What You Should Know About the Paycheck Protection Program Flexibility Act
By Jonathan R. Ksiazek
On June 5, 2020, the President signed into law the Paycheck Protection Program Flexibility Act of 2020, H.R. 7010 (the “Flexibility Act”). The Flexibility Act amends the CARES Act and makes significant changes to Small Business Administration (“SBA”) rules relating to the Paycheck Protection Program (the “PPP”). This article contains a summary of the changes that the Flexibility Act makes to the CARES Act and describes how small businesses can use this flexibility when reopening their businesses.
Use of PPP Loan Proceeds
Previously, under the CARES Act and SBA guidance, at least 75% of the proceeds of a PPP loan had to be used for covered payroll costs. Now, under the Flexibility Act, borrowers must only use at least 60% of their PPP loan proceeds for covered payroll costs, and may use up to 40% of their loan proceeds for payment of covered non-payroll costs, including payment of interest on covered mortgage obligations, payments of covered rent obligations, and covered utility payments.
On Monday, June 8th, U.S. Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza released a joint statement regarding the passage of the Flexibility Act. In this statement, Secretary Mnuchin and Administrator Carranza explained that the new 60% requirement will not be a cliff. This means that if a borrower spends less than 60% of the PPP loan amount for expenses that otherwise would be forgivable, then that borrower will still get some forgiveness, instead of no forgiveness.
Extension of Covered Period
The CARES Act originally provided for an eight-week covered period beginning on the origination date of the loan for determining the amount of a PPP loan that will be forgiven. Under the Flexibility Act, the covered period now:
- Begins on the origination date of the loan (which SBA has indicated will be the date loan proceeds are disbursed), and
- Ends the earlier of:
- the date that is 24 weeks (168 days) after the loan origination date, or
- December 31, 2020.
Borrowers who received loans before June 5 may elect to continue to use their eight-week covered periods under the original CARES Act provision if they wish. The SBA’s Interim Final Rules permit borrowers who pay employees on a bi-weekly or more frequent basis to elect to use an eight-week “alternative payroll covered period” that begins on their first payroll date following disbursement of their loans.
Extension of Safe Harbor Deadline for Reductions in FTEs or Salaries/Wages
The CARES Act originally provided for a decrease in the forgiven amount of a loan based on the extent of reductions in full-time employees (“FTE”) or salary/wage levels during the covered period. Previously, the borrower could avoid the decrease in forgiveness if it restored FTE and salary/wage levels to their February 15 levels by no later than June 30. Now, under the Flexibility Act, the safe harbor deadline for eliminating reductions in FTE and salary/wage levels is now extended to December 31.
Additional Safe Harbor for Reductions in FTEs
The Flexibility Act also added a further provision providing that the forgiven amount of a loan will be determined without regard to a reduction in FTEs that is due to:
- An inability to both
- rehire individuals who were employees on February 15, and
- hire similarly qualified employees for unfilled positions on or before December 31;
- An inability to return to the same level of business activity at which the borrower was operating before February 15 due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the CDC, or OSHA during the period of March 1 through December 31, related to maintenance of COVID-19-related standards for sanitation, social distancing or any other worker or customer safety requirement.
To qualify for this additional safe harbor, borrowers must document in good faith their inability to rehire or hire employees, or to return to their pre-February 15 level of business activity and provide that documentation with their forgiveness applications.
PPP Loan Maturity
Lastly, under the CARES Act and previous SBA guidance, PPP loans had a maximum maturity of ten years from their origination date and all PPP loans would mature and be payable after no more than two years from the date on which the borrower applies for loan forgiveness. Now, under the Flexibility Act, PPP loans made on or after June 5 will have a minimum maturity of five years, and a maximum maturity of ten years, from the date on which the borrower applies for forgiveness. Lenders and borrowers may mutually agree to modify the maturity terms of loans made before June 5 to apply the extended maturity provision.
These new provisions in the Flexibility Act will provide even further opportunities for small businesses to reap the benefits of the PPP Loan program. As always, small businesses are encouraged to reach out to Di Monte & Lizak, LLC for guidance on how to manage their operations during these challenging times.