On Wednesday evening, June 3, the United States Senate by unanimous voice vote passed the Paycheck Protection Program Flexibility Act of 2020 in the same form previously passed by the House of Representatives. The bill is expected to be promptly signed by the President (which may have already happened by your reading of this bulletin).
The Flexibility Act provides some welcome relief to businesses who have either already secured a PPP loan or are considering applying for one by the deadline of June 30. Here are the major changes brought about by the new law:
* Loan Maturity Period: Borrowers who secure a PPP loan after the enactment of the Flexibility Act will have five years to repay the unforgiven loan balance, instead of the previously-set two. The Act provides, however, that “Nothing in this Act… shall be construed to prohibit lenders and borrowers from mutually agreeing to modify the maturity terms of a covered loan” secured prior to the enactment of the new law, to conform with the new five-year maturity period.
* Changes to the Loan’s Covered Period: New borrowers will have a “covered period” of 24 weeks in which to spend the proceeds of the loan, rather than the previously-existing eight weeks. Borrowers who had already secured the PPP loan before the enactment of the Flexibility Act will have the choice of either keeping their old 8-week covered period or opting for the new 24-week time frame.
* Rehiring of Employees: Responding to numerous complaints by employers regarding the difficulty they were having in rehiring previously laid off workers, Congress provided some safe harbors for employers to take advantage of before having the forgiven amount of their loan proportionately reduced by a failure to succeed in such rehiring, and extended the period of time employers have to conduct such rehiring. In particular, the law provides an “Exemption Based On Employee Availability” which states that “during the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness under this section shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if an eligible recipient, in good faith… is able to document (i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.”
* More Relief of Loan Forgiveness Reductions: One other exemption from the loan forgiveness reduction was provided in that same section, in circumstances where the borrower, in good faith, “is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by” the DHS, CDC or OSHA “related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.”
* Changes to Required Use of Loan Proceeds: The Flexibility Act reduces from 75% to 60% the portion of the loan proceeds which must be dedicated to payroll expenditures. In corresponding fashion, the Act provides that loan recipients “may use up to 40% of such amount for any payment of interest on any covered mortgage obligation… any payment on any covered rent obligation, or any covered utility payment.” It has been reported that Congress, through the precise wording of the new law, perhaps unintentionally created a “cliff effect,” wherein if employers do not spend at least 60% of the loan amount on payroll, none of the loan amount will be forgiven (as opposed to a previously-existing “sliding scale” of forgiveness.) It is anticipated, therefore, that Congress may soon issue “technical corrections” to remedy that problem.
* Delayed Payment of Certain Payroll Taxes By PPP Loan Recipients: The CARES Act had previously provided that companies could defer payment of the employer portion of Social Security taxes until December 31, 2020, unless they were the recipient of a PPP loan. That exception/exclusion has been removed by the Flexibility Act, so that the recipients of PPP loans may now likewise defer such payments until the end of the year.
Because legal developments pertaining to COVID-19 are constantly evolving, we recommend that our clients call the Kullman Firm attorney(s) with whom they work for the most current guidance on these matters.