Alerts and Updates
Congress Passes Paycheck Protection Program Flexibility Act to Revise Key Components of Paycheck Protection Program
June 5, 2020
The PPP Flexibility Act extends the loan forgiveness period provided by the CARES Act and subsequent guidance from the Small Business Administration.
Note: This Alert has been updated to include further developments highlighted in a joint statement released by the Treasury Department and Small Business Administration (SBA) on June 8, 2020.
The Paycheck Protection Program Flexibility Act (PPP Flexibility Act), which changes some of the components of the Paycheck Protection Program (PPP) provided under the Coronavirus Aid, Relief and Economic Security Act (CARES Act), was passed by the House of Representatives on May 28, 2020, and by the Senate on June 3, 2020. The PPP Flexibility Act was subsequently signed into law by President Trump on June 5, 2020.
Some of the most significant changes to the PPP loan program are:
- The extension of the loan forgiveness period from eight weeks to the earlier of 24 weeks or December 31, 2020;
- The adjustment in the 75/25 rule to 60/40 rule. As a result, the prior requirement that borrowers must use 75% of loan proceeds eligible for forgiveness for payroll costs and only 25% for nonpayroll costs now instead requires borrowers to use 60% of the loan proceeds eligible for forgiveness for payroll costs and 40% for nonpayroll costs;
- The extension from June 30, 2020, to December 31, 2020, for borrowers to rehire employees in order to avoid any reduction in their loan forgiveness amount; and
- An exemption for borrowers who are unable to rehire employees in order to avoid any reduction in their loan forgiveness amount.
Extension of PPP Loan Repayment Period for Unforgiven Amounts
For PPP loans with remaining balances after borrowers have applied for loan forgiveness, the PPP Flexibility Act extends the amount of time borrowers have to repay any remaining balances from a previous minimum of two years to a new minimum of five years and a maximum of 10 years for any loans issued after the PPP Flexibility Act. The lenders and borrowers may mutually agree to modify the maturity terms for any loans issued prior to the PPP Flexibility Act.
Expansion of Loan Forgiveness Eligibility Period
The PPP Flexibility Act extends the loan forgiveness period provided by the CARES Act and subsequent guidance from the Small Business Administration (SBA). Under the CARES Act, borrowers had eight weeks from the first disbursement of the PPP loan in order to use the loan proceeds to pay certain payroll and nonpayroll costs which would then be eligible for loan forgiveness. The PPP Flexibility Act extends the period to use the loan proceeds and be eligible for loan forgiveness to the earlier of (i) 24 weeks from the date of the first disbursement of the PPP loan or (ii) December 31, 2020.
Note that borrowers who received PPP loans prior to the enactment of the PPP Flexibility Act still have the option to apply for loan forgiveness using the eight-week period provided under the CARES Act.
Elimination of 75/25 Requirement and Replacement with 60/40 Requirement for Forgivable Payroll and Nonpayroll Costs
The PPP Flexibility Act increases the percentage of nonpayroll costs that may be used during the applicable loan forgiveness period. The SBA previously set forth the 75/25 rule, which permitted PPP loan borrowers to use up to 25% of their total loan proceeds for certain nonpayroll costs, such as rent, mortgage interest and utilities that meet the forgiveness criteria. Under the PPP Flexibility Act, borrowers are now permitted to use up to 40% of the loan proceeds on these nonpayroll costs, and 60% of the loan proceeds on payroll costs. The use of the loan proceeds in these ratios will be eligible for loan forgiveness.
As was the case with the 75/25 rule, the PPP Flexibility Act itself does not address the consequences for borrowers that use less than 60% of their PPP proceeds on payroll expenses. Notably however, in a joint statement released on June 8, 2020, Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza announced that borrowers who use less than 60% of their total PPP loan proceeds on eligible payroll expenses during the covered period will continue to be eligible for partial loan forgiveness, so long as those borrowers use at least 60% of their total loan forgiveness amount for eligible payroll costs.
The Treasury and SBA’s joint statement provides important clarification and significantly more flexibility to borrowers in evaluating the benefits of the PPP loan overall, and how to manage their spending of PPP loan proceeds. PPP loans continue to be available for new applicants. According to the joint statement, forthcoming rules will confirm that June 30, 2020, remains the last date on which PPP loans can be approved.
Extension of Safe Harbor Period to Rehire Employees
Under the PPP Flexibility Act, borrowers now have until December 31, 2020, to restore reductions to full-time equivalent employee headcount and compensation in order to avoid any reduction of borrowers’ loan forgiveness amount. Under the CARES Act, borrowers are required to restore reductions in full-time equivalent employee headcount and compensation by June 30, 2020, in order to avoid any reduction in loan forgiveness.
New Exemptions for Borrowers Unable to Rehire Employees
The PPP Flexibility Act removes the limits on loan forgiveness for borrowers that were unable to rehire employees, hire new employees or return to the same level of business activity as before the outbreak of COVID-19 if they meet specified conditions. To avoid any reduction in loan forgiveness, borrowers must be able to document (i) an inability to rehire individuals who were employees on February 15, 2020, and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020. If borrowers are able to meet these conditions, and provide the supporting documentation, their loan forgiveness amount will not be reduced because of any reduction in employee headcount.
Importantly, the PPP Flexibility Act exempts a borrower from a reduction in loan forgiveness if the borrower is able to document an inability to return to the same level of business activity it had on February 15, 2020, due to compliance with social distancing guidelines and health-related actions from the Centers for Disease Control or Prevention or other federal agencies issued between March 1, 2020, and ending December 31, 2020.
Extension of Deferral Period and Loan Forgiveness Application Period
Under the PPP Flexibility Act, borrowers are now eligible for deferrals on payments of principal, interest and fees on their PPP loans until the date on which their PPP loan forgiveness amounts are remitted to their lenders.
In addition, the period for submitting loan forgiveness applications has been extended to 10 months following the last day of the period in which borrowers may use their PPP loan funds. However, borrowers should keep in mind that if they fail to apply for PPP loan forgiveness within 10 months after the last day of (i) the eight-week period (for borrowers electing to apply for loan forgiveness under the original eight week timeline), (ii) the 24 week period or (iii) December 31, 2020, as applicable, borrowers will then have to start making payments of principal, interest, and fees on their PPP loans, beginning on the date that is 10 months after the last day of the applicable periods described above.
Expansion of Payroll Tax Credits
The PPP Flexibility Act now allows PPP loan borrowers to qualify for a separate, recently enacted tax credit to defer payroll taxes owed on wages for the period beginning March 27, 2020, and ending December 31, 2020. The deferred payroll taxes are to be paid in two installments, with 50% due on December 31, 2021, and the remaining 50% due on December 31, 2022. PPP loan borrowers previously were excluded from the provision of the CARES Act that permits the deferral of payroll taxes.
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