New Legislation Eases “PPP” Loan Forgiveness Restrictions
June 9, 2020
On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”). As the name suggests, the Flexibility Act provides PPP loan borrowers (“Borrowers”) with flexibility to obtain forgiveness on their PPP loans, among other things. Specifically, the Flexibility Act now gives Borrowers the option to lengthen its “covered period” for forgiveness to the earlier of: (i) 24-weeks after the loan origination date; or (ii) December 31, 2020. It is important to note that Borrowers are able to retain their original covered period of 8-weeks if they so desire.
In addition, the Flexibility Act amends the “75-25” rule, which required that 75% of a Borrower’s forgiveness amount be attributable to payroll costs. Now, payroll costs must account for 60% of the total loan proceeds in order to obtain full forgiveness. A subtle difference in this amendment compared to prior guidance, is that there now appears to be a threshold requirement of spending at least 60% of the total loan amount on payroll costs in order to receive loan forgiveness.
The Flexibility Act also adds some additional relaxation with respect to full-time employee equivalent (“FTEE”) rules. Originally, Borrowers had to restore FTEE’s and wages to pre-February 15, 2020 levels by June 30, 2020 in order to receive full loan forgiveness. Now, under the Flexibility Act, if a Borrower restores its FTEE count and wages by December 31, 2020, there will not be a reduction in the amount of loan forgiveness. It is, however, unclear whether this change only applies to Borrowers who elect the new 24-week (or end of year) covered period. Additionally, in the event a Borrower is unable to restore FTEE’s by December 31, 2020, or if a Borrower can document that they are unable resume activity to pre-COVID-19 levels, the Flexibility Act adds an additional safe harbor where Borrowers will not face the FTEE forgiveness reduction if: (i) a Borrower is able to document that it is unable to rehire FTEE’s who were employed as of February 15, 2020; and (ii) the Borrower demonstrates they are unable to hire similar employees on or before December 31, 2020. Borrowers must rely on compliance with the various rules and regulations established by the CDC, OSHA and the HHS regarding pandemic procedures relating to COVID-19 in order to show that they are unable to return to the same level of business activity.
Lastly, in order to accommodate the FTEE relaxation discussed above, the Flexibility Act establishes a few new loan terms. First, all new PPP loans must now have a minimum maturity date of 5-years (as opposed to a maximum of 10-years under the CARES Act). Congress simultaneously released guidance that the Flexibility Act does not mean that there has been an extension to apply for a PPP loan, with the hard deadline of June 30, 2020 still remaining intact. Full details of that guidance can be found here. Next, the Flexibility Act lengthens the payment deferral period to the date the SBA provides the lender with the forgiven amount. However, this extension only allows for a maximum deferment of 10 months after the covered period ends. This means that under the Flexibility Act, a Borrower could potentially defer payments until November 1, 2021 based on the new covered period rules.
While additional guidance surrounding the CARES Act and the Flexibility Act is expected, Borrowers should consider approaching their PPP lenders to discuss the possibility of amending their loan documents if they desire to take advantage of the new Flexibility Act regime (if applicable). As always, please feel free to reach out to the McNees Corporate and Tax team should you have any questions.
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