On June 5, 2020, President Trump signed into law the much-anticipated Paycheck Protection Program Flexibility Act of 2020 (“PPP Flexibility Act”), which was passed with nearly unanimous bipartisan Congressional support. In response to the extended impact of COVID-19, the PPP Flexibility Act modifies the Paycheck Protection Program (“PPP”), the cornerstone of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), to make it easier for borrowers to achieve forgiveness of PPP loans by extending critical timelines and easing certain restrictions. Specifically, the PPP Flexibility Act provides for the following:
Reduction of Payroll Spend Requirement
The PPP Flexibility Act reduces the minimum portion of PPP loan funds borrowers must spend on payroll costs to qualify for loan forgiveness from 75% to 60% of the loan funds. Accordingly, borrowers may now spend up to 40% of the loan funds on covered non-payroll costs (e.g., rent obligations, mortgage interest and utility payments) without forfeiting eligibility for loan forgiveness.
Extension of Covered Period for Use of Loan Funds
The PPP Flexibility Act extends the covered period within which borrowers must spend PPP loan funds from 8 weeks from the loan disbursement date to the earlier of 24 weeks from the loan disbursement date or December 31, 2020. By way of exception, the PPP Flexibility Act permits borrowers that received a PPP loan prior to the enactment of the PPP Flexibility Act to elect to retain the original 8-week covered period.
This extension is expected to allow more borrowers to achieve loan forgiveness while gradually reopening, but will also allow current borrowers that may have spent, or are on track to spend, the full amount of loan funds to maintain the original covered period. Borrowers may consider electing to maintain the original covered period if they will spend the full amount of loan funds within the 8-week period and may thereafter need to lay off staff or reduce wages to continue operations. If the borrower does not elect to maintain the 8-week covered period and lays off staff or reduces wages at some point during the extended covered period, then such actions could reduce the borrower’s loan forgiveness amount.
Extension of Period for Re-Hire Exemption
The PPP Flexibility Act extends from June 30, 2020 to December 31, 2020, the deadline by when borrowers must restore the number of full-time equivalent employees and any reduction in the salary of its employees in order to qualify for loan forgiveness under the CARES Act exemption for re-hires.
Addition of Exemptions Based on Employee Availability
In addition to extending the re-hire exemption period, the PPP Flexibility Act adds exemptions to any reductions in loan forgiveness based on “employee unavailability.” Specifically, the new exemptions prevent a borrower from having its loan forgiveness amount reduced if the borrower can document, in good faith:
- an inability to rehire individuals who were employees as of February 15, 2020, and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
- an inability to return to the same level of business activity as such business was operated at before February 15, 2020, due to compliance with U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, or Occupational Safety and Health Administration requirements or guidance 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 requirements related to COVID-19.
Further guidance will be necessary to interpret these new exemptions and the feasibility of their application, but they may ease potential borrowers’ hesitation to apply for a PPP loan based on a potential inability to qualify for loan forgiveness if the borrower is unable to re-hire employees as required due to employee unavailability.
Extension of Deferral Period
The PPP Flexibility Act extends the deferral period for borrowers’ payment on principal, interest and fees from 6 months from the issuance of the PPP loan to the date on which the amount of forgiveness determined under the PPP is remitted to the lender. Notwithstanding this extension, if a borrower fails to apply for forgiveness within 10 months after the end of the covered period, then the borrower will be required to immediately begin paying the principal, interest, and fees of the PPP loan.
Extension of Maturity of Loans
The PPP Flexibility Act extends the minimum maturity date for unforgiven portions of PPP loans issued after the enactment of the PPP Flexibility Act from 2 years to 5 years. It is important to note that this amendment does not automatically extend the maturity of loans issued prior to the enactment of the PPP Flexibility Act. The PPP Flexibility Act allows lenders and borrowers to mutually agree to a longer maturity date.
While the PPP Flexibility Act has expanded eligibility for full loan forgiveness, this provides relief for those borrowers that still are not able to achieve full loan forgiveness.
Delay Payment of Employer Payroll Taxes
The PPP Flexibility Act allows borrowers to delay payment of employer payroll taxes even after a PPP loan is forgiven, consistent with the terms of the CARES Act. Under the CARES Act, borrowers with forgiven PPP loans were specifically prohibited from delaying payment of these taxes.
The U.S. Small Business Administration is now expected to prepare additional rules and guidance implementing and clarifying the changes enacted under the PPP Flexibility Act.