Paycheck Protection Program (PPP) Flexibility Act Makes Key Changes to the PPP Program
June 15, 2020
On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act (“PPP Flexibility Act”) into law. This Act modifies several parts of the Paycheck Protection Program (“PPP”), which was created by the Coronavirus Air, Relief, and Economic Security Act (“CARES Act”). (For an overview of the PPP program, click here; for an overview of forgiveness of PPP loans, click here.) The PPP Flexibility Act makes the following important changes to the PPP program.
Extended Forgiveness Period — The original PPP program required PPP loan proceeds to be used to pay payroll costs and certain utilities during the “covered period,” which was generally the 8-week period following disbursement of the loan. However, the PPP Flexibility Act extends the forgiveness period to 24 weeks, or until December 31, 2020 (whichever is earlier), instead of the original 8 weeks. Thus, businesses that received PPP loans must spend the loan proceeds on payroll costs and covered utilities within 24 weeks after disbursement (or by December 31, 2020, if that is sooner than 24 weeks).
Relaxed Restrictions on Use of Loan Proceeds (new 60/40 ratio) — PPP loans will only be forgiven if the funds are used for specific purposes. Under the original PPP program, to be eligible for forgiveness, at least seventy-five percent (75%) of the loan proceeds had to be used for “payroll costs,” and no more than twenty-five percent (25%) of the proceeds could be used for other, non-payroll costs, during the covered loan period. However, the PPP Flexibility Act has relaxed that ratio, from 75/25 to 60/40 — that is, businesses may now spend up to forty percent (40%) of PPP loan proceeds on permissible non-payroll expenses, which include rent payments, utility payments, and certain business mortgage interest payments, and are only required to spend sixty percent (60%) of the loan proceeds on payroll costs. It is important to note that if less than sixty percent (60%) of the funds are used for payroll, the PPP loan may not be forgiven.
Extended Deadline to Restore Employees — The original PPP program required businesses that received PPP loans to maintain a stable number of employees during the covered loan period in order to receive full forgiveness. If a business failed to do so (if it laid off employees or significantly reduced an employee’s salary), then the forgivable amount of the loan would be reduced. However, the original PPP program created a “safe harbor” that allowed such businesses to receive full forgiveness if the business brought those (or similar) positions back or reinstated an employee’s prior salary level by June 30, 2020.
The PPP Flexibility Act extends that safe harbor. Borrowers now have until December 31, 2020 to completely restore their full-time employee workforce. If they do so, they will be eligible for complete loan forgiveness.
Safe Harbor for Unsuccessful, Good-Faith Efforts to Re-Hire Employees — The PPP Flexibility Act also adds another safe harbor. Businesses that received a PPP loan and that had a reduction in their workforce will still be eligible for full forgiveness if they are unable, despite their best, good faith efforts, to bring back laid off employees or find suitable replacement employees. However, it is imperative that a business thoroughly document its efforts to bring back laid off employees. If those employees will not come back, then the business must attempt hire similarly qualified employees to fill those positions, and it must thoroughly document those efforts, as well.
Alternatively, if a business is unable to re-hire certain employees because compliance with CDC, Health and Human Services, or OSHA sanitation and safety requirements caused a decrease in revenue that prevents the re-hiring of those employees or re-filling of those positions by December 31, 2020, then the business may still be eligible for full forgiveness. However, the business must thoroughly document precisely why compliance with government health and safety guidelines has prevented it from returning to the same level of business activity.
Extended Loan Maturity Period for Unforgiven Amounts — The original PPP program stated that unforgiven PPP loan amounts would mature in two (2) years. The PPP Flexibility Act extends the maturity date for unforgiven amounts to five (5) years. However, this extended maturity date only applies to loans made after June 5, 2020. Nevertheless, borrowers and lenders may mutually agree to extend the maturity date of PPP loans disbursed prior to June 5, 2020.
Extended Deferral Date — The original PPP program deferred payments on unforgiven amounts for six (6) months after the forgiveness determination. However, the PPP Flexibility Act amends this requirement. Payments on unforgiven amounts are now deferred until the U.S. Small Business Administration (“SBA”) remits the forgiveness amount to the lender, unless the borrower has not applied for forgiveness within ten (10) months after the covered period ends, in which case the borrower must begin making payments on the full loan amount once those ten (10) months have expired.
Because the PPP program is constantly evolving, it is important to continue to monitor SBA guidance regarding changes and updates. The SBA has been releasing guidance on the PPP program, which can be accessed here, and it has been regularly updating a FAQ document regarding PPP loans with helpful information, which can be accessed here. Additionally, to see the full text of the PPP Flexibility Act, click here.
The Broehl Law Office will continue to monitor changes to the program and provide updates on our website.