On June 3, 2020, Congress passed the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”). The Flexibility Act modifies several aspects of the forgiveness of paycheck protection program (“PPP”) loans as designed by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that was passed and signed into law back in late March. In key part and as detailed below, the Flexibility Act:
- Extends the period during which PPP loan amounts may be forgiven from eight weeks to 24 weeks (but no later than December 31, 2020);
- Broadens safe harbors to avoid reductions in PPP loan forgiveness on account of reductions in workforce or pay;
- Permits up to 40% of a borrower’s PPP loan forgiveness amount to be due to non-payroll costs, overriding an earlier administrative rule restricting non-payroll costs to, at most, 25% of a PPP loan forgiveness amount;
- Extends the term to maturity for PPP loans to 5 years for those loans issued on or after the date the Flexibility Act is enacted;
- Extends the deferral period from 6 months to a period ending on the date on which a borrower’s PPP loan lender is remitted the forgiveness amount associated with that loan; and
- Permits a PPP loan borrower to defer payment of employer payroll taxes.
Except as specifically noted with regard to extending the term to maturity on PPP loans, the amendments to the PPP loans provided for in the Flexibility Act are effective as if included in the CARES Act and apply to all PPP loans. The Flexibility Act will now go to the President’s desk to be signed into law.
While the Flexibility Act extended the covered period for PPP loans through December 31, 2020, administrative guidance in the wake of the Flexibility Act has clarified that PPP loans will continue to be available only through June 30, 2020. An earlier version of this Client Alert provided that PPP loans may be available through year-end on the basis of the extended covered period provided for in the Flexibility Act.
Maximization of Loan Forgiveness
Longer Forgiveness Period
Forgiveness of PPP loan amounts is dependent upon the borrower paying or incurring certain eligible expenses during a fixed period and, of course, using the PPP loan funds for such expenses. The CARES Act originally limited this fixed period to eight weeks from the date the PPP loan originated. The Flexibility Act has extended that period to 24 weeks from the PPP loan origination date (or, if such 24-week period would extend beyond 2020 year-end, then December 31, 2020), giving borrowers a longer period in which to pay or incur eligible expenses while business slowly returns to pre-COVID-19 levels.
However, the Flexibility Act permits a PPP borrower that received its PPP loan prior to enactment of the Flexibility Act to elect to use the shorter eight-week period.
Extended Period to Eliminate Employee Reductions or Pay Cuts
Forgiveness of PPP loans is subject to reduction if a borrower has reduced its full-time equivalent employees (as determined pursuant to guidance issued under the CARES Act) or reduced its employees’ pay. The CARES Act had provided a safe harbor for borrowers who eliminated such reductions by June 30, 2020. In keeping with the extended timeframe, the Flexibility Act has extended the date for eliminating those reductions to December 31, 2020.
New Safe Harbor for “Employee Availability”
The Flexibility Act permits a borrower to determine its forgiveness amount without regard to reduction in its full-time equivalent employees, provided that a borrower is able to document: (1) it was unable to re-hire individuals who were employees as of February 15, 2020 and was also unable to hire similarly qualified employees for unfilled positions as of December 31, 2020; or (2) it is able to document that it was unable to return to the same level of business activity that it was operating at prior to February 15, 2020 due to compliance with sanitation, social distancing, or other worker or customer safety standards related to COVID-19, as such standards are established or set forth in guidance issued from March 1, 2020 until December 31, 2020 by the U.S. Department of Health and Human Services, the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration.
Adjust Regulatory Cap on Use of Forgiveness Amounts for Non-Payroll Costs
In the wake of the CARES Act, the Small Business Administration (“SBA”) put forth an administrative rule requiring that at least 75% of a borrower’s PPP loan forgiveness amount must be used for payroll costs (as defined in the CARES Act and related guidance), thereby limiting the use of PPP loan forgiveness amounts for non-payroll costs to, at most, 25% of the total forgiveness amount. This administrative rule met criticism as being insensitive to the actual day-to-day operating needs of businesses dealing with the economic effects of the COVID-19 crisis.
Congress, in the Flexibility Act, has adjusted the restriction: PPP loan borrowers must use at least 60% of their PPP loan forgiveness amount for payroll costs and may use up to 40% of such amount for non-payroll eligible costs, such as rent, mortgage interest, and utilities.
Extended Term for Remaining Loan Balance
The Flexibility Act provides that any remaining balance on a PPP loan after forgiveness must have a term of at least five years to maturity. The CARES Act had not specified a minimum term, and the SBA had provided for a term of two years.
This revised five-year term to maturity will apply to any PPP loan made on or after the date on which the Flexibility Act is enacted. Note, however, that the Flexibility Act also provides that lenders and borrowers are not prohibited from modifying the maturity of an existing PPP loan to conform to this longer maturity; some may choose to do so for administrative convenience or simply as a borrower accommodation.
Extended Deferral Period
The SBA, pursuant to the CARES Act, issued guidance deferring borrowers’ payment obligations on PPP loans for six months. The Flexibility Act extends this deferral period for a PPP loan until the date on which the SBA remits the forgiveness amount on such loan to the applicable lender.
If a borrower has not applied for forgiveness within ten months from the last day of its 24-week forgiveness period (which cannot extend beyond December 31, 2020), then that borrower must begin making payments on its PPP loan on the date that is ten months after the last day of its 24-week forgiveness period, but no earlier.
Removal of Restriction on Delaying Payment of Employer Payroll Taxes
Among other tax benefits, the CARES Act permits an employer to delay payment on employer payroll taxes through December 31, 2020, with such tax amounts becoming due over the following two years. As enacted, the CARES Act did not permit a PPP borrower to take advantage of this benefit. The Flexibility Act removes this restriction, so that any PPP loan borrower may delay payment of its employer payroll taxes in accordance with the rules set forth in the CARES Act.
Note, however, that the Flexibility Act did not eliminate the restriction disallowing a PPP loan borrower to benefit from the employee retention tax credit enacted in the CARES Act.