UPDATE: On June 10, 2020, the SBA published an IFR incorporating the provisions of the Paycheck Protection Flexibility Act (Flexibility Act) and their related impact to the first IFR
On June 5, 2020 the president signed into law the Paycheck Protection Flexibility Act (Flex Act). The Flex Act makes significant changes to the Paycheck Protection Program (PPP), giving borrowers more time to use the funds received, more time to repay amounts not forgiven, and lower limits on how the funds are required to be spent.
We’ve summarized the key points of the Flex Act below. To read the Flex Act in its entirety, visit congress.gov.
With the exception of the Loan Maturity Date, all of the provisions below are effective as if they were included in the original CARES Act. The Loan Maturity Date is effective for loans after the Flex Act enactment date; loans before can be modified with the mutual agreement of the borrower and lender.
- Loan Maturity Date – Loans will now have a minimum maturity of 5 years; this has increased from the original maturity of 2 years. The interest rate remains unchanged at 1% and borrowers can prepay without penalty.
- Covered Period – The covered period still begins on the date of loan origination (receipt of funds). However, the ending period has changed to the earlier of:
- The date that is 24 weeks after origination or
- December 31, 2020
- Note – borrowers who received a covered loan before the Flex Act can still elect a covered period to end on the date that is 8 weeks after the origination date. We expect that those electing keep the 8-week covered period could also elect to use the 8-week Alternative Payroll Covered Period provided for in the PPP Loan Forgiveness Application (SBA Form 3508 05/20); however, that remains to be seen. We are therefore, expecting additional guidance to clarify. Borrowers should begin the process of evaluating if the revised 24 week period will maximize forgiveness.
- New Exemption – During the period beginning on February 15, 2020 and ending on December 31, 2020, the amount of forgiveness will not be reduced by a proportional reduction in the number of FTEs if the borrower can demonstrate (in good faith and fully documented):
- An inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and
- An inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
- Is able to document 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 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 standards for sanitation, social distancing or any other COVID-19 safety requirement.
- We are expecting additional guidance to be issued that will address the interaction of this new exemption with the other provisions on FTE’s in the original CARES Act.
- Limitation on Forgiveness – Previously at least 75% of the loan proceeds were to be used for payroll costs. That has now been reduced to 60%. Therefore, borrowers can use the remaining 40% on covered mortgage interest, rent and utilities (MRU).
- While this does add flexibility to the program, it also potentially introduces a new requirement. In order to receive loan forgiveness, a borrower must use at least 60% of the loan proceeds on payroll. This is important because if less than 60% of the loan is used for payroll, none of it will be eligible for forgiveness, and the entire amount will be a loan. We are expecting additional guidance to clarify.
- Extension of Deferral Period – The deferral period for the payment of principal, interest, and fess has been extended until the date on which the loan amount of forgiveness is determined.
- However, if a borrower fails to apply for forgiveness within 10 months of their covered period, they will then be required to start making payments of principal, interest and fees.
- Delay of Payment of Employer Payroll Taxes – Borrowers receiving PPP loans can now take advantage of deferring the payment of payroll taxes.