On June 3, 2020, the U.S. Senate passed the Paycheck Protection Program Flexibility Act which was previously approved by the House of Representatives on May 28, 2020. The Flexibility Act was written and considered in response to concerns raised by Payroll Protection Program (PPP) loan borrowers. While this law has not yet been approved by the President, it is expected to be signed without change. Once signed by the President, we anticipate the Small Business Administration (SBA) and Department of Treasury will issue guidance pertaining to the Flexibility Act, including a new form forgiveness application. The following is a summary of the highlights of the Flexibility Act and resulting changes to the PPP provisions of the CARES Act.
Extension of the Covered Period
For all PPP loans, the Flexibility Act has extended the “covered period” from 8-weeks to the earlier of 24-weeks from the date of funding or December 31, 2020 in which borrowers are eligible to use PPP funds and receive forgiveness for both permitted payroll and non-payroll costs paid. This extended “covered period” will allow borrowers to achieve a greater amount of forgiveness on PPP loan funds received. While the Flexibility Act extended the “covered period,” it also allows borrowers to make an election to have the original 8-week period apply in lieu of the 24-week period if they chose. This election allows borrowers that have already spent PPP loan funds to apply for and confirm their loan forgiveness at an earlier time and before the rules may change again.
Reduction in Head Count Safe Harbor
In line with the extension of the “covered period,” the Flexibility Act expressly states and extends interim rule regulations which provided for a safe harbor allowing borrowers to avoid a reduction in forgiveness due to head count. The safe harbor has been extended from June 30, 2020 to December 31, 2020 for a borrower to return its FTE head count to the average weekly FTE during either: (a) February 15, 2019 to June 30, 2019 or (b) January 1, 2020 to February 29, 2020. This extended safe harbor will allow borrowers to rehire employees when they are needed and not merely to compensate employees to continue to stay home. Businesses will now have a better chance at long term survival by allowing them to compensate employees when they can actually return to work.
Additionally, the Flexibility Act expressly confirmed (and expanded) the safe harbor to a borrower to exclude FTE reductions after February 15, 2020 that are due to: (1) any position for which the Borrower made a good-faith, written offer to rehire an employee during the 24-week period; and (2) was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. The Flexibility Act also acknowledged and provided a safe harbor for any reduction in workforce after February 15, 2020 due to: (1) compliance with requirements established or guidance issued by the Secretary of Health & Human Services, the CDC or the Occupational Safety & Health Administration beginning March 1, 2020 until December 31, 2020; or (2) related to maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19. We anticipate guidance on this safe harbor as the language lacks clear guidance and many businesses will not be able to come back to full size due of many factors, including a U.S. population concerned to leave their homes which is now arguably not directly related to any guidance, order or standard.
Payroll vs Non-Payroll Use Split
For all PPP loans, the Flexibility Act changed the SBA interim rule requirement that 75% of loan amounts considered for forgiveness to be spent on payroll costs. Under the new legislation, a borrower of a PPP loan is required to use at least 60% of the PPP loan proceeds for payroll costs, and may use up to 40% for permitted non-payroll costs being rent, utilities, and interest on secured debt.
PPP Term Extension for New Borrowers and Those that Negotiate
For new applicants/borrowers, the Flexibility Act changes the term of PPP loan from 2 years to 5 years. Interest rates remain at 1% for new applicants/borrowers for this extended loan term. To address the unfairness of this change to existing borrowers, the Flexibility Act does allow lenders and existing borrowers to mutually agree to modify the maturity date/terms of existing PPP loans. As was the case with initially obtaining a PPP loan, the relationship with your SBA lender will again prove beneficial should you have a PPP loan and desire to extend its term as is being offered to new borrowers.
Deferral of Employer’s Share of Payroll Taxes
Another welcome change under the Flexibility Act is that all borrowers are now retroactively eligible to defer payment of FICA (U.S. Federal Payroll Tax) from the period of March 27, 2020 through December 31, 2020. This allows borrowers to now defer the payment of the employer’s share until 2021 when 50% of such taxes must be paid, with the remaining 50% due in 2022.
Deferment of Loan Payments No Application for Forgiveness
Finally, the Flexibility Act extended the deferral of PPP loan payments, if a borrower fails to apply for forgiveness, from 6 months from the date of loan origination to 10 months after the last day of the “covered period.” This would appear to indicate that borrowers should apply for forgiveness within 10 months from the end of the now extended “covered period.” Additionally, this indicates that borrowers can receive a PPP loan and simply repay according to the loan terms without considering or applying for any forgiveness. A PPP loan is really just a loan if borrowers cannot achieve forgiveness.
Borrowers should continue to watch for additional guidance and/or regulations issued by the SBA, including a new forgiveness application form, and consult their advisors on any such guidance/regulations. Borrowers may now consider easing the push to spend PPP loan proceeds and/or re-hire or fill positions when their business is not ready to return to “normal.” This will leave some former employees seeking unemployment, but will allow U.S. small business a chance to survive in the long term.