Much Anticipated PPP Flexibility Act Signed into Law

June 12, 2020 Update: On June 10, 2020, the SBA released the Paycheck Protection Program (PPP) – Revisions to First Interim Final Rule (“Revised IFR”). The Revised IFR was released to reflect modifications to the PPP by the PPP Flexibility Act. Most of the Revised IFR is a reiteration of the PPP Flexibility Act as summarized below. However, it also provides the following additional clarifications:

  • 60/40 Split Requirement: Under the PPP Flexibility Act, borrowers must use 60% of the PPP loan proceeds towards eligible payroll costs. It was previously thought that borrowers were required to use at least 60% of the PPP loan proceeds towards payroll costs to be eligible for any loan forgiveness. However, the Revised IFR clarifies that the SBA will apply this requirement as a proportional limit as opposed to a threshold. In other words, borrowers can receive forgiveness even if they spend less than 60% of the PPP loan proceeds on eligible payroll costs.

Illustration: If a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54%) of its loan on payroll costs, then because the borrower used less than 60% of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60 percent of the forgiveness amount and $36,000 in non-payroll costs constituting 40 percent of the forgiveness amount).

  • Deferral of Principal and Interest Payments: The PPP Flexibility Act extended the first payment date for PPP loans from six months (6) after origination to the earlier of (a) 10 months after the end of the “covered period” or (b) the date the bank receives a remittance of the forgiven amount from the SBA. The Revised IFR confirms that this extension applies automatically and does not require an amendment to the payment terms.

Per the Revised IFR, the SBA will issue additional revisions to its interim final rules on loan forgiveness and loan review procedures in response to the PPP Flexibility Act. We will continue to update this client alert accordingly.

Background

On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”) This is an important update to the already existing Paycheck Protection Program which was implemented as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Among other things, the PPP Flexibility Act extends the covered period to 24 weeks, but this additional flexibility comes at a cost. This client alert provides more information about this expansion and summarizes other key aspects of the PPP Flexibility Act.

Expansion of “Covered Period”

The CARES Act originally specified an 8 week covered period that began following the disbursement of a Paycheck Protection Program (“PPP”) loan. The PPP Flexibility Act extends this covered period to be the earlier of (i) 24 weeks from disbursement or (ii) December 31, 2020. For loans that are already outstanding, the borrower has the choice to use the original 8 week period or the new 24 week period.

Impact of Choosing 24-week Covered Period

Extending the Covered Period from 8 weeks to 24 weeks appears to be beneficial to a borrower because it extends the period during which the borrower can incur or pay eligible expenses (see our previous client alert on this topic. This additional flexibility, however, comes at a cost.

If the Covered Period is extended, the period used to measure reductions in forgiveness for both the number of full time equivalent employees (“FTEs”) as well as the reduction in wages/salary is also extended, which means that employers will be required to retain or rehire FTEs and continue wages/salary much longer than they had originally planned. Because of this, we highly recommend that employers carefully consider the cost of this flexibility before choosing to use the extended 24-week Covered Period.

Reduction of Payroll Threshold

The PPP Flexibility Act also reduces the percentage of proceeds that must be used on payroll costs from 75% to 60%. The benefit of this approach is that now a full 40% of the PPP proceeds may be used for permissible non-payroll costs (generally utilities, rent and mortgage interest).

Flexibility for Reduced Headcount

The PPP Flexibility Act provides two new safe harbors.  The first is a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees for borrowers that are unable to return to the same level of business activity the business was operating at before February 15, 2020, due to compliance with requirements or guidance issued between March 1, 2020 and December 31, 2020 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, related to worker or customer safety requirements related to COVID–19.

The second is a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees, to provide protections for borrowers that are both unable to rehire individuals who were employees of the borrower on February 15, 2020, and unable to hire similarly qualified employees for unfilled positions by December 31, 2020.

Other Miscellaneous Changes

In addition to the foregoing, the PPP Flexibility Act:

  • Extends the maturity of PPP loans to at least 5 years (instead of 2);
  • Revises the deferral period for payment of interest, principal and fees to end on the date that the application for forgiveness is remitted to the lender (instead of 6 months);
  • Provides that if the borrower does not apply for forgiveness within 10 months after the Covered Period ends, that the borrower is required to begin paying interest, principal and fees on the PPP loan even if they have not yet applied for forgiveness; and
  • Permits a borrower that receive forgiveness to still take advantage of the deferring the payment of employer payroll taxes as permitted under Section 2302 of the CARES Act.  Prior to this change, a borrower that received forgiveness of a PPP Loan was not eligible for the payroll tax

Please contact Anthony S. DiSandro, Edward C. Renenger, Joseph P. Hofmann, Sunjeet S. Gill, James B. Longacre, Daniel J. Sobol or the Stevens & Lee attorney with whom you regularly work if you have questions or need assistance with this process.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.

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