On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”) which generally allows greater flexibility with respect to the Paycheck Protection Program, Section 7(a) business loans, that were enacted on March 27, 2020 as part of the CARES Act. Below are key provisions of the PPPFA:
Extension of the Covered Period
- The PPPFA amends the CARES Act and allows borrowers to extend the Covered Period of the PPP Loan from 8 weeks to the earlier of 24 weeks from the date of origination of the loan or December 31, 2020. Arguably, the ‘date of origination’ is still defined as the ‘date of disbursement’ as provided in previous SBS Interim Rules.
- Of note, borrowers that received PPP loans prior to June 5, 2020 may elect to utilize the original 8-week covered period for purposes of their loan and calculation of PPP loan forgiveness. Borrowers with loan disbursements after June 5, 2020 must use the 24-week covered period.
- Although not directly addressed, until additional guidance is released, it is expected that the Full Time Equivalent reduction test would be extended to the new 24-week Covered Period should borrowers utilize such period. In addition, the salary reduction test would also be applied over a 24-week period.
- FML note: the PPP Loan Forgiveness Application published in May and the subsequent SBA Interim Rule (published in the Federal Register on June 1, 2020), effectively expanded the 8-week period to a 9 or 10 week period by allowing borrowers to include payments made and payments earned within the Covered Period and by allowing bi-weekly or more frequent payors of payroll to elect an Alternative Covered Period beginning with the first date of payroll distribution. This expansion, combined with the late passage of the PPPFA has placed many borrowers in a position where substantially all of the funds will be expended on eligible and forgivable costs within the original 8-week period. Borrowers should evaluate whether the 24-week Covered Period is necessary given their spend with the original 8-week Covered Period and the additional compliance burdens that could be required if a 24-week period is chosen.
Safe Harbor Date Revision
- The PPPFA replaces the key date of June 30, 2020 with December 31, 2020 for ‘Safe Harbor’ tests relating to FTE rehires and FTE salary reductions. Pursuant to the CARES Act, Borrowers were effectively able to ‘disregard’ the loan forgiveness reductions related to either (1) FTE reduction or (2) salary/hourly wage reduction if with respect to FTE reduction, the Borrower had FTE reduction between February 15, 2020 and April 26, 2020 and brought its FTE count back to February 15, 2020 numbers by June 30, 2020 or with respect to salary/hourly wage reduction, the Borrower reduced an employee’s salary by more than 25% between February 15, 2020 and April 26, 2020 (as compared to Q1-2020) and brought such employee’s salary or hourly wage to February 15, 2020 amount.
- It appears that a Borrower that elects the 8-week Covered Period but has loan forgiveness reduction related to either FTE reduction or salary/hourly wage reduction must wait until December 31, 2020 to apply for loan forgiveness if they want to apply the Safe Harbor provisions. It is anticipated that the SBA will issue guidance on this point.
Additional Safe Harbor Provisions
The PPPFA provides additional Safe Harbors related to ‘Employee Availability’. During the period February 15, 2020 through December 31, 2020, loan forgiveness is not reduced related to a proportional reduction in FTEs for the following:
- An inability to rehire individuals who were employees of the Borrower on 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 the Borrower was operating at before February 15, 2020 due to compliance regulations and requirements related to standards for sanitization, worker safety, or social distancing.
The above Safe Harbors require good faith efforts by Borrowers and must be documented.
The PPPFA decreases the amount required to spent on ‘payroll costs’ from 75% to 60% and allows for 40% of PPP loan proceeds to be used for interest on mortgages, rent, and utilities. Of note, this current limitation applies to the ‘loan amount’ and not just amounts expended. The PPPFA does not address whether the 60% requirement is an all or nothing test. For example, if 55% is used for payroll, will a Borrower still be eligible for forgiveness. We expect that the SBA will issue similar guidance to the original CARES Act allowing for partial forgiveness in such situations. Currently, the Borrower divides payroll costs by 75%, the resulting amount is a cap on loan forgiveness.
Deferral of Loan Payback
The PPPFA extends the loan deferral period from 6 months to the date until loan forgiveness is remitted to the lender. In addition, Borrowers are allowed 10 months following the end of its Covered Period apply for loan forgiveness. Accordingly, loan repayment could extend to 20 months if a 24-week Covered Period is elected.
Employer Payroll Tax Deferral
The PPPFA allows Borrowers of PPP loans to continue to defer employer payroll taxes through December 31, 2020. Pursuant to the CARES Act and IRS guidance, PPP Borrowers were previously only allowed employer payroll tax deferral through the date of loan forgiveness.