the Borrower is unable to resume normal business activity levels due to compliance with HHS, CDC, or OSHA requirements or guidelines in effect between March 1, 2020, and December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to the COVID-19 pandemic.
Minimum Payroll Spend Requirement. The PPP Flexibility Act requires that at least 60% of PPP loan proceeds be spent on eligible payroll costs during the applicable forgiveness period in order to qualify for loan forgiveness. The remaining 40% of PPP loan proceeds spent during the forgiveness period may be spent on any combination of eligible payroll and/or eligible non-payroll expenses (i.e., mortgage interest, rent, or utility payments). Failure to spend at least 60% of PPP loan proceeds on eligible payroll costs may result in a complete bar to forgiveness. This is being broadly interpreted as a modification to the SBA’s requirement that 75% of loan proceeds be used for payroll costs. Borrowers, however, should continue to monitor SBA guidance with respect to the use of proceeds, as the statute does not preclude the SBA from continuing to impose more stringent payroll spend requirements.
Extended Deferral of Repayment. The PPP Flexibility Act extends the end of the deferral period for PPP loan interest, principal and fees from 6 months to the date on which the amount of forgiveness is remitted by the SBA to the lender. Notwithstanding this extended deferral period, Borrowers will be required to begin paying principal, interest, and fees on their PPP loans 10 months after the end of the forgiveness covered period if they fail to apply for forgiveness.
Maturity for Loans with Remaining Balance: The PPP Flexibility Act sets the minimum maturity date for unforgiven portions of PPP loans issued after the enactment of the PPP Flexibility Act at 5 years. Unlike the other provisions of the PPP Flexibility Act which apply to all PPP loans, whether made before or after the enactment of the PPP Flexibility Act, this provision is only applicable to loans made on or after the enactment of the PPP Flexibility Act, but existing Borrowers can agree with their lenders to a longer maturity date, which is in conformance with the PPP Flexibility Act.
Delay of Payment of Employer Payroll Taxes: The PPP Flexibility Act strikes the exclusion of a business that obtains PPP loan forgiveness from benefiting from Section 2302(a) of the CARES Act, which allows for the delayed payment of employer payroll taxes.
As these provisions directly affect existing regulations previously promulgated by the SBA, we expect that additional guidance will be forthcoming. Borrowers should stay tuned, as these regulations will continue to influence their forgiveness calculations.