On Friday, June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) was officially enacted, bringing important changes to the existing Paycheck Protection Program.
LOAN PERIOD EXTENDED
The original Paycheck Protection Program rules allowed for loan forgiveness if it was used within 8 weeks (from the loan origination date, referred to as the “covered period”) for payroll costs, interest on mortgage obligations, rent, and utility payments.
The Flexibility Act extends the covered period from 8 weeks to 24 weeks. This applies for all loans made after the enactment date.
In addition, businesses that already have paycheck protection loans can choose between using 8 weeks or 24 weeks for the covered period.
PAYROLL PORTION REDUCED
The percentage of the loan proceeds which must be spent on payroll costs has also been reduced, from 75% to 60%. This allows businesses to use more of the loan toward rent, utilities, and mortgage interest without jeopardizing forgiveness.
The exact text of the law suggests that businesses that do not use at least 60% of the loan proceeds for payroll costs would not be entitled to any forgiveness. However, further clarifying guidance may change this to be a proportionate reduction rather than a total loss of forgiveness.
EMPLOYEE & PAY REDUCTION EXCEPTIONS
Under prior rules, loan forgiveness is reduced if a business reduces its payroll by more than 25% or reduces its number of employees. Certain exceptions exist, including a safe harbor for reductions in employee levels in the period beginning February 15, 2020 and ending April 26, 2020. If the employee levels are restored by no later than June 30, 2020 to the prior levels, there is no reduction in forgiveness.
The Flexibility Act extended this deadline to December 31, 2020.
An additional exception made by the Flexibility Act allows reductions in employees for businesses that are unable to return to their February 15, 2020 levels of business activity due to compliance with HHS, CDC or OSHA requirements or guidance related to COVID-19.
It also allows reductions in employees if businesses are unable to rehire employees and are unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
The existing exceptions presumably still apply, allowing an employer to exclude workforce reductions for which a good-faith, written offer to rehire was rejected, for any employees who resigned or were fired for cause, and for any employees who voluntarily requested and received a reduction of their hours.
REPAYMENT PERIOD EXTENDED
The Flexibility Act specifies that the minimum repayment term is 5 years. Previous Treasury regulations implementing the Paycheck Protection Program established a 2-year repayment period.
This 5-year repayment only applies for loans made after the enactment date. It is not retroactive for existing loans. However, lenders may (but are not required to) extend the repayment term for existing paycheck protection loans. The 1% interest rate has not been changed.
The payment deferral period has also changed. It was initially 6 months. Now, payments of principal, interest, and fees are deferred until the forgiveness amount is remitted to the lender by the SBA. However, if no application for forgiveness is made within 10 months of the end of the covered period, payments must then begin immediately.
A change was also made to allow deferral of payroll tax payments for businesses that take out paycheck protection loans. The prior rules did not permit this.
The deadline to apply for a paycheck protection loan was not extended. It remains June 30, 2020.