Paycheck Protection Program Flexibility Act
On June 5, 2020, the President signed into law the Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act), which makes a number of changes to the Paycheck Protection Program (“PPP”) as follows:
Extended Deadline for Using Loan Proceeds for Forgiveness
The Flexibility Act extends the loan forgiveness period (the period during which the borrower can incur and pay costs that count toward forgiveness of loan principal) from 8 weeks to 24 weeks, although the covered period cannot extend beyond December 31, 2020. Borrowers that already have a PPP loan may elect to use an 8 week period instead of the 24 week period if they prefer.
Decrease in Percentage of Loan Proceeds Used for Payroll
Borrowers are only required to use 60% of the loan proceeds for eligible payroll costs, as opposed to the previous requirement of 75%. As currently drafted, the Flexibility Act provides that if the borrower does not meet the 60% threshold, the borrower would not be eligible for any forgiveness whatsoever. This appears to be an error in drafting, and Senator Rubio and other lawmakers have indicated that corrections will be made (presumably, through further regulations) so the current “sliding scale,” whereby the nonpayroll portion of forgiveness amount is reduced if the payroll portion does not meet the required minimum percentage – will remain in effect.
Extended Loan Maturity Date
The term for a loan to repay any amount not forgiven has been extended from 2 years to 5 years. It appears that this provision only applies to borrowers whose PPP loans are disbursed after the June 5, 2020 enactment of the Flexibility Act. With respect to already existing PPP loans, the Flexibility Act allows lenders and borrowers to extend or otherwise modify the loan maturity date if they agree to do so.
Extended Deferral of Loan Payments
The Flexibility Act extends the deferral period for payments of principal, interest and fees (previously a minimum of 6 months, up to a maximum of 1 year) to the date on which the amount of loan forgiveness is remitted to the lender by the SBA. Borrowers that do not apply for forgiveness have 10 months from the last day of their applicable covered period before principal, interest and fee payments commence.
Payroll Tax Deferral
The Flexibility Act removes the ban on borrowers whose loans were partially or completely forgiven from deferring payment of payroll taxes. The payroll tax deferral is now open to all PPP borrowers.
Safe Harbor for Rehiring Workers
Loan forgiveness under the PPP remains subject to a reduction proportionate to any reduction in the borrowers full-time equivalent employee (“FTE”) level, as compared to the FTE level during a specified earlier reference period. However, the Flexibility Act extends the existing safe harbor deadline to December 31, 2020; borrowers who furloughed or laid-off workers will not be subject to a loan forgiveness reduction due to a reduced FTE level if the borrower restores its FTE level by December 31, 2020.
New Exemptions From Loan Forgiveness Reduction Penalties
The forgiveness amount will not be reduced due to a reduced FTE count if the borrower, in good faith, can document that:
- The borrower attempted but was unable to rehire individuals who had been employees on February 15, 2020, and the borrower was unable to hire “similarly qualified employees” before December 31, 2020; or
- The borrower was unable to return to the “same level of business activity” as prior to February 15, 2020, due to sanitation, social distancing, and worker or customer safety requirements.
If you have questions about the Paycheck Protection Program or the Flexibility Act, contact our attorneys through our website at www.www.smlaw.com or call (707) 524-1900. We are here to help.
Spaulding McCullough & Tansil LLP