On Friday, June 7, 2020, the President signed the ‘‘Paycheck Protection Program Flexibility Act of 2020’’ (PPPFA) into law. This Act, recently passed in Congress by large bipartisan votes, makes a number of significant changes to the Paycheck Protection Program (PPP), which was passed by Congress on March 25, 2020, as part of the Coronavirus Aid Relief, and Economic Security (CARES) Act.
Here are the key changes made by Paycheck Protection Program Flexibility Act:
- The Eight-week “Covered Period” is Extended to 24 weeks. The CARES Act required that borrowers under the PPP program spend the loan proceeds in just eight weeks. Many businesses found this a difficult challenge that would cause the unspent portion of their loan to be ineligible for the PPP’s loan forgiveness rules. Borrowers now have a full 24 weeks (or December 31, 2020, if earlier) from their loan funding date to spend the loan proceeds.
- Rehiring Safe Harbor Rules Extended. To receive maximum loan forgiveness, the CARES Act required borrows to maintain full-time equivalent employees at a level that existed prior to the Coronavirus pandemic and maintain compensation of full-time equivalent employees of at least 75{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} of prior compensation levels. However, if the borrower had furloughed employees, they did not have to take those cuts into account if the levels of full-time equivalent employees were rehired and their wages are restored to previous levels by June 30, 2020. The Paycheck Protection Program Flexibility Act extends this safe harbor date to December 31, 2020.
- Flexibility if Unable to Re-Hire Employees. In addition to the extension of the safe-harbor date, the amount of a borrower’s loan forgiveness will not be reduced if the borrower can document that it was unable to rehire employees due to compliance with requirements established or guidance issued by Health and Human Services (HHS), the Centers for Disease Control and Prevention, (CDC), or the Occupational Safety and Health Administration (OSHA) during the period beginning on March 21, 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.
- PPP “75/25” Spending Rule Changed to a 60/40-Rule. While not in the CARES Act, a Small Business Administration (SBA) rule and the PPP loan application required that at least 75{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} of a PPP borrower’s loan proceeds be spent on “payroll costs,” as defined in the CARES Act. PPPFA formally codifies this rule but gives borrowers the flexibility to spend up to 40{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} on qualified non-payroll expenses such as rent, mortgage interest and utilities.
- Extension of Loan Deferral Period. The CARES Act required that if a loan was not forgiven, the payment of principal and interest on the loan was deferred for six months. After six months, the accrued interest became payable. PPPFA requirements provide for a complete payment deferral until the loan forgiveness amount is remitted by the SBA to the lender (thus satisfying the loan obligation), provided that the borrower applies for the loan forgiveness within 10 months after the end of the covered period. If the borrower does not apply for loan forgiveness, then amortized payments would be required under the loan.
- Extension of Loan Maturity from Two Years to Five Years. While the CARES Act did not initially provide for a minimum loan maturity period, an SBA rule administratively set the minimum loan maturity date at two years. PPPFA in effect overrode that administrative decision, requiring that any new PPP loans effective after PPPFA must have a minimum maturity of five years. For PPP loans existing prior to the effective date of PPPFA, PPPFA provides that nothing in its enactment shall be construed to prohibit lenders and borrowers from mutually agreeing to modify the maturity terms of a PPP loan to confirm those existing loans to the new five-year maturity requirement.
- Payroll Tax Deferral for PPP Borrowers. The CARES Act allows employers to defer payment of the employer’s portion of Social Security taxes due on employment compensation from March 27, 2020 through December 31, 2020. Such deferred tax must then be paid in two equal installments no later than December 31, 2021 and December 31, 2022, respectively. However, the CARES Act did not permit this deferral option to a PPP borrower after a PPP loan is forgiven. This rule was changed by PPPFA, thus allowing PPP borrowers to utilize this deferral option, even though their PPP loan is forgiven.
- More Guidance Expected. PPPFA is effectively “a change of the rules in the middle of the game,” as many PPP borrowers are in the middle of their original eight-week “covered period” in which they were required to spend their PPP loan proceeds. We expect the Treasury Department and the SBA to issue further administrative guidance to help answer the likely questions from PPP borrowers as they adapt to the new rules. SYK will continue to monitor these developments.
Michael D. Walker is a business, tax and estate planning attorney who has worked with individuals and small to medium-sized businesses for nearly 30 years. A careful listener, Michael skillfully guides his clients to meet the wide variety of legal challenges they face in our current complex world.
