On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) was enacted. The Flexibility Act amends portions of the Paycheck Protection Program (“PPP”) retroactively to the date of the passage of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The following is a summary of the key changes to the PPP:
1. Longer Repayment Period. For borrowers who receive PPP loans after the enactment of the Flexibility Act, the maturity period for unforgiven PPP loans is extended from 2 years to 5 years. The maturity dates of previously originated PPP loans are not extended, but can be upon mutual agreement of the lender and borrower.
2. Extension of Covered Period. The PPP originally required borrowers to spend PPP loans within eight weeks after the loan originated. This period was designated by the PPP as the “Covered Period.” The new legislation changes the Covered Period from eight weeks to the earlier of (a) 24 weeks after loan origination or (b) December 31, 2020. Despite this change, a borrower may still spend all of its loan proceeds prior to the end of its Covered Period. This extension was intended to help businesses that have been shut down and unable to spend all PPP loan funds in the original eight week time period.
3. Forgiveness Reduction Based on Terminated Employees. Originally, employees terminated between Feb. 15, 2020, and April 26, 2020 could be rehired prior to June 30, 2020, allowing a PPP borrower to include those rehired employees in the borrower’s calculation for loan forgiveness. The Flexibility Act extends the rehire deadline to December 31, 2020. Additionally, under the Flexibility Act a borrower is not required to meet the forgiveness reduction test if it can document in good faith either of the following:
(a) the borrower is unable to rehire a terminated employee and the borrower is unable to hire a similarly qualified employee to replace the terminated employee; or
(b) the borrower is unable to return business activity to a level commensurate with the business’s activity level as of Feb. 15, 2020, as a result of guidance issued by the Occupational Safety and Health Administration, the Centers for Disease Control and Prevention, or the Secretary of Health & Human Services.
4. Payroll Cost Spend Requirement. Prior to the enactment of the Flexibility Act, Guidance issued by the Treasury Department and the SBA required PPP borrowers to spend at least 75% of their PPP loan proceeds on payroll costs to obtain maximum forgiveness. The Flexibility Act reduces this requirement to 60%, and allows 40% of a borrower’s PPP loan to be spent on other eligible expenses. The caveat to this is that the Flexibility Act requires all PPP borrowers to meet this 60% minimum to receive any forgiveness of the PPP loan. Absent additional guidance to the contrary, under the Flexibility Act, if a borrower does not spend at least 60% of its PPP loan on payroll costs, none of its PPP loan will be forgiven. This requirement was not included in the original PPP.
5. Extension of Deferral Period. The Flexibility Act extends the deferral period on loan payments until the date the lender receives the forgiveness amount from the SBA. Previously payments were only deferred for 6 months.
6. Timeline for Forgiveness Application. The Flexibility Act requires PPP borrowers to apply for forgiveness within 10 months of the end of the borrower’s Covered Period (as described in Paragraph 2 above). If a PPP borrower fails to apply for forgiveness by such time, they will be required to start making payments on the PPP loan.
7. Payroll Tax Deferral. The Flexibility Act allows businesses that took a PPP loan to delay payment of their payroll taxes into 2021 and 2022, even if the PPP loan is forgiven prior to December 31, 2020. This was prohibited for PPP borrowers under the original CARES Act.