Update on PPP Loans: Paycheck Protection Program Flexibility Act Signed into Law

On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”). The PPP Flexibility Act makes a handful of significant changes to the Paycheck Protection Program (“PPP”) that may be impactful for businesses facing challenges in complying with the previously existing rules relating to PPP loan forgiveness. Importantly, these changes have retroactive effect to the date of enactment of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and, as a result, apply to all outstanding PPP loans regardless of when originated. The key changes implemented by the PPP Flexibility Act are outlined below. 

 
EXTENSION OF COVERED PERIOD FOR FORGIVENESS 

• Under the CARES Act, the “covered period” during which PPP loan proceeds need to be used in order for those funds to be eligible for forgiveness is limited to the first eight weeks after the PPP loan was disbursed. 
• Under the PPP Flexibility Act, borrowers can now obtain forgiveness for the amount of the PPP loan proceeds used between the date the loan is disbursed and the earlier of (i) 24 weeks thereafter and (ii) December 31, 2020. This extension of the covered period gives borrowers significantly more flexibility to utilize PPP loan proceeds in accordance with the aims of the program after many businesses expressed concern that the eight-week period was too restrictive.

CHANGE IN LIMITATIONS ON FORGIVENESS

• PPP loan rules and guidance previously issued by the U.S. Small Business Administration (“SBA”) and U.S. Department of the Treasury provide that the amount of forgiveness for a PPP loan depends on how much of the proceeds are used during the covered period for payroll purposes as compared to other permitted purposes (i.e., payments of mortgage interest, rent and utilities). In order for a PPP loan to be fully forgivable, at least 75% of the loan proceeds would need to be used for payroll costs, and up to 25% could be used for other permitted purposes.
• The PPP Flexibility Act provides that, in order to receive loan forgiveness, a borrower must use at least 60% of the loan proceeds for payroll costs and may use up to 40% for other permitted purposes. While this gives borrowers substantially more flexibility to use proceeds for permitted purposes aside from paying payroll that may be critical to sustaining their business during the COVID-19 pandemic, it also retroactively imposes a new requirement that all borrowers must comply with for any portion of their PPP loan to be forgiven—any borrower that uses less than 60% of their PPP loan proceeds for payroll costs will be ineligible for forgiveness.

RELAXATION OF IMPACT OF EMPLOYEE REDUCTIONS

• Under the CARES Act, the portion of a PPP loan that is eligible for forgiveness will be proportionally reduced by the amount of (i) any reductions in full-time equivalent employees during the covered period as compared to the average number of full-time equivalent employees per month during certain historical periods prior to the COVID-19 pandemic and (ii) certain reductions in salary or wages during the covered period. However, borrowers have an opportunity to cure those reductions by rehiring employees who were terminated between February 15, 2020 and April 26, 2020 and by restoring salaries or wages for employees whose pay was reduced during that period by June 30, 2020.
• The PPP Flexibility Act provides that forgiveness will not be reduced for employee headcount reductions between February 15, 2020 and December 31, 2020 if the borrower is able to document that either: (i) it is unable to rehire individuals who were employees on February 15, 2020 and is unable to hire similarly qualified employees for unfilled positions by December 31, 2020, or (ii) it is unable to return to the same level of business that was conducted prior to February 15, 2020 as a result of guidance from the Secretary of Health and Human Services, the Director of the Center for Disease Control and Prevention or the Occupational Safety and Health Administration relating to COVID-19 safety (including as a result of complying with standards for sanitation, social distancing and other worker or customer safety requirements). In addition, the period to cure reductions in headcount, salary and wages is extended from June 30, 2020 to December 31, 2020. 

IMPACT OF PPP LOAN FORGIVENESS ON PAYROLL TAX DEFERRAL

• The CARES Act gives employers the option to defer the payment of the social security component of employer payroll taxes ("OASDI") owed on wages in the period beginning March 27, 2020 and ending December 31, 2020, with 50% of the deferred taxes being due on December 31, 2021 and the remaining 50% being due on December 31, 2022. However, the CARES Act also provides that this deferral is not available to any employer receiving loan forgiveness with respect to a PPP loan.
  
• The PPP Flexibility Act eliminates the exclusion for borrowers receiving PPP loan forgiveness, making all PPP loan borrowers eligible for the OASDI deferral provided under the CARES Act.
  
  

EXTENSION OF DEFERRAL PERIOD

• Under rules issued by the SBA, payments of principal and interest on PPP loans are deferred for a period of six months from the date on which the PPP loan is disbursed.
• The PPP Flexibility Act extends the deferral period until the date the lender receives the applicable forgiven amount from the SBA. In addition, it clarifies that if a borrower fails to apply for forgiveness within 10 months after the end of the covered period, the deferral period for that loan will end on the date that is 10 months after the last day of the covered period.
  

EXTENSION OF MATURITY FOR NEW LOANS

• Under rules issued by the SBA, existing PPP loans have a maturity of two years that would apply to any amounts not forgiven.
• PPP loans issued after the enactment of the PPP Flexibility Act will have a minimum maturity of 5 years.