Congress Provides More Flexibility to Paycheck Protection Program Borrowers

by Christopher R. Hanewald

President Trump has signed into law the Paycheck Protection Program Flexibility Act of 2020 (Flex Act). In the wake of criticism from many business owners, the Flex Act seeks to address a number of shortcomings of the Paycheck Protection Program (PPP). Most notably, the new legislation is targeted at two requirements of the PPP—the 8-week Covered Period and 75% payroll requirement—which have resulted in businesses being forced to use loan proceeds to cover payroll despite reduced or entirely shuttered operations.

Accordingly, the Flex Act extends the 8-week Covered Period—the original measurement period in which funds were required to be expended in order to be forgiven—to 24 weeks or until the end of the year, whichever comes first. Borrowers are still permitted to utilize the original 8-week Covered Period at their discretion. Additionally, the threshold requirement that 75% of PPP loan proceeds be expended on eligible payroll costs has been lowered to 60%. Consequently, the recipients of PPP loans will now have more flexibility to use a greater proportion of proceeds to cover non-payroll eligible expenditures—such as utilities, rent, and mortgage interest payments.

While the above changes are assuredly welcome reprieves from the rigidity of the PPP, the Flex Act is not without its own unique challenges. In the absence of further regulations or guidance, the Flex Act appears to create a “cliff effect” as it relates to the 60% payroll cost mandate. As written, the Flex Act will only permit forgiveness for borrowers who utilize “at least 60%” on payroll costs which represents a departure from the CARES Act. Thus, if a borrower comes up short of the 60% mark, the entirety of the loan is ineligible for forgiveness rather than simply resulting in a proportional reduction of eligible forgiveness. Moreover, it must be acknowledged that the passage of the Flex Act at this point will greatly disadvantage those early recipients of PPP loans as those who received funding in early April have already expended a majority of the proceeds while operating on the 8-week Covered Period timeline.

The Flex Act additionally provides for the following:

  • Creates a minimum maturity date of five years for PPP loans originated on or after the passage of the Flex Act—borrowers who have already received PPP loans may want to discuss with lenders whether maturity dates could be amended in light of this change.
  • Extends the workforce restoration period from June 30th to December 31st. In conjunction with the extended Covered Period, employers will now have until 12/31/2020 to restore total employee headcount to pre-pandemic levels.
  • Extends the deferral period for making payments on the loan for those who do not have the proceeds forgiven. Rather than a 6-month deferral, the Flex Act would not require repayment until 10 months after the last day of the Covered Period.
  • Permits PPP loan recipients to delay payment of the employer portion of social security taxes for all payroll paid from March 27, 2020, through the end of 2020. Borrowers will now be able to defer the payment until 2021 when 50% will be due with the other 50% becoming due in 2022.

Borrowers who have already received PPP loans may want to discuss with their lenders whether their existing loan documentation could be amended in light of the above changes.

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