Update June 08: This blog has been updated to reflect current guidance about the Paycheck Protection Program Flexibility Act of 2020.
The U.S. House and Senate recently passed the Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act), which has been signed into law by the President. As its name implies, the Flexibility Act modifies some of the central (and most controversial) provisions related to Paycheck Protection Program (PPP) loans under the CARES Act, providing more flexibility for borrowers.
A summary of the key provisions of the Flexibility Act is below:
Prior to the Flexibility Act, PPP borrowers (Borrowers) were required to spend at least 75 percent of PPP loan proceeds on payroll costs and up to 25 percent of loan proceeds on permissible non-payroll costs (i.e., mortgage interest, rent/personal property leases, utilities, and interest on other debt—although interest on other debt is not subject to forgiveness). Failure to do so reduced the forgiveness amount.
The Flexibility Act modifies these thresholds such that Borrowers may now spend up to 40 percent on permissible non-payroll costs, lowering the amount required to be used on payroll costs to 60 percent of loan proceeds.
Although Borrowers now have the ability to use up to 40 percent of their PPP loan for permissible non-payroll costs, the Flexibility Act was drafted such that it appeared PPP loans would not be eligible for any forgiveness if the Borrower did not spend at least 60 percent of their PPP loan on payroll costs.
However, SBA and U.S. Treasury have issued a press release indicating that they will be issuing additional guidance clarifying that Borrowers who do not meet the 60 percent payroll cost threshold will nonetheless be eligible for partial loan forgiveness. If and when this clarification is issued, it will remedy a particularly detrimental provision from the Flexibility Act.
The Flexibility Act modifies the "covered period" within which a Borrower is entitled to incur and pay permissible costs with the proceeds of the PPP loan that would then be eligible for forgiveness. The CARES Act and Small Business Administration (SBA) guidance previously calculated the maximum forgiveness amount as the Borrower's permissible expenses paid and incurred during the eight-week period after the funding of the PPP loan.
The Flexibility Act has now completely modified the covered period, extending such period to the earlier of 24 weeks after loan origination or December 31, 2020. Borrowers who received loans prior to the enactment of the Flexibility Act now have the option to either utilize the new 24-week covered period or to continue utilizing the original eight-week covered period.
The CARES Act was silent as to the time period within which Borrowers must apply for loan forgiveness. The Flexibility Act now implies that Borrowers must now apply for forgiveness within 10 months after the last day of the covered period.
Under the CARES Act and related SBA guidance, the maximum loan forgiveness amount is reduced if a Borrower reduces its FTE-levels or employee salary/wages in excess of 25 percent as compared to an earlier reference period. Prior to the Flexibility Act, Borrowers could avoid such reductions to their maximum forgiveness amount if they remedied such reductions by June 30, 2020.
Recognizing that many employers are still not open or operating at full capacity (and may not be for a while), the Flexibility Act extends this safe-harbor deadline to December 31, 2020. This means that Borrowers can avoid reductions in forgiveness if they reinstate their FTE counts and employee wages to pre-pandemic levels by December 31, 2020. 1
Prior to the passage of the Flexibility Act, SBA clarified that Borrowers would not be detrimentally impacted (i.e., their forgiveness amounts would not be reduced) due to reductions in FTEs due to an employee's rejection of a written employment offer, or if an employee is fired for cause, resigns, or requests reduced hours during the eight-week covered period.
The Flexibility Act expands this even further, indicating that Borrowers will not be penalized and their forgiveness amounts not reduced if they can demonstrate:
1 To avoid reductions in forgiveness, FTEs must be reinstated to levels equal to the lesser of (i) February 15, 2019-June 30, 2019, or (ii) January 1, 2020-February 29, 2020 (although different periods apply for seasonable employers), and each employee’s wages must be reinstated to at least 75 percent of such employee's wages from the quarter immediately prior to the pertinent covered period. The forgiveness guidance issued by SBA also clarifies that Borrowers do not need to double-count reductions in FTE and reductions in wages, i.e., if an employee is terminated, the FTE reduction would apply, but the Borrower does not also need to count the reduction in this employee’s wages when calculating the reductions to the forgiveness amount.
2 To apply, such requirements or guidance must be issued between March 1, 2020, and December 31, 2020.