Editor’s note: Dan Fuchs and Jeremy Freifeld are attorneys with Hutchison PLLC.
RALEIGH – On Friday, June 5, 2020, the Paycheck Protection Program Flexibility Act (PPPFA) became law. The PPPFA amends certain provisions of the Paycheck Protection Program (PPP). Among other things, the PPPFA is largely aimed at providing greater flexibility to borrowers with respect to loan terms and loan forgiveness.
Key takeaways from the PPPFA:
Expansion of “covered period.” Previously, borrowers had eight weeks from the loan origination date to use the proceeds for such proceeds to be eligible for forgiveness. The PPPFA modifies “covered period” to mean the earlier of (a) 24 weeks after a borrower first receives funds under the program or (b) December 31, 2020. The PPPFA allows borrowers that received a loan prior to the enactment of the PPPFA to elect the shorter eight-week covered period.
Impact of covered period on obligation to maintain headcount and compensation levels. Under the PPP, the covered period also determines the time period during which a borrower must maintain employee headcount and compensation levels. By extending the covered period for purposes of forgiveness, the PPPFA also extends this obligation of the borrower. Borrowers who have already received a PPP loan should consider whether this continuing obligation outweighs the benefits of the longer covered period for forgiveness and may wish to elect the original 8-week covered period.
Two additional exemptions for the failure to re-hire employees. The PPPFA included two additional exemptions to the limitations on forgiveness for reductions in headcount. The failure to re-hire employees will not reduce the loan forgiveness amount if the borrower, in good faith, can document:
- an inability to rehire individuals who were employees of the borrower on February 15, 2020, and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
- an inability to return to the same level of business activity as such business was operating at before February 15, 2020, 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 worker or customer safety requirement related to COVID–19.
Reduced threshold for payroll costs. The PPPFA lowers the percentage of loan proceeds required to be used for “payroll costs” from 75% to 60%. As a result, up to 40% of the loan proceeds may be used on nonpayroll costs. Notably, by the express language of the PPPFA, the failure to use at least 60% on payroll costs would render the entire loan ineligible for forgiveness. Similar language was previously used in PPP statute, but was later relaxed by the terms of the forgiveness application for the PPP. It is unclear whether the language of the PPPFA will similarly be relaxed in the future and all borrowers intending to apply for forgiveness should plan to achieve the 60% requirement.
Modifies the loan payment deferral date. Previously, loan payments could be deferred for between six to twelve months, as agreed between the borrower and its lender. The PPPFA allows borrowers to defer payment until the date that the amount of loan forgiveness is remitted to the lender; provided, that if a borrower fails to apply for loan forgiveness within ten months of the end of the applicable covered period, then the payment deferral ceases at the end of such ten month period.
Payroll tax deferral. Previously, employers who received loan forgiveness were prohibited from deferring payment of federal payroll tax. The PPPFA removes that prohibition. In other words, PPP borrowers are now eligible to take advantage of the payroll tax deferral provided under the CARES Act.
All information regarding the PPP (as amended by the PPPFA) is subject to change as the information regarding the program coming from the SBA and Treasury Department is updated. If you have questions or would like additional information, please feel free to contact Dan Fuchs at firstname.lastname@example.org or Jeremy Freifeld at email@example.com and they would be happy to assist you.
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