The 10 Most Important Developments in the New “PPP Flexibility Act“
June 10, 2020
- The new PPPFA offers serious flexibility in the way employers may calculate FTE and spend their loan funds.
- Several deadlines are now extended, including those for spending your money, re-hiring your workforce, and re-paying your loan.
- The amount you can borrow (2.5x average monthly payroll) and the deadline for securing application approval (June 30) remain unchanged.
Since the enactment of the CARES Act on March 27, 2020, small businesses across the country have secured funding through the Paycheck Protection Program (the “PPP”), which was intended to provide economic relief to small businesses that were adversely impacted by COVID-19. As the PPP evolved by way of guidance issued by the Treasury and SBA, the requirements of the program became an ever-moving goal post and it was clear that the PPP was not a one-size-fits-all solution that was sufficient to meet the needs of the broad range of small businesses throughout the United States.
With an eye toward providing flexibility and alleviating the stress that was inadvertently created by the PPP, Congress passed the Paycheck Protection Program Flexibility Act (“PPPFA”) with bipartisan support on June 5. The PPPFA provides some drastic changes to the PPP. Much like the original PPP, the PPPFA will be helpful to some borrowers and not quite as helpful to others.
Here is a summary of the notable changes:
What is the maturity date for loan amount that is not forgiven?
Before PPPFA: SBA guidance established a maturity date of 2 years.
After PPPFA: The PPPFA provides that loans issued after June 5, 2020, must have a minimum maturity date of 5 years.
For loans issued before June 5, the borrower may increase the maturity date of the loan by renegotiating their loan agreement with their lender.
When do I have to restore FTE levels in order to receive full forgiveness if my average FTE count over the covered period is less than February 15 levels?
Before PPPFA: June 30, 2020
After PPPFA: December 31, 2020
How long do I have to spend my loan proceeds?
Before PPPFA: 8 weeks from the disbursement of your loan proceeds or 8 weeks from the first day of the first pay period following the disbursement of your loan proceeds.
After PPPFA: You may extend the covered period to 24 weeks after the date of loan disbursement.
There is no requirement to make use of the 24-week period. Therefore, borrowers who have spent a large portion of their funds may not see much benefit from the extended covered period and might consider sticking with the original 8-week covered period.
Are there any exceptions to the FTE calculation for employees who have departed during the covered period?
Before PPPFA: Yes, the following cases will not reduce a borrower’s loan forgiveness:
- Any positions for which the borrower made a good-faith, written offer to rehire an employee during the covered period, which was then rejected by the employee; and
- Any employees who, during the covered period: (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.
After PPPFA: In addition to the previously established exceptions, there is a new safe harbor from reductions in loan forgiveness based on reductions in FTEs in the following circumstances:
- Reductions in FTEs for borrowers that are unable to return to the same level of business activity the business was operating at before Feb. 15 due to compliance with requirements or guidance issued between March 1, 2020, and December 31, 2020, relating to worker or customer safety requirements relating to COVID-19 by the Secretary of Health and Human Services, the Director of the CDC, or OSHA; and
- Reductions in FTEs for borrowers that are both: (a) unable to rehire individuals who were employees of the borrower on Feb. 15, 2020; and (b) unable to hire similarly qualified employees for unfilled positions by Dec. 31, 2020.
How much of the entire loan amount must I spend on payroll costs?
Before PPPFA: 75%
After PPPFA: 60%
How much of the forgiveness amount must I spend on payroll costs?
Before PPPFA: 75%
After PPPFA: 60%
Am I able to receive partial loan forgiveness?
Before PPPFA: Due to the requirement that 75% of the loan amount be spent on payroll costs, it was uncertain whether partial forgiveness would be available for those borrowers that spent less than 75% on payroll because this could have been construed as an unauthorized use of loan proceeds.
After PPPFA: Yes. The Treasury and the SBA have clarified that if a borrower uses less than 60% of the loan amount for payroll costs during the covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60% of the loan forgiveness amount having been used for payroll costs.
How long can payments of principal, interest, and fees be deferred on loans for amounts not forgiven?
Before PPPFA: 6 months from the disbursement of the loan proceeds.
After PPPFA: Payments may be deferred until:
- The date the SBA remits the borrower’s loan forgiveness amount to the lender; or
- If the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period.
Can I receive more than 2.5x average monthly payroll or receive another PPP loan?
Before PPPFA: No.
After PPPFA: No.
When is the last date on which a PPP loan application can be approved?
Before PPPFA: June 30, 2020
After PPPFA: June 30, 2020
Although these changes certainly provide much more flexibility, there are still many issues that must be addressed. In a joint statement by Treasury Secretary Mnuchin and SBA Administrator Carranza, the Treasury and SBA promised to promptly issue rules and guidance, a modified borrower application form, and a modified loan forgiveness application to correspond with the changes to the PPP.
Borrowers and potential borrowers should stay vigilant and monitor the new developments that are sure to come. As PPP veterans know, new guidance can provide substantial changes to the program that will be important to every borrower’s strategy for making the most of their PPP loan proceeds.
Cody Myers is a business lawyer with Kegler Brown, working with clients on their funding strategies during the pandemic, including optimizing PPP and pursuing forgiveness. He can be reached directly at [email protected] or (614) 462-5495.