Paycheck Protection Program Flexibility Act of 2020

Now that the majority of small businesses seeking PPP loans have received their PPP proceeds, many PPP borrowers have turned their attention to understanding what will help them qualify for loan forgiveness. On June 3, the Senate approved the Paycheck Protection Flexibility Act (the “Act”), which had been approved by the House of Representatives on May 28 and as of June 4 is ready to be signed by the President. The Act makes several changes to the PPP, which generally will help borrowers to maximize forgiveness under their PPP loans.
 

• Borrowers who received a PPP loan prior to enactment of the Act can now choose whether to spend their funds over a period of 24 weeks or the original 8 weeks. This change allows many borrowers additional time to use their PPP funds, given that many had been struggling to use a loan amount based on 2.5 months’ payroll in only 8 weeks. But other borrowers will likely prefer to stick with the 8-week period. For some, it’s because they have already scheduled their use of the funds to fit the 8-week period. Others may not have sufficient funds to pay employees for the entire 24-week period, so necessary furloughs occurring after the first 8 weeks could result in a reduction in overall forgiveness. The covered period will be 24 weeks for all PPP loans funded after the enactment of the Act.


• The requirement that borrowers use at least 75% percent of their PPP loan proceeds on payroll costs has been reduced to 60%. The 75% requirement was not originally part of the program under the CARES Act, but was incorporated through later guidance issued by the SBA. The requirement, now at 60%, has been codified as part of the PPP statute.
  
  This change, however, could cause significant issues for certain borrowers based on how it is written into the Act. While the SBA guidance would have allowed borrowers that did not meet the 75% requirement to still obtain forgiveness (albeit at a lesser amount), the language contained in the Act appears to require 60% of the loan proceeds to be used for payroll costs, with borrowers who fail to do so being unable to obtain any forgiveness under the Act. It is not clear if that was the intent of this language or if future guidance will be provided to clarify. Until any such guidance is issued, borrowers should assume that 60% of loan proceeds must be spent on payroll in order to obtain any loan forgiveness.


• There are two tests created by the CARES Act for reducing the amount of forgiveness a for which a PPP loan may be eligible, one based on headcount (FTEs) and the other based on pay rates. The CARES Act provided for a safe harbor date by which certain employees could be rehired or have pay restored, and thereby, a borrower could avoid reduction of forgiveness for those employees. The Act extends that date from June 30, 2020 to December 31, 2020. This change allows business to have additional time to qualify for the safe harbor. But it also potentially lengthens the time for applying for forgiveness. Thankfully, the Act also lengthens the time for interest and principal payments under a PPP loan to begin until after the forgiveness determination is made by the lender, and the SBA has provided the lender with funds equal to the amount forgiven.


• The Act includes two new exceptions allowing borrowers to obtain forgiveness even if they don’t fully restore their employees. The SBA previously provided exceptions to the forgiveness reduction tests for employees who quit, turned down an offer of rehire, or requested reduced hours. The Act added exceptions for a borrower’s inability to find qualified employees or because operating restrictions prevented it from returning to February 15, 2020 employment levels.


• The Act extends the minimum loan term from 2 to 5 years for loans made after the enactment of the Act.

The CARES Act contains provisions under which eligible businesses may defer payment of payroll taxes, but it specifically forbid PPP borrowers from taking advantage of such deferral. The Act now allows PPP borrowers to defer up to 2 years of payroll taxes under those CARES Act provisions.

If you would like further information or to discuss this guidance, please contact Greg Gorospe or Josh Christie of Ice Miller’s COVID-19 Task Force.

Please contact our COVID-19 Task Force if you have any questions about managing the risks of the coronavirus pandemic. Our Task Force leadership consists of partners Josh Christie, Tami Earnhart and Christina Fugate. Also see our Coronavirus (COVID-19) Resource Center for additional resources, which is updated daily.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. It speaks only to guidance available as of May 13, 2020. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.