Paycheck Protection Program Flexibility Act
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On June 5, 2020, the Paycheck Protection Program (PPP) Flexibility Act (H.R. 7010) was enacted. The law gives employers more time and flexibility to use their PPP loans while still receiving loan forgiveness, a chief highlight of the program. The law makes the following key changes to the PPP:
Extension of Maturity Date
- The law extends the maturity of the unforgiven portion of a PPP loan to a minimum of five years. The SBA had originally set loan maturity at two years.
- This provision applies to PPP loans made on or after the date the law was enacted, provided that borrowers and lenders of PPP loans made prior to such date may mutually agree to extend the maturity date, presumably without adversely impacting loan forgiveness or the availability of the SBA guarantee.
- Expansion of Covered Period for Loan Forgiveness Purposes: The covered period during which businesses may use PPP funds for payroll and nonpayroll costs for which they may seek loan forgiveness has been extended to 24 weeks (instead of eight weeks). Importantly, businesses which have already received PPP funds may elect to continue to apply the original eight-week covered period. This election may be particularly beneficial for businesses that expect to experience layoffs and/or wages reductions following the original eight-week covered period, as the reductions in loan forgiveness based on full-time equivalent (FTE) employee levels and wages will be based on the original eight-week period, rather than the 24-week period.
- Increase in Percentage of Non-Payroll Costs Eligible for Forgiveness: The law provides that, in order to receive loan forgiveness, at least 60% of the loan must be used for payroll costs. As written, the law appears to require borrowers to spend at least 60% on payroll or risk losing all loan forgiveness. However, it appears that this may have been a technical drafting error in the law. The Administration may issue guidance interpreting this provision to permit loan forgiveness of any amount used on permitted payroll costs and permitted non-payroll costs, except to the extent the non-payroll costs exceed 40% of the amount for which forgiveness is sought.
- Extension of Certain Safe Harbors: The law extends the deadline to December 31, 2020 (from June 30, 2020) for businesses to restore their FTE employee levels and wages to pre-pandemic levels to remain eligible for full loan forgiveness under the FTE employee and wage reduction safe harbors.
- Exceptions for Inability to Rehire: The law provides businesses with certain exceptions from the FTE employee-based loan forgiveness reduction calculation required under the CARES Act and SBA rules issued thereunder. In particular, a business is not subject to the proportional reduction in loan forgiveness based on FTE employee count if it can document (1) an inability to rehire individuals who were employed on February 15, 2020 and an inability to hire similarly qualified employees for unfilled positions by December 31, 2020; or (2) an inability to return to its pre-pandemic level of business activity because of compliance with certain sanitation, social distancing, worker or customer safety requirements related to COVID-19.
Extension of Payment Deferral Period
- The law extends the deferral period for payments of principal, interest and fees in respect of PPP loans from six months from the date of disbursement of the loan to the date on which the amount of loan forgiveness is remitted to the lender (presumably by the SBA), subject to a maximum of 10 months after the last day of the covered period.
Employer Payroll Tax Deferral
- Under the CARES Act, employers (which did not receive loan forgiveness) could defer the employer portion of Social Security tax for up to two years. This legislation permits a business that receives PPP loan forgiveness to take advantage of the employer payroll tax deferment.
In addition to these provisions in the law, the Senate included a statement of congressional intent in the Congressional Record to clarify that, while the period for applying for a loan is technically extended to December 31, 2020, the deadline to issue new PPP loans remains at June 30, 2020. Senator Ron Johnson (R-WI) would not provide his vote for unanimous consent without the inclusion of the statement of congressional intent.
This is not the last of the PPP fixes that are expected to be made by Congress. Senator Mitch McConnell (R-KY) has already announced the Senate will consider more technical fixes to the loan program, and Senators Marco Rubio (R-FL) and Susan Collins (R-ME) will likely lead that effort.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.