Paycheck Protection Program Flexibility Act Makes Significant Changes to CARES ACT Paycheck Protection Program

Last week, the President signed the Paycheck Protection Program Flexibility Act (“Flexibility Act”). The Flexibility Act makes significant changes to the Paycheck Protection Program(“PPP”) that was created under the CARES ACT. Some highlights:

• The Flexibility Act extends the availability of the PPP program through December 31, 2020.
• Under the prior PPP the portion of the loan that was not ultimately forgiven had to be repaid over a 2-year period. The Flexibility Act extends the PPP loan term to 5 years for new PPP loans made after the effectiveness of the Flexibility Act and gives lenders some flexibility to negotiate longer terms for current loans that would otherwise have a 2-year loan repayment. Additionally, the Flexibility Act revises the deferral period for paycheck protection loans, allowing recipients to defer payments of the principal and interest until they receive notice of the results of their forgiveness applications. Under the old PPP, a borrower had a 6-month deferred period after which it needed to begin making payments on the unforgiven amount. Those payments amortized the remaining balance over an 18-month period. Now, that period for repayment will not start until a borrower’s lender has received a determination on how much will be forgiven. For those businesses which do not apply for forgiveness, the payments begin 10 months from the program’s expiration.
• The original PPP required that at least 75% of the proceeds be used for payment of employee wages with up to 25% for other eligible costs (commercial mortgages, rent, utilities, etc.). The Flexibility Act revises the 75%/25% rule currently governing payroll costs/eligible expenses to a 60%/40% rule.
• Originally the PPP required that a borrower use the proceeds in an 8-week period commencing on the day the loan was funded. This created a problem for many businesses that had not been able to open at the time they received the loan. The Flexibility Act extends the 8-week period to 24 weeks but also allows borrowers to elect to use the original initial 8-week period.
• Another major practical problem with the PPP was that many employers found that due to the combination of the stimulus payments, including an additional $600 weekly in unemployment, and standard unemployment compensation, certain employees did not want to come back to work or even accept their normal wages while they did not work. There was also the additional circumstance of employees who did not want to work regardless of the essential or open status of the business due to concerns over COVID-19. The Flexibility Act expands exemptions related to the reduction of forgiveness amounts based upon reduction in full-time equivalent employees based on employee availability. Forgiveness will not be affected provided an employer properly documents its inability to rehire, to hire similarly qualified individuals, or to return to the same level of business activity it was operating at prior to February 15, 2020.
• The Flexibility Act allows borrowers with forgiven loans to defer the employer portion of 2020 payroll taxes. The CARES Act only afforded the benefit of this payroll tax deferral until a borrower received notice of forgiveness. One-half of the employer’s share of payroll taxes are now due on December 31, 2021, and the remaining half will be due December 31, 2022. Borrowers are encouraged to discuss the wisdom of deferral of payroll taxes with their tax advisers.

We encourage you to speak with one of the firm’s transactional group attorneys to answer any questions.

By Brian G. Enright and Suzanne M. Scibilia, Halloran Sage