Congress Provides Flexibility in New Bill for the Paycheck Protection Program

On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) became law and changed several major aspects of the CARES Act and the Paycheck Protection Program (“PPP”).  The Flexibility Act lives up to its name by providing flexibility for borrowers of PPP loans through the key changes below to the PPP.  We previously discussed the PPP and the CARES Act here.

Flexibility Act Changes to PPP:

• Expanding the covered period for the spending of PPP loan funds and the measurement of employees and wages for the potential PPP loan forgiveness reduction tests to the earlier of 24 weeks from the origination of the PPP loan or December 31, 2020. Borrowers who have already received PPP loans retain the option to use an 8-week covered period.
• Changing the required spending percentage of the PPP loan amount on payroll costs during the covered period to at least 60% of the PPP loan amount from at least 75% on payroll costs. The remaining 40% of the PPP loan may be spent on allowed non-payroll expenses, which are (a) interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), (b) any payment on any covered rent obligation, or (c) any covered utility payment.
  • The Flexibility Act on its face did not provide for partial PPP loan forgiveness if this 60% payroll spending threshold was not met, but in the Joint Statement, as defined below, the Treasury and SBA confirmed that a borrower would be eligible for partial loan forgiveness.
• Allowing borrowers until December 31, 2020, as opposed to June 30, 2020, to hire employees to eliminate any decrease in full-time equivalent employees and eliminate any reduction in the salary or wages of its employees for the potential PPP loan forgiveness reduction tests.
• Providing an exemption from the full-time equivalent employee test for potential PPP loan forgiveness reduction for the period of February 15, 2020 through December 31, 2020 if a borrower in good faith can document:

(a) an inability to rehire individuals who were employees of the borrower on February 15, 2020 and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or

(b) an inability to return to the same level of business activity as such business was operating at before February 15, 2020 due to compliance with requirements established or guidance of various listed federal agencies related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

• Changing the payment deferment period for the payment of principal, interest, and fees for the unforgiven portion of a PPP loan from between 6 months and 1 year to until the date on which the forgiven amount of the PPP loan is remitted to the lender by the SBA.
• Adding the rule that if a borrower fails to apply for forgiveness of a PPP loan within 10 months after the last day of the covered period (“Minimum Deferment Date”), then the borrower shall make payments of principal, interest, and fees on such PPP loan beginning on the day that is not earlier than the Minimum Deferment Date.
• Allowed employers and self-employed individuals who are PPP loan borrowers to defer the payment of the employer-portion of Social Security Taxes (the 6.2% tax on wages up to $137,700 of wages) and 50% of the tax imposed on the self-employment income, respectively, until 2021 and 2022.
  • This deferral applies to payroll tax deposits from March 27, 2020 to December 31, 2020.
  • Previously, borrowers could only defer until the PPP loan was forgiven.
• All of the changes above are effective as if they had been included in the CARES Act originally enacted on March 27, 2020.
• Changing the minimum maturity date of the unforgiven portion of a PPP loan to 5 years from the date the borrower applies for forgiveness (as opposed to 2 years prior to the Flexibility Act).
  • This change only applies to PPP loans made on or after June 5, 2020. Lenders and borrowers may mutually agree to modify a current PPP loan to comply with this change.

The Flexibility Act creates additional unanswered questions.  We can expect further guidance from the SBA and Treasury.  On June 8, 2020, U.S. Treasury Secretary Steven T. Mnuchin and SBA Administrator Jovita Carranza issued a  joint statement stating that the SBA, in consultation with Treasury, will promptly issue rules and guidance, a modified borrower application form, and a modified loan forgiveness application implementing the Flexibility Act changes to the PPP (the “Joint Statement”).  The Joint Statement stated that the new guidance will confirm that June 30, 2020 remains the last date on which a PPP loan application can be approved.  As of June 9, 2020, the Treasury had not issued new guidance or new forms based on the Flexibility Act and its changes to the PPP.