June 5, 2020
On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”). This is an important update to the already existing Paycheck Protection Program which was implemented as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). This client alert summarizes key aspects of the PPP Flexibility Act.
Expansion of “Covered Period”
The CARES Act originally specified an 8-week covered period that began following the disbursement of a Paycheck Protection Program (“PPP”) loan. The PPP Flexibility Act extends this covered period to be the earlier of (i) 24 weeks from disbursement or (ii) December 31, 2020. For loans that are already outstanding, the borrower has the choice to use the original 8 week period or the new 24-week period.
Impact of Choosing 24-Week Covered Period
Extending the Covered Period from 8 weeks to 24 weeks appears to be beneficial to a borrower because it extends the period during which the borrower can incur or pay eligible expenses (see our previous client alert on this topic. This additional flexibility, however, comes at a cost.
If the Covered Period is extended, the period used to measure reductions in forgiveness for both the number of full time equivalent employees (“FTEs”) as well as the reduction in wages/salary is also extended, which means that employers will be required to retain or rehire FTEs and continue wages/salary much longer than they had originally planned. Because of this, we highly recommend that employers carefully consider the cost of this flexibility before choosing to use the extended 24-week Covered Period.
Reduction of Payroll Threshold
The PPP Flexibility Act also reduces the percentage of proceeds that must be used on payroll costs from 75% to 60%. The benefit of this approach is that now a full 40% of the PPP proceeds may be used for permissible non-payroll costs (generally utilities, rent and mortgage interest). The disadvantage of this change, however, is if a borrower does not use at least 60% of the PPP loan proceeds for permissible payroll expenses, then none of the loan will be forgivable.
There has been some discussion that Congress may pass a technical correction that would revise this rule to just limit forgiveness to 60% of payroll, but unless and until that bill passes, the 60% threshold is a bright line that every borrower, even those that already have PPP loans, must respect or none of the loan will be forgivable.
Flexibility for Reduced Headcount
The PPP Flexibility Act provides flexibility for determining the number of FTEs for purposes of calculating the potential reduction due to decreases in FTEs. Generally, a borrower does not need to consider a reduction in FTEs if it can document an inability to (i) rehire employees employed on February 15, 2020 or hire similarly qualified employees or (ii) an inability to return to the same level of business activity the borrower was operating at before February 15, 2020 due to compliance requirements for maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement that are issued by HHS, CDC or OSHA.
Other Miscellaneous Changes
In addition to the foregoing, the PPP Flexibility Act:
- Extends the maturity of PPP loans to at least 5 years (instead of 2);
- Revises the deferral period for payment of interest, principal and fees to end on the date that the application for forgiveness is remitted to the lender (instead of 6 months);
- Provides that if the borrower does not apply for forgiveness within 10 months after the Covered Period ends, that the borrower is required to begin paying interest, principal and fees on the PPP loan even if they have not yet applied for forgiveness; and
- Permits a borrower that receive forgiveness to still take advantage of the deferring the payment of employer payroll taxes as permitted under Section 2302 of the CARES Act. Prior to this change, a borrower that received forgiveness of a PPP Loan was not eligible for the payroll tax
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.