Paycheck Protection Program Flexibility Act of 2020 Modifies Loan Forgiveness Rules of the Paycheck Protection Program in Favor of Borrowers

On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”), which makes several borrower-friendly amendments in order to maximize Paycheck Protection Program (“PPP”) loan forgiveness. These amendments apply to new and existing PPP loans. It should be noted, however, that no new PPP loans may be originated after June 30, 2020.

This Client Alert will summarize the high-level changes to PPP loan forgiveness as a result of the PPPFA. We expect additional clarification and guidance will be issued from the Small Business Administration in the near future.

  • Longer Covered Period. The PPP loan covered period has been increased from 8 weeks to 24 weeks. Borrowers now have 24 weeks to spend their PPP loan proceeds from the date of the loan disbursement instead of 8 weeks from the date of the loan disbursement. However, the covered period cannot be extended beyond December 31, 2020. Borrowers who already have a PPP loan can choose to maintain their original 8-week covered period. Such borrowers will be obligated to maintain payroll levels[1] only through the 8-week covered period to qualify for maximum forgiveness. Borrowers who elect to use the expanded 24-week covered period must maintain payroll levels for the full 24-week period to avoid reductions in their forgivable loan amounts. Regardless of whether a borrower chooses an 8-week covered period or 24-week covered period, such payroll levels can also be restored by December 31, 2020 to avoid any reduction in loan forgiveness.
  • Reduced Payroll Spending Requirement. The previous guideline that 75% of PPP loan proceeds must be spent on payroll costs in order to obtain full loan forgiveness has been reduced to 60%. Borrowers can now spend up to 40% of PPP loan proceeds on rent, utilities and mortgage interest without reducing their loan forgiveness.
  • Extended Deadline for FTE and Wage Restoration. The previous requirement that borrowers restore payroll levels during the covered period by June 30, 2020 has been extended to December 31, 2020. If a borrower reduces the number of its full-time equivalent employees or the salary of its employees between February 15, 2020 and April 26, 2020, such reductions will not negatively impact loan forgiveness if the original levels are restored by December 31, 2020.
  • Extended Maturity Date. The deadline to pay off any unforgiven PPP loan amount has been extended from 2 years to 5 years. Lenders and borrowers may mutually agree to modify any existing PPP loans to conform to the new 5-year maturity date.
  • Extended Loan Payment Deferral. Originally, borrowers were not required to make any loan payments of principal or interest for six months after the PPP loan was disbursed. Now, a borrower is not required to make loan payments to its lender until the date the SBA sends the loan forgiveness amount to the borrower’s lender. Borrowers who do not apply for PPP loan forgiveness will not be required to make loan payments until 10 months after the applicable covered period ends.
  • Rehiring. Borrowers will not suffer a reduction in loan forgiveness if there is a reduction in the number of its full-time equivalent employees if the borrower is able to document either: (A) the borrower was unable to rehire individuals who were employees on February 15,2020 and unable to hire similarly-qualified employees on or before December 31, 2020; or (B) the borrower was unable to return to the same level of business activity it had as of February 15, 2020 due to its compliance with requirements 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 related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
  • Payroll Tax Deferral. Borrowers are permitted to delay paying the employer’s 6.2% portion of 2020 payroll taxes. This deferral applies even if the borrower has their PPP loan forgiven, which was not originally permitted under the CARES Act.

[1] Loan forgiveness is reduced if: (1) the average number of borrower’s full-time equivalent employees is reduced when compared to a chosen reference period (either February 15, 2019 through June 20, 2019 or January 1, 2020 through February 29, 2020); or (2) borrower employees who made less than $100,000 in annualized wages in 2019 receive a pay reduction of more than 25% during the covered period.

Link to full text of the PPPFA can be found here.

Information contained in this alert is for general information purposes only. It should not be considered as legal advice or the sole source of information when analyzing and resolving a legal issue. If you have specific questions regarding your particular circumstances, please do not hesitate to contact your CH& counsel.