On June 5, 2020, the President signed into law the Paycheck Protection Program (“PPP”) Flexibility Act of 2020 (the “Act”),which brings about significant changes to the PPP Loan program, with specific impact on the rules governing forgiveness. We expect further guidance and regulations to follow shortly that have the potential to expand or restrict some of these changes made by the Act. This client alert provides a summary of the key provisions of the Act. See our previous client alert on PPP Loan forgiveness here. In light of the changes made by the Act, this client alert shall supersede any conflicting guidance in the previous client alert.
The biggest change under the Act is the extension of the “Covered Period” and “Alternative Covered Period” from eight weeks to the earlier of (i) twenty-four weeks from the date of disbursement of the PPP Loan or (ii) December 31, 2020. This allows Borrowers to use the proceeds of the PPP Loan for a greater period of time and provides relief to many that have been unable to effectively put their funds to use. Borrowers that received a loan prior to the enactment of the Act shall have the option to continue using the original period of eight weeks from the date of disbursement of the PPP Loan (“Covered Period”) or eight weeks from the first day of the first pay period following the date of disbursement of the PPP Loan (“Alternative Covered Period”).
The Act also extends the dates for which a Borrower may satisfy the criteria of the Safe Harbor for FTE reductions and/or Salary or Hourly Wage reductions originally set for June 30, 2020. Under the Act, the new deadline for which a Borrower may eliminate an FTE reduction and/or Salary or Hourly Wage reduction is December 31, 2020. While this allows the Borrower a greater amount of time to satisfy the criteria for a Safe Harbor, when coupled with the extension of the Covered Period, it could also impose a longer period of time for which Employers must maintain FTE levels to meet the requirements of the PPP Loan program.
The Act creates two new, additional criteria for Borrowers to satisfy the eligibility requirements for the FTE Safe Harbor. Under the Act a Borrower is now also eligible for the FTE Safe Harbor if it can show, in good faith, that it is able to document:
Prior to the Act, the threshold for forgiveness of eligible costs under PPP required that a Borrower’s payroll costs equal at least 75% of the total amount of forgiveness and also capped non-payroll costs at 25% the total amount of forgiveness. However, under the Act, these thresholds were relaxed and now require only that payroll costs equal at least 60% of the total amount of forgiveness, with non-payroll costs being capped at 40% of the total amount of forgiveness. This change may be especially helpful to small retail and service industry businesses, which often have higher rent expenses relative to payroll. While the language of the Act appears to suggest that a Borrower’s failure to meet these thresholds would be an absolute bar to forgiveness, we anticipate that further guidance may relax this strict interpretation to allow for a prorated reduction of forgiveness for such failure.
The Act removes the prohibition against Borrowers deferring the payment of Employer Payroll Taxes under the CARES Act. Under Section 2302(a) of the CARES Act, an employer is allowed to defer payment of its share of social security taxes for each employee’s covered wages (up to 6.2%) for the period beginning March 27, 2020 and ending on January 1, 2021. The employer will ultimately pay these taxes in two installments. The first half of the deferred taxes must be paid by the employer on or before December 31, 2021, and the remaining half must be paid by the employer on or before December 31, 2022. This section applies to all Borrowers, regardless of size.
For employers eligible for the FFCRA employment tax credit, that credit would reduce employment tax due and would reduce the amount of tax subject to deferral under this provision of the CARES Act. The deferral is not allowed with respect to businesses receiving loan forgiveness under the PPP Loan.
Application for Forgiveness.The Act extends the date for which a Borrower may apply for forgiveness by stating that any Borrower that has not applied for forgiveness on a date which is ten months following the Covered Period shall begin making payments of principal, interest and fees on a date which is ten months from the date of the end of its Covered Period.
Extension of Maturity Date of Loan. The Act increases the term of new PPP Loans from two years to five years. While the language of the Act allows for these longer terms on new PPP Loans (i.e., after the date of enactment of Act), PPP Loans existing prior to the Act may still extend their maturity date upon mutual agreement between the Borrower and the lender.
Extension of Deferment of Principal, Interest and Fees. The Act extends the deferment period for payment of principal, interest and fees from six months until the date upon which the SBA remits forgiveness amount to the lender. Lenders have sixty days to issue a decision on forgiveness applications and the SBA subsequently has an additional ninety days to remit the forgiveness payments to the lenders, leaving the Borrower with the potential for a longer deferment period. The Act is silent on extensions of the deferment period for a Borrower that does not submit a forgiveness application, or for a Borrower that submits an application that is rejected by the lender as incomplete or incorrect. Until further guidance is released on this point, Borrowers should assume they are bound by the original six month deferment period unless they submit a complete application that is not rejected by the lender.