On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”), which makes several critical changes to the Paycheck Protection Program (“PPP”) that should provide relief to many businesses that have received or will receive PPP loans and will eventually apply for loan forgiveness. The PPP is the backbone of the government’s COVID-19 stimulus program.

SBA and the Department of the Treasury are expected to issue Frequently Asked Questions and interim final rules to implement and clarify the provisions of the PPPFA and its impact on the inconsistent portions of prior interim final rules and guidance, as well as to address numerous outstanding issues and questions pertaining to the PPP and loan forgiveness that were not addressed by the PPPFA.

Key provisions of the PPFA follow.

Loan Forgiveness

The most significant changes contained in the PPPFA relate to PPP loan forgiveness.  Originally, Section 1106 of the CARES Act provided that borrowers could receive loan forgiveness up to the amount spent on covered payroll costs, covered mortgage interest, covered rent, and covered utilities during the eight (8) week period following the receipt of the PPP loan proceeds.  The PPPFA enlarged this covered forgiveness period, now beginning from the receipt of the PPP loan proceeds to the earlier of 24 weeks or December 31, 2020.

Additionally, whereas Interim Final Rules issued by SBA/Treasury after the CARES Act was enacted required at least 75 percent of the forgiveness amount to be attributable to covered payroll costs, the PPPFA lowers that percentage to 60 percent.  Notably, unlike the SBA/Treasury rules, the language in the PPPFA indicates that: (1) the 60 percent requirement is based on the total loan amount, not the eligible forgiveness amount, meaning that at least 60 percent of the loan amount must be spent on payroll costs during the 24-week covered period; and (2) failing to meet this 60 percent threshold will preclude a borrower from receiving any forgiveness, as opposed to simply resulting in a decrease in forgiveness.

If a borrower received its loan prior to the enactment of the PPPFA, it may still elect to use the original eight-week covered forgiveness period.   At this time, however, it is unclear what impact choosing to utilize the eight-week period will have on the applicability of the other provisions of the PPPFA, including the new 60 percent requirement.

Forgiveness Reduction Due to Decreases in Employees or Wages

The underlying calculations to determine whether any loan forgiveness amount must be reduced still apply, based on decreases in a borrower’s full time equivalent employee (“FTE”) count or employee wages during the covered forgiveness period and the existing SBA/Treasury guidance on those forgiveness reductions. But the PPPFA has altered/increased certain safe harbors.  Previously, the forgiveness amount would not be subject to a reduction as long a borrower cured any reduction to its FTE count and employee wages by June 30, 2020.  The PPPFA extends this “cure” deadline to December 31, 2020.  In application, this means that if a borrower restores its FTE count and employee wages to February 15, 2020 levels by the end of the calendar year, no reduction in forgiveness will apply.  At this time, it is unclear whether the FTE count and wage levels must be at or equal to February 15, 2020 levels on December 31, 2020, or if an employer may qualify for this safe harbor by matching or exceeding its February 15, 2020 levels for a single week any time prior to December 31, 2020.

The PPPFA also adopts a safe harbor for FTE reductions to address a borrower’s inability to rehire employees or resume pre-COVID-19 business activity as previously set forth in the PPP Loan Forgiveness Application.  This rule provides that a reduction in the number of FTEs will be disregarded when calculating loan forgiveness if the borrower is able to document either:

  • That it was unable to rehire individuals who were employees on February 15, 2020 AND was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
  • That it was unable to return to its February 15, 2020 business activity level due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other employee or customer safety requirement related to COVID-19.

PPP Term and Deferral Period

All PPP loans issued after the enactment of the PPPFA must have a minimum maturity of 5 years (increased from 2 years) and payments of principal and interest are deferred until the date the lender receives the forgiven amount from the SBA (previous deferral period was six months from the date of the loan).  However, the deferral period for PPP loans issued after the PPPFA will end on the date that is 10 months after the end of the new 24-week covered period if the borrower fails to apply for loan forgiveness during that time.

While these changes do not apply to existing loans, lenders and borrowers may mutually agree to amend these loans to conform with the new provisions.  Additionally, borrowers should review their existing PPP loan documentation to determine if they include provisions that address amendments to the term and deferral period in the event of changes to the PPP legislation, rules, or guidance.

Payroll Tax Deferral

Previous guidance indicated that PPP borrowers could utilize the payroll tax deferral provisions of the CARES Act only until they received forgiveness of their PPP loan.  The PPPFA allows borrowers to continue to defer 2020 payroll taxes under the CARES Act, even after it receives loan forgiveness.  The first half of the deferred tax is still due by December 31, 2021 and the remaining half is due by December 31, 2022.

If you have any questions about the PPP, PPP Loan Forgiveness, or any other aspect of the CARES Act, please contact Josh Steele or the Harris Beach attorney with whom you normally work.

This alert does not purport to be a substitute for advice of counsel on specific matters.

Harris Beach has offices throughout New York State, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as New Haven, Connecticut and Newark, New Jersey.