Paycheck Protection Program Flexibility Act Gives Borrowers More Leeway
Just two months after the Paycheck Protection Program (“PPP”) began taking applications, the House and Senate have passed the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) aimed at smoothing the way for more borrowers to take advantage of PPP loans and loan forgiveness. The Flexibility Act modifies several key provisions of the original PPP rules that had garnered complaints from borrowers as they attempted to navigate the program’s requirements. However, ambiguous drafting in some sections of the Flexibility Act suggests that the Small Business Administration (“SBA”) and the Treasury Department may need to issue additional guidance in the coming weeks to fully clarify the modified rules.
The Flexibility Act modifies the following aspects of the PPP:
- Use of PPP funds: Borrowers will be eligible for loan forgiveness if they use at least 60% of their PPP loan for covered payroll costs, down from 75% in the SBA’s existing guidance. Note that the new language makes this 60% threshold both a minimum and a cliff: no portion of a PPP loan will be eligible for forgiveness if a borrower uses less than 60% of its loan on payroll. This feature may be corrected, as Senators indicated they did not intend to eliminate the PPP’s original sliding scale mechanism for borrowers who did not meet the use threshold.
- Extension of “Covered Period”: The “covered period” is extended from 8 weeks to 24 weeks (or December 31, 2020, if earlier). One of PPP borrowers’ main concerns has been that the current 8-week “covered period” – in which borrowers must use their loan proceeds in order to have their loan be eligible for forgiveness – is too short, particularly for businesses that may not be able to reopen immediately. Borrowers will now have much longer to deploy their loan proceeds while still retaining forgiveness eligibility; however, borrowers are free to use the old 8-week covered period if they prefer.
- Safe Harbor: Borrowers that restore salaries or re-hire workers by December 31, 2020 (previously June 30, 2020) will not have their forgiveness eligibility reduced. Forgiveness eligibility will not be affected by certain circumstances beyond borrowers’ control. While the change to the covered period definition gives borrowers more time to use the funds for payroll, it means that the PPP’s requirements to maintain headcount and salary levels during the covered period are also extended. To the extent a borrower decreases its FTE headcount or lowers certain salaries as compared to its pre-covered period operations, the portion of its loan that is eligible for forgiveness will be reduced. In tandem with the covered period change, however, the Flexibility Act adjusts the deadline for the so-called “safe harbor” provision from June 30, 2020 to December 31, 2020. Also, the Flexibility Act provides that forgiveness eligibility will not be reduced for borrowers who are able to document an inability to restore staffing levels or whose business is not able to reopen to pre-pandemic levels due to guidance or requirements from the CDC, HHS, or OSHA relating to sanitation standards, social distancing, or other safety requirements related to COVID-19. This appears to be an expansion of the SBA’s existing guidance that employers will not be penalized for employees who elect not to return to work.
- Longer Loan Maturity: For new PPP loans that are not forgiven, the minimum maturity is five years (increased from two years). The longer period is automatically effective for borrowers who receive PPP loans after the Flexibility Act becomes effective, but borrowers with preexisting loans may work with their lenders to extend maturity to five years or more.
- Payment Deferrals: Required payments of principal and interest will be deferred until a borrower receives a forgiveness determination (increased from 6 months after origination). For borrowers who opt not to apply for forgiveness, or who have not started the process, payments of principal and interest will begin following the 10-month anniversary of the end of their covered period.
- Payroll Tax Deferrals: PPP borrowers may defer certain payroll tax payments. The Flexibility Act eliminates a detriment to many borrowers in the original CARES Act legislation. While the CARES Act generally permitted businesses to defer payment of certain payroll taxes, this deferral did not apply to businesses that received loan forgiveness under the PPP. The Flexibility Act removes this exclusion, allowing PPP borrowers to participate fully in the tax benefit.
As the PPP continues to evolve – and as the SBA and Treasury clarify implementation of the Flexibility Act’s new provisions – borrowers should carefully assess their use of PPP funds to make sure they are getting the greatest benefit out of the program, and to make sure they are complying with the program’s requirements.