Summary
Congress passed, and the President signed into law the Paycheck Protection Program Flexibility Act with an effective date of June 5, 2020. This Act provides a number of widely requested modifications to the Paycheck Protection Program (“PPP”), which was initially signed into law as part of the CARES Act on March 27, 2020. It also provides significant modifications to PPP guidance previously issued by the Small Business Administration (“SBA”). The new provisions enacted by the PPP Flexibility Act apply to all PPP borrowers, regardless of whether PPP funds were received before or after the enactment of the PPP Flexibility Act (with one exception related to maturity date of PPP loans, discussed below). As with all PPP matters, it is anticipated that the SBA will issue additional guidance to further clarify and implement the provisions of the PPP Flexibility Act, which will necessarily include modification of its previously issued guidance.
• Reduction from 75% to 60% for the Payroll Costs Requirement. Under the original PPP, the SBA issued regulations which required borrowers to utilize at least 75% of the PPP loan proceeds for “payroll costs” (as that term is defined in the CARES Act). If a borrower failed to do so, the amount of PPP funds eligible for forgiveness for that borrower was to be reduced proportionally. The PPP Flexibility Act has now reduced the payroll costs requirement from 75% to 60%. Thus, up to 40% of PPP funds may be used for qualified non-payroll cost expenses (covered mortgage interest, covered rent obligations, and covered utility payments, all as those terms are defined in the CARES Act).
o IMPORTANT CHANGE: The PPP Flexibility Act language appears to state that if a borrower does not meet this 60% payroll cost threshold, the borrower loses eligibility for any forgiveness of their PPP loan. This is a significant change from previous guidance issued by the SBA which indicated that a borrower would only have their forgiveness amount reduced as opposed to losing all eligibility for forgiveness. In short, while the PPP Flexibility Act makes it easier for a borrower to meet the payroll costs threshold, it has increased the penalty for borrower’s unable to meet this lower threshold. The SBA will hopefully address this change in future guidance.
• Expansion of the Forgiveness Covered Period. The original PPP provided that a borrower was only eligible for forgiveness of funds used in the 8-week period immediately following the borrower’s receipt of the PPP funds (referred to as the “covered period”). The PPP Flexibility Act significantly expands this forgiveness covered period to the earlier to occur of either (i) 24 weeks from receipt of PPP funds or (ii) December 31, 2020. This new 24-week covered period provides far greater flexibility for borrowers, and will allow borrowers to more easily meet the 60% payroll threshold.
• Extension of Safe Harbor Period to Eliminate Reduction in Full-time Equivalent Employee Headcount and Employee Salaries. Under the PPP, the amount of a PPP loan eligible for forgiveness was to be reduced in proportion to any reduction in employee salaries of greater than 25% and reduction in the number of full-time equivalent (“FTE”) employees during the covered period as compared to a base period (see link below for further discussion on this topic). The original PPP provided a safe harbor whereby the forgiveness would not be reduced for reductions of FTE numbers or salaries which occurred between February 15, 2020 and April 26, 2020, if such reductions in FTE or salaries were eliminated by the borrower on or before June 30, 2020. The PPP Flexibility Act extends this safe harbor period from June 30, 2020 to December 31, 2020, which gives borrowers until the end of this year to restore its FTE count and salary levels to avoid reduction of forgiveness. Note, this safe harbor still only applies for reductions in FTE headcount or salaries which originally occurred between February 15, 2020 and April 26, 2020.
• Creation of New Exceptions to Reduction of PPP Forgiveness Amount. The PPP Flexibility Act creates two new exceptions to the general rule that forgiveness amounts will be reduced if the borrower reduces its FTE employee headcount.
o The first new exception provides that the amount of loan forgiveness available to a borrower will not be reduced for a reduction in FTE employees if a borrower, in good faith, can document that the borrower was unable to rehire the same individuals who were employees of the borrower on February 15, 2020, AND the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. This modifies previous SBA guidance which only required a showing that a former employee refused to be rehired. Now a borrower must also show it was unable to hire someone else to fill the position.
o The second new exception provides that the amount of loan forgiveness available to a borrower will not be reduced for a reduction in FTE employees if a borrower, in good faith, can document “an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of 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.”
It is anticipated the SBA will issue guidance clarifying the requirements for meeting these exceptions.
• Modification of Payment Deferral Period. The original PPP provided that borrowers were to begin repaying the unforgiven portion of the PPP loans on the date that was 6 months after the funding date of such loan. The PPP Flexibility Act modifies this timeline so that borrowers are now to begin repayment of unforgiven portions of the loans on the date on which forgiveness amounts are paid to the lender by the SBA. However, if a borrower has not applied for forgiveness within 10 months after the last day of the 24-week forgiveness covered period, such borrower must begin making principal and interest payments on the date that is 10 months after the last day of such 24-week forgiveness covered period.
• Extension of Maturity Date. The PPP Flexibility Act extends the maturity date for all new PPP loans to a minimum of 5 years. Note, however, that this only applies to PPP loans funded after June 5, 2020. For already funded PPP loans, borrowers and lenders may mutually agree to modify the maturity date to the new minimum of 5 years, but are under no obligation to do so.
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