On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act (“PPPFA”) into law. This bipartisan legislation addresses many concerns that have arisen in the small business community regarding the Paycheck Protection Program (“PPP”) created under the Coronavirus, Aid, Relief, and Economic Security Act (“CARES Act”); changes several of the key PPP loan terms to be more consumer friendly; and provides additional flexibility to borrowers and lenders in the application of their PPP loan proceeds.
The PPPFA provides seven (7) key changes for PPP Loans. Let’s explore these changes one by one:
1. Maturity Date of PPP Loans: Under the CARES Act as originally established, a PPP loan could have a maximum maturity of 10 years. However, the U.S. Small Business Administration (“SBA”), in providing guidance and rules for PPP loans to the marketplace, assigned a maturity of two (2) years for all PPP loans. The PPPFA extends the maturity date for the portion of PPP loans that are not forgiven from two (2) years to five (5) years. Interim Final Rule No. 17 (“IFR 17”), issued on June 10, 2020, confirmed that the maturity date for all PPP loans made on or after June 5, 2020 shall be five (5) years.
It is important to recognize that the PPPFA does not retroactively apply this change to existing PPP loans. However, lenders and borrowers are free to mutually agree to amend an existing PPP Loan to conform to the new five-year term requirement.
2. Extension of the Covered Period: This is the first of the two most notable changes to the PPP. Though the restrictions on the use of PPP loan funds have not changed (that is, PPP loans can be used for eligible expenses including payroll and benefits, interest on Mortgages or other existing debt, rent, and utility costs), the PPPFA has extended the timeframe for which the PPP loan proceeds can be used and forgiven. The PPPFA extends the “covered period” of PPP loans, with respect to loan forgiveness, from eight (8) weeks from the date the PPP loan was disbursed to the earlier of either (i) twenty-four 24 weeks after the PPP loan is initially disbursed or (ii) December 31, 2020. If a borrower received their PPP loan prior to the enactment of the PPPFA, they may still elect the shorter eight (8) week period. At this time, there does not appear to be an option to have a covered period of between eight (8) and twenty-four (24) weeks.
It is important to note that the extension of the covered period for forgiveness of PPP loans does not extend the June 30, 2020 application deadline for PPP loans – any lenders looking to make further PPP loans and any borrowers looking to take a PPP loan, should do so before the end of June. Also, on June 10, 2020, the SBA issued a new PPP Application to be used through June 30, 2020.
3. Change in Forgivable Uses of the Loan Proceeds: This is the second of the two most notable PPP changes instituted by the PPPFA. The SBA issued guidance following the enactment of the CARES Act requiring that eligible non-payroll costs can account for no more than 25% of the forgiven amount of PPP loans. The PPPFA has loosened that requirement by raising that cap from 25% to 40%. This, along with the extension to the covered period, should make it easier for borrowers to use their PPP loan funds in a manner that better fits the needs of their business and to provide the borrower with a greater likelihood that they will receive maximum forgiveness of their PPP loan.
And, though the PPPFA created a fixed threshold requiring a borrower to use at least 60% of their PPP loan to receive any loan forgiveness, IFR 17 clarified that there is no such threshold for receiving any loan forgiveness. Per IFR 17, to include that requirement would contradict the flexibility that is provided with the extension of the safe harbor for rehiring workers, to be discussed in the next section. Accordingly, the SBA has flexibility in the determination of what will be the proportional requirement of payroll costs as a share of a borrower’s loan forgiveness amount.
4. Extension of the Safe Harbor for Rehiring Workings: Even with changes instituted in the PPPFA, loan forgiveness remains subject to reductions in proportion with reductions in a borrower’s number of full-time equivalent employees (“FTEs”) as compared to employment levels on February 15, 2020. Previously, a borrower’s PPP loan forgiveness amount would be reduced if FTE headcounts and wages were not restored to their February 15, 2020 pre-COVID-19 levels by June 30, 2020. However, the PPPFA has extended the safe harbor deadline to re-hire workers to December 31, 2020. This means that if a borrower restores its FTE headcount and wages to February 15 levels by the end of 2020, there will be no reduction to their PPP loan forgiveness.
5. New Exemptions from Rehiring: The PPPFA provides that a borrower’s reduction in FTEs will not reduce their PPP loan forgiveness amount for two (2) new reasons:
- A PPP loan borrower can document that they were unable to rehire individuals who were employees on February 15, 2020 and were unable to hire “similarly qualified employees” before the extended December 31, 2020 safe harbor period has ended. This codifies a PPP Frequently Asked Question answer published on May 3, 2020 (FAQ #40).
- A PPP loan borrower can document an inability to return to the same level of business activity as on February 15, 2020, due to compliance with requirements established or 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 during the period beginning on March 1, 2020, and ending Dec. 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
6. Extension of Loan Deferral Period: The PPPFA also extends the loan payment deferral period. Originally consisting of a fixed 6-month period, the PPPFA provides that the deferral period shall commence on the date the loan is disbursed and shall expire on either (a) the date that the amount of loan forgiveness is determined and remitted by the SBA to the PPP loan lender or (b) the date that is 10 months from the end of the covered period if a borrower has not applied for PPP loan forgiveness. As a reminder, the covered period is now the earlier of either (i) twenty-four 24 weeks after the disbursement of the PPP loan or (ii) December 31, 2020. This extends the previously established six (6) month payment deferral period for PPP loan payments to a potential of twenty (20) months for a borrower who does not apply for loan forgiveness.
7. Payroll Tax Deferral: Prior to the PPPFA, the CARES Act banned borrowers whose loans were partially or fully forgiven from deferring payment of their payroll taxes. The PPPFA now allows a borrower to defer their 2020 payroll taxes, even after receiving loan forgiveness, under the CARES Act.
Borrowers and lenders are encouraged to remain diligent and be on the lookout for new and revised SBA guidance on PPP loans in the form of new Interim Final Rules and updated Frequently Asked Questions. Of special importance to existing PPP loan borrowers and lenders, if existing PPP loan documentation does not provide for flexibility of terms based on changes to rules and regulations of the PPP, it may become necessary for existing loan documentation to be amended in order to reflect these new rules and policy changes. As the PPP loan program has a history of many changes, we expect that there will be other modifications to the program, so… stay tuned!
