On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”) was signed into law. It enacted several significant changes to the Paycheck Protection Program (“PPP”).
Covered Period Expands
Perhaps most significantly, the Flexibility Act changes the covered period—the period during which loan recipients must spend loan proceeds in order to be eligible for loan forgiveness—from eight (8) weeks after origination of the loan to twenty-four (24) weeks after origination of the loan. Note, however, that borrowers that received their loan prior to enactment of the Flexibility Act may still elect to utilize an eight (8) week covered period if they choose.
The previous requirement that 75% of loan proceeds must be spent on payroll costs has also been changed. Now, borrowers must spend 60% of their loan proceeds on payroll costs in order to be eligible for forgiveness, and therefore up to 40% of proceeds may now be spent on mortgage interest (still no prepayments), rent obligations, and covered utility payments.
Changes in Loan Forgiveness
Another significant change is that employers will now have until December 31, 2020 (instead of June 30, 2020) to eliminate any reduction in FTEs or wages that would otherwise reduce the amount of loan forgiveness for which a borrower is eligible. The Flexibility Act also sets forth the circumstances in which the loan forgiveness calculation will ignore reductions in FTEs. Namely, that loan forgiveness will be calculated without regard to any proportional reduction in FTEs attributable to instances in which the borrower can document, in good faith, (i) an inability to rehire employees that were employees on February 15, 2020, and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or (iii) that the borrower is unable to return to the same level of business activity as the business was operating at as of February 15, 2020 due to compliance with sanitation or social distancing guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration from March 1, 2020 to December 31, 2020.
The minimum maturity date for PPP loans that are not forgiven is now five (5) years for loans made on or after June 5, 2020, though borrowers and lenders may choose to modify the maturity date of an existing PPP loan. In addition, the deferral period for payments of principal and interest on PPP loans was changed from a minimum of six (6) months to until the amount of loan forgiveness is remitted to the lender. Note, however, that if a borrower does not apply for loan forgiveness before ten (10) months after the end of their covered period, then they will be required to begin principal and interest payments, i.e., borrowers cannot indefinitely delay the end of the deferral period by not applying for loan forgiveness.
A Key CARES Act Change Too
Finally, Section 2302 of the CARES Act, which allows for the delay of payment of certain payroll taxes, originally included a prohibition against companies delaying their payroll taxes if they received loan forgiveness for a PPP loan. That prohibition has now been deleted, and whether borrowers receive loan forgiveness through the PPP is no longer a factor in whether that borrower can also delay payment of their payroll taxes pursuant to the CARES Act.
These are welcome changes for employers seeking assistance in dealing with the effects of the pandemic. We will continue to provide updates on the Paycheck Protection Program as additional guidance is issued.