The Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”) was signed into law by President Trump on June 5, 2020. The PPPFA intends to provide flexibility for businesses making use of Paycheck Protection Program (“PPP”) funds by:
- extending the “covered period;”
- increasing the amount of loan forgiveness that may be attributable to non-payroll costs;
- extending the date by which employers must restore full-time employee (“FTE”) levels;
- creating a new safe harbor for inability to restore FTE levels;
- extending the loan repayment period to five years; and
- deferring payroll tax.
Extension of the Covered Period
Under the original terms of the CARES Act, PPP loan funds would only be forgivable if used during the defined “covered period.” For purposes of this provision, the covered period was the 8-week period immediately following the loan origination. The PPPFA extends the covered period to the earlier of the 24 weeks immediately following the loan origination, or December 31, 2020.
Borrowers that received PPP funds before the enactment of the PPPFA have the option to either make use of the 24-week covered period or keep the original 8-week period.
Increased Amount of Loan Forgiveness for Non-Payroll Costs
Prior to the enactment of the PPPFA, the SBA required that no more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs. The PPPFA eliminated this rule. Instead, to receive loan forgiveness, at least 60 percent of the loan amount — rather than the amount of loan forgiveness — must be used to cover payroll costs. No more than 40 percent of the loan amount may be used to cover non-payroll costs. Partial loan forgiveness may be available if less than 60 percent of the loan amount is used for payroll costs during the covered period.
FTE Safe Harbor Extension
The PPPFA addresses the situation when a borrower reduced its number of full-time employees between February 14, 2020, and April 26, 2020. The borrower will now be exempt from the reduction in loan forgiveness during the covered period as long as by December 31, 2020, its FTE and salary levels return to the same level as on February 15, 2020.
Note that this extends the original FTE safe harbor provision in the CARES Act from June 30, 2020, to December 31, 2020.
New FTE Safe Harbor
Under PPPFA, if a borrower documents that:
(1) it was unable to rehire individuals who were FTEs on February 15, 2020, and unable to hire similarly qualified FTEs for the unfilled position on or before December 31, 2020; or
(2) as a consequence of compliance with safety and sanitation regulatory guidance between March 1, 2020, and December 31, 2020, the borrower was unable to return to the same level of business activity as it was operating at before February 15, 2020;
then any decrease in forgiveness based on a reduction in FTE will be disregarded.
Payroll Tax Deferral
Under PPPFA, any borrowers who received a PPP loan may defer payment of their 2020 payroll taxes (the employer’s portion of social security taxes), regardless of whether the SBA has granted them forgiveness.
Loan Repayment Period Extended
For loans issued after the date of the enactment of the PPPFA, the repayment period is now five years.
The period of repayment for loans issued before the date of enactment of the PPPFA is two years, but the length may be extended to five years if the lender and borrower agree.
Additionally, the first payment on the loan is deferred until forgiveness is granted by the SBA and remitted to the borrower’s respective lender.
If you have questions regarding the CARES Act, the Paycheck Protection Program Flexibility Act, or other SBA COVID-19 relief options, Kostelanetz & Fink is here to help. Please contact Robert Russell or Yoram Keinan.