On Friday June 5, 2020, the President signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”), which makes a number of significant changes to the Paycheck Protection Program (PPP) and eliminates the prohibition on employment tax deferral for PPP loan borrowers, as further described below.
A copy of the PPP Flexibility Act can be obtained by clicking on the link below:
The following are some of the important changes to the PPP made by the PPP Flexibility Act, which, other than as expressly stated in this Alert, are retroactive to the date of enactment of the CARES Act (March 27, 2020):
Five-year Minimum Loan Maturity on New PPP Loans. PPP loans made on or after June 5, 2020 will have a minimum maturity of five years with respect to any portion of the loan that is not forgiven. Existing loans, which have a maturity of two years, can be amended in accordance with this change by the mutual agreement of the lender and borrower.
Extension of PPP Covered Period. The end of the covered period for purposes of the PPP has been extended from June 30, 2020 until December 31, 2020. Though it is unclear from the legislative text, this raises the possibility that some PPP loans may be made past June 30th.
Extension of PPP Loan Forgiveness Period. Unless a borrower elects out as further described below, the period following the disbursement of the PPP loan during which the eligible costs incurred and paid count toward forgiveness has been extended from eight weeks to the earlier of 24 weeks following loan disbursement or December 31, 2020.
Extension of Safe Harbor Date for Forgiveness Reduction. Prior to the enactment of this new legislation, borrowers were required to return to their February 15, 2020 full-time equivalent employee numbers and salaries/wages levels prior to June 30, 2020 to be eligible for the forgiveness reduction safe harbors. Under the PPP Flexibility Act, this date has been extended to December 31, 2020.
New Safe Harbor for Forgiveness Reduction based on Employee Availability. A new safe harbor enables borrowers to determine loan forgiveness without regard to a proportional reduction in the number of full-time equivalent employees if the borrower, in good faith, is able to document either:
- (a) an inability to rehire individuals who were employees of the borrower on February 15, 2020; and (b) 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 that such business was operating before February 15, 2020, due to compliance with requirements established or guidance issued 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 during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
New Limitation on Forgiveness based on Payroll Costs. To receive loan forgiveness borrowers are now required to use at least 60 percent (as opposed to 75% previously established by the SBA and U.S. Treasury) of the PPP loan amount for payroll costs, and may use up to 40 percent on other eligible non-payroll costs. The failure to meet this requirement will make borrowers ineligible for any forgiveness. Under the PPP prior to the enactment of the PPP Flexibility Act, the failure to satisfy this 75% requirement resulted in only a partial loss of entitlement to forgiveness while under the new PPP Flexibility Act, it appears that failure to meet the 60% for payroll costs requirement will result in a bar to any forgiveness. There is already talk about further modifications to have such failure result in only a partial loss of forgiveness.
Election of Eight-Week Forgiveness Period for existing PPP loans. Borrowers who received their PPP loans before June 5, 2020 may elect for the original eight-week period following disbursement of the loan to apply in counting the payment and incurrence of eligible costs for purposes of forgiveness. Existing borrowers should carefully consider whether to make this election and the potential impact on loan forgiveness, in light of the extension to December 31, 2020 of the full-time equivalent employee and salaries/wages reduction safe harbor testing date.
Extension of Deferral Period. Lenders are now required to defer payments by borrowers of principal, interest and fees on a PPP loan until the amount of forgiveness with respect to the loan has been approved by the SBA and paid by the SBA to the lender, rather than the original six-month minimum deferral period. However, borrowers cannot extend the deferral period indefinitely by delaying submission of their forgiveness application. The legislation provides that if a borrower has not submitted the forgiveness application within ten months after the end of the covered period for forgiveness (i.e., the earlier of 24 weeks or December 31, 2020, or eight weeks if elected by the borrower, following loan disbursement), payments under the loan will commence at the end of the ten-month period.
Employer Payroll Tax Deferral
The statute eliminates the prohibition that existed in the CARES Act on employment tax deferral by businesses who have PPP loan forgiveness. This change is retroactive to the date of enactment of the CARES Act, March 27, 2020.