On Wednesday evening, the U.S. Senate passed the Paycheck Protection Program Flexibility Act (the “Act”), which amends the CARES Act to provide businesses with greater flexibility in the use of PPP funds. President Trump signed the bill into law today, June 5. Below is a summary of the key changes.
Extended Period to Spend Funds
The Act’s most significant provision amends the CARES Act to extend the original eight-week “covered period” to incur and pay eligible expenses to twenty-four weeks, provided such period ends on or before December 31, 2020. Many borrowers had expressed concerns that they would be unable to expend their entire loan amount in an eight-week period. This change provides such borrowers with a much greater opportunity to utilize their loan proceeds in full. Borrowers that received loans prior to the enactment of the Act may elect to retain the original eight-week period, which may be preferable for businesses that clearly spend the entire proceeds of their loans on covered expenses within the original eight-week and are ready to submit their loan forgiveness applications.
Lower Percentage Allocated Towards Payroll
The CARES Act required that 75% of the loan proceeds be used for payroll costs. This new bill lowers that number to 60%, giving businesses even more flexibility in the use of the funds. However, the new bill makes clear that if a business does not reach the 60% threshold, none of the loan funding will be eligible for forgiveness.
New Exceptions to Forgiveness Reduction
The bill includes new exceptions that would allow borrowers to erase potential reductions in loan forgiveness. Under the new law, the amount of loan forgiveness will not be reduced by the proportional reduction of full-time equivalent employees if a business is able to document, in good faith:
- “an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020, and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or
- “an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established 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 during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”
Ability to Participate in Paycheck Protection Program and Utilize Payroll Tax Deferral
The CARES Act provided an extension of the payment dates for the employer portion of Social Security taxes for all employer obligations from the date of enactment of the CARES Act through December 31, 2020. The payment dates were extended such that 50% of the amounts are due on December 31, 2021 and December 31, 2022, respectively. However, the CARES Act provided that any employer receiving loan forgiveness under the Paycheck Protection Program could not utilize the payroll tax deferral. The Act reverses that prohibition and now allows employers to obtain loan forgiveness under the Paycheck Protection Program and utilize the payroll tax deferral feature of the CARES Act as well.
Additional Provisions
- The CARES Act previously provided that all payments on a PPP loan were deferred for at least six months. The Act removes that language and provides that all payments are deferred until the date on which the loan forgiveness amount is remitted to the lender. However, if borrowers do not submit their loan forgiveness application within ten months from the end of the covered period, the borrower will be required to start making payments on the loan at such time.
- To the extent loan proceeds are not forgiven, businesses will have five years instead of the prior two years to repay the loan at a 1% interest rate.
- Borrowers will now have until December 31, 2020 to rehire workers and/or restore wages in order to avoid forgiveness reductions.
