On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010, the “Act”) was enacted. The Act is generally effective as of June 5, 2020, except for the portions covering forgiveness which are effective retroactively to the effective date of the CARES Act (Pub. L. No. 116-136, March 27, 2020). The Act makes several beneficial changes to the original law, as described below.
The covered period is extended from eight weeks to 24 weeks although borrowers with an outstanding loan can elect to keep the original eight-week period.
The minimum required amount of qualifying expenditures during the covered period that must be spent on payroll for purposes of determining the amount of the loan that is eligible for forgiveness is reduced from 75 percent (per the SBA’s Interim Final Rule - Paycheck Protection Program, RIN 3245-AH34, 85 Fed. Reg. 73, 20811 (April 15, 2020) but not specified in the CARES Act) to 60 percent. There is still controversy regarding the fact that as written, this provision appears to create a “cliff” whereby spending any percentage less on payroll results in the inability for all qualifying costs to be forgiven. Some Senators have requested clarification from Treasury that there should not be a cliff effect (although a legislative fix may be required).
For purposes of the curtailment of forgiveness due to a reduction in the number of employees, the safe harbor is extended from June 30, 2020 to December 31, 2020. For example, if a company reduces its workforce during the 24-week covered period but rehires those employees by December 31, 2020, it would not be penalized for a reduction in staff.
The Act adds a new exemption to the workforce reduction rules for companies that are not able to return to “normal” due to federal health guidelines that are “related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–
19.” Importantly, the new exemption requires that the business must be able to document that such guidelines resulted in an inability to rehire individuals who were employees on February 15, 2020 or similarly qualified employees for unfilled positions on or before December 31, 2020. Of note is that the exemption is based on federal, not state or local health guidelines. The Act also codifies an exemption that the SBA had already provided by FAQ relating to the inability to: 1) rehire employees who had previously been employed by the small business on February 15, 2020; or 2) hire new employees who are similarly qualified by December 31, 2020.
The PPP loan repayment period is extended to five years >from two years. Importantly, this only applies to new loans made after the date the Act became law. In order to extend the PPP loan repayment period to five years for loans made before June 5, 2020, the borrower and lender (and presumably the SBA as guarantor) must mutually agree to the change. This requirement will likely necessitate loan modification processes and possibly a new note.
The deferral period for making principal and interest and payments on the loans has generally been extended from six months to the date the SBA remits the loan forgiveness amount for a loan to the lender. However, if a borrower does not submit a loan forgiveness application to the lender within 10 months after the covered period ends, payments of principal and interest begin on that date. The interest rate remains at one percent.
The Act removes an exception in the CARES Act with respect to an employer’s ability to delay the payment of payroll taxes for companies that had PPP loans forgiven.
In extending the covered period to December 31, 2020, the Act created some confusion with respect to whether the period for originating PPP loans was also extended to the end of the year. The Congressional Record provides clarity on this issue:
“The Paycheck Protection Program (PPP) was authorized by Congress under the CARES Act as a short-term solution to help businesses make ends meet and continue to pay their employees during the initial shocks of the COVID–19 pandemic. Under the CARES Act, authorized funds for the program are set to expire on June 30, 2020, allowing for no new loans to be issued after this date.”
There are continuing discussions and requests for additional changes to the PPP loan forgiveness rules beyond what is set forth in the Act.
The current status and text of the bill can be found at this link: https://www.congress.gov/bill/116th-congress/house-bill/7010/text
For more information and resources on the Paycheck Protection Program, visit www.WoltersKluwerFS.com/PPP
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