COVID-19: Paycheck Protection Program Flexibility Act of 2020
- Mick Bain
On Friday, June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the Act) became law. The Act modifies previously adopted CARES Act provisions related to the Paycheck Protection Program administered by the U.S. Small Business Administration (SBA).
Among other changes, the Act provides new flexibility on loan terms and loan forgiveness, but also imposes an important new condition on loan forgiveness. Specifically:
Minimum Loan Maturity: The Act extends the minimum of unforgiven loan amounts from 2 years to 5 years after the date of the loan forgiveness application. The amendment is only effective for loans disbursed after the Act’s adoption. For loans made prior to the Act’s adoption, borrowers and lenders must mutually agree to modify the maturity of the loan to take advantage of the extended maturity.
Period for Use of PPP Loan Proceeds: Under Section 1102 of the CARES Act, the “covered period” under which loan proceeds may be spent on allowable uses was scheduled to expire June 30, 2020. The Act extends that date to December 31, 2020. Pursuant to a bipartisan Congressional Intent letter, this extension is only intended to change the use of proceeds period, but does not change the period for making new PPP loans. Participating lenders must not accept or approve loans after June 30, 2020.
Covered Period for Loan Forgiveness: The Act extends the “covered period” under Section 1106 of the CARES Act, during which proper uses of PPP loans are eligible for forgiveness, from the original 8 weeks following loan disbursement to the earlier of 24 weeks following loan disbursement or December 31, 2020. This also lengthens the period (to coincide with the loan forgiveness period) for which employee headcount and salaries/wages must be maintained in order to avoid reductions in a borrower’s potential forgiveness amount. Borrowers who received a PPP loan before June 5, 2020 may elect the shorter 8 week period, which would also limit the period for which the headcount and salary-maintenance requirement applies and allow a borrower to avoid carrying unforgiven debt any longer than necessary.
Increased Flexibility for Non-Payroll : The SBA had previously issued guidance requiring that at least 75% of PPP loan proceeds be spent on payroll costs and that at least 75% of the amount forgiven be attributable to payroll costs. The Act overrides that guidance by allowing borrowers to use up to 40% of the loan proceeds on non-payroll costs without risking loan forgiveness. However, in order to be eligible for any amount of forgiveness, a borrower must use at least 60% of the loan on payroll costs. The Act does not change the definitions of payroll costs, other that may give rise to forgiveness, or other eligible uses of PPP loan proceeds.
Modifications to Workforce Restoration Credit:
- The bill extends the period in which an employer may rehire or eliminate a reduction in employment, salary, or wages that would otherwise reduce the forgivable amount of a Paycheck Protection Program loan. Previously, the CARES Act provided that borrowers had until June 30, 2020 to rehire or eliminate a reduction in employment, salary, or wages. The Act extends this deadline to December 31, 2020. Because workforce restoration is measured at the time a borrower applies for forgiveness, borrowers who are unable to rehire or restore payroll to adequate levels may wish to take advantage of the extended deadline and delay applying for forgiveness.
- The Act also added a new provision allowing for borrowers to avoid this reduction in loan forgiveness if they are either unable to rehire former or similarly qualified employees or are unable to return to the same level of business activity due to compliance with federal requirements or guidance related to COVID-19. Notably, the SBA rule requiring borrowers to inform state unemployment insurance offices of rejected of re-employment within 30 days of rejection remains in place.
Loan Payment Deferral: Additionally, the Act revises the loan payment deferral period, allowing recipients to defer payments until the date on which the borrower’s lender receives payment for the forgiven amount (rather than, under prior law, a period of at least 6 months and not to exceed a year), provided that if a forgiveness application has not been filed by 10 months after the end of the borrower’s 8- or 24-week period, then deferment ends on that date. This change was adopted to address concerns that many borrowers could have found themselves required to make loan payments while their loan forgiveness applications were still under review by lenders and the SBA.
Payroll Tax Deferral: The Act eliminates the CARES Act provision barring employers who received loan forgiveness from deferring payment of the 6.2% Federal payroll tax. That payroll tax deferral is now available to all program borrowers.
HOW WILMERHALE CAN HELP: Please let us know if you would like our assistance in understanding how these changes might impact your existing Paycheck Protection Program loan or your consideration of seeking new loan funding.