Congress Passes Paycheck Protection Program Flexibility Act
UPDATE: The Paycheck Protection Program Flexibility Act of 2020 was signed into law June 5, 2020. Treasury has issued new Interim Final Rules to ensure prior guidance conforms with the PPPFA, and fix a drafting error described below.
On June 3, 2020, the Senate passed the Paycheck Protection Program Flexibility Act of 2020 (the “PPPFA”). The PPPFA had previously been passed by the House, and now heads to the President’s desk for signature.
The PPPFA modifies the CARES Act and Paycheck Protection Program in the following ways:
- All PPP loans made after enactment of the PPPFA must have a minimum maturity date of 5 years. The Regulations issued by the SBA established the minimum maturity date for a loan at 2 years.
- Lenders who made loans prior to enactment of the PPPFA can, but are not required, to modify the maturity of existing loans to 5 years.
- The time period for the PPP has generally been extended to December 31, 2020. Importantly, this has the following impacts:
- Extends the time period for lenders to make loans and for the SBA to guaranty loans under the PPP to December 31, 2020
- Extends the time period for borrowers to pay expenses with PPP loan funds to December 31, 2020
- Extends the date by which borrowers must correct reductions in the number of full time equivalent employees, or salary reductions, to be eligible for the full amount of loan forgiveness to December 31, 2020
- Most importantly, the PPPFA extends the time period for approved expenses to be eligible for forgiveness to the earlier of 24 weeks after the date of origination of the covered loan or December 31, 2020. This change applies retroactively to loans made prior to the enactment of the PPPFA.
- In addition to extending the date by which borrowers may remedy employee or salary reductions and still be eligible for full loan forgiveness, the PPPFA provides relief to borrowers:
- who can document a good faith effort, but inability, to rehire the same or similarly qualified employees to those who were employed on February 15, 2020; and
- who are able to document an inability to return to the same level of business activity due to compliance with COVID-19 related requirements or guidance issued by the Secretary of Health and Human Services, the Director of Centers for Disease Control and Prevention, or the Occupational Health and Safety Administration during the period beginning on March 1, 2020 and ending on December 31, 2020.
- There are a number of questions to this part of the PPPFA that SBA will need to provide guidance on in order for borrowers to take advantage. For example, what does it mean to be “similarly qualified” and how much deference will SBA give employers to make this determination? Also, what is the appropriate measure of “business activity” and what if revenue is equal to pre-COVID-19 revenue but expenses are substantially higher due to COVID-19 related compliance expenses?
- The PPPFA states borrowers must use 60% of the PPP loan proceeds for Payroll Costs to receive loan forgiveness
- This section is intended to provide relief to borrowers who were unable to spend the required 75% of PPP loan proceeds on Payroll Costs to be eligible for full loan forgiveness under SBA regulations. However, as drafted, this section requires borrowers to spend at least 60% of PPP loan proceeds to receive any loan forgiveness. The SBA’s 75% rule was a sliding scale and reduced, but did not eliminate loan forgiveness for borrowers who could not meet the 75% test.
- This drafting error has been identified and discussed by Senators and influential commentators. Although we expect Congress to fix this issue with a technical correction or SBA to issue rules interpreting this language as a sliding scale, until one of those events happens – Borrowers should do everything possible to ensure that they spend at least 60% of PPP loan proceeds on Payroll Costs.
- UPDATE: As expected, Treasury issued an Interim Final Rule on June 11, 2020 indicating borrowers that did not reach the 60% payroll cost threshold would reduce loan forgiveness by a percentage based on the amount of PPP loan proceeds actually used for payroll costs, rather than being prohibited from receiving any forgiveness.
- The PPPFA extends the deferral period for payments on the loan to the date which the amount of loan forgiveness is determined, rather than the date that is 6 months from disbursement of the loan proceeds. If the borrower does not apply for forgiveness, the borrower must begin making payments 10 months after the covered period ends (which is now December 31, 2020 for all current PPP borrowers).
- The PPPFA changes the CARES Act such that borrowers who apply for loan forgiveness are now eligible for the deferment of certain Payroll Taxes under Section 2302(a) of the CARES Act
We expect the SBA and Treasury will be issuing more regulatory guidance in light of the new legislation. The KMK Law COVID-19 team is happy and eager to assist businesses and non-profits in understanding the application and forgiveness process, and will continue to keep businesses and non-profits apprised of further guidance as it is released.
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