Editor’s note: Church Law & Tax has been closely tracking the Paycheck Protection Program (PPP), the federal government’s multi-pronged economic response to the COVID-19 (coronavirus) pandemic for small employers, including churches. Previous coverage includes “An Overview of the CARES Act for Churches,” which created the PPP, as well as “How Churches Can Apply for the Paycheck Protection Program” and “Starting Your Church's PPP Loan Forgiveness Process,” which covers how to convert the loan into a nontaxable grant.
This article explains new changes made under the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”), which was approved by Congress and signed into law on June 5, 2020, by President Trump.
Subsequent to the Flexibility Act, the SBA has issued Interim Final Rules (IFRs) addressing PPP and the Flexibility Act: one IFR on June 10, 2020, addresses the Flexibility Act; two more on June 19, 2020, with one addressing the first IFR that SBA published about PPP, and the other addressing other follow-up IFRs for PPP); and one on June 22, 2020, which addresses loan forgiveness and review procedures tied to PPP and the Flexibility Act. Batson will describe and explain these updates in a forthcoming article for Church Law & Tax.
On June 3, 2020, the Senate passed H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020 (the Flexibility Act). This bipartisan bill passed in the House by a vote of 417-1 and in the Senate by a unanimous voice vote, and then was signed into law on June 5, 2020, by President Trump.
What does this mean for churches that received a Paycheck Protection Program (PPP) loan? This article reviews eight major changes to be aware of.
Expansion of the loan forgiveness Covered Period
The CARES Act created an 8-week "Covered Period” during which forgivable expenses are captured. The Flexibility Act redefines the Covered Period to be the period that begins on the date the PPP loan originates (which the SBA has interpreted to be the date the loan funds are distributed) and ends on the earlier of:
- the date that is 24 weeks later; or
- December 31, 2020.
Note. A church that received a PPP loan prior to the enactment of the Flexibility Act still may choose to use the original 8-week Covered Period.
Reduction of the payroll costs expenditure threshold to 60 percent
In its First Interim Final Rule, the SBA announced a requirement that at least 75 percent of forgivable loan costs be payroll costs. The Flexibility Act changes this threshold to 60 percent.
The statute states that “to receive loan forgiveness . . . , an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs.” The June 8 statement from the SBA and Treasury included clarification that partial PPP loan forgiveness remains if the 60 percent threshold is not met, noting:
If a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.
Extension of the PPP Loan Program
The PPP loan program as it was originally envisioned in the CARES Act only contemplated making loans through June 30, 2020. The program was to no longer authorize new loans after that date. The Flexibility Act extends the PPP loan program through December 31, 2020.
Despite this change, on June 8, 2020, the SBA and the U.S. Department of Treasury issued a statement about the Act that included confirmation that June 30, 2020 “remains the last date on which a PPP loan application can be approved.”
Editor’s note. Find out how churches can apply for a new loan unless or until funding runs out or the program expires on June 30.
Extension of time to rehire workers
The CARES Act provides an exemption to the application of the full-time equivalent (FTE) employee reduction quotient for employers that rehired employees by June 30, 2020. The Flexibility Act now extends the time to rehire employees until December 31, 2020. While this gives employers more time to restore their workforces, it also creates a potential delay in applying for loan forgiveness for employers seeking to use this exemption, as they will not be able to apply for loan forgiveness until after December 31, 2020.
New exemption from proportional reduction in loan forgiveness amount
The CARES Act includes a provision that reduces loan forgiveness by a fraction that compares an employer’s FTE headcount during the Covered Period to its FTE headcount during one of two reference periods:
- February 15, 2019, through June 30, 2019; or
- January 1, 2020, through February 29, 2020.
Seasonal employers are permitted to select either of the above reference periods or any 12-week consecutive period between May 1, 2019, and September 15, 2019. The CARES Act provided an exemption from this reduction if an employer restored its FTE headcount by June 30 (now December 31; see section above) to the same level or higher.
The Flexibility Act now creates a second form exemption. The language of this new exemption reads:
(7) Exemption Based on Employee Availability.—During the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness under this section shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if an eligible recipient, in good faith—
(A) is able to document—
(i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and
(ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
(B) 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 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.
This new exemption sets aside the FTE reduction quotient where an employer can document the inability to rehire workers employed by the employer on February 15, 2020, or the inability to hire similarly qualified replacement workers on or before December 31, 2020. The term “inability” is not yet defined. For example, does this mean the employer is unable to rehire because the employer lacks the financial means to pay the workers? Does it mean the workers are unavailable? Or does it mean some combination of these or other factors?
In addition, the Flexibility Act provides this exemption applies if, during the period of March 1, 2020, through December 31, 2020, an employer is able to document an inability to return to the same business level at which it was operating on February 15, 2020, because of compliance with certain government requirements or guidance related to sanitation, social distancing, or any other worker or customer-safety requirement related to COVID-19. The Flexibility Act does not define the manner in which an employer’s “business level” is to be measured for comparison. The Flexibility Act also does not address the availability of this exemption to businesses that have not been directly affected by the government-mandated safety standards, but nonetheless have experienced a decline in the level of their business because their customers are impacted by the government-mandated safety levels.
It is possible that this exemption will aid schools, camps, conference and retreat centers, and other similar employers whose activity levels have been impacted by stay-at-home orders and other similar pronouncements.
Extension of the minimum loan maturity
In its First Interim Final Rule, the SBA exercised its authority to set the minimum maturity for PPP loans at two years. The Flexibility Act extends the minimum loan maturity on any loan entered into after enactment to five years.
While the Flexibility Act only directly affects new loans, Congress made it clear that nothing in the Flexibility Act, the CARES Act, or the Paycheck Protection Program and Health Care Enhancement Act (the act that provided additional funding for PPP loans in April) is to “be construed to prohibit lenders and borrowers from mutually agreeing to modify the maturity terms of a [previously issued PPP loan] to conform with requirements of this section.”
Thus, the minimum maturity of existing loans may be modified by mutual agreement of the lender and the borrower to have a five-year minimum maturity and still meet the definition of a PPP loan.
Extension of the loan deferral period to coincide with the date of loan forgiveness
The Flexibility Act replaces the reference in the CARES Act to a loan deferral period of not less than six months or longer than one year. The new loan deferral period begins with the disbursement of the loan funds and ends with “the date on which the amount of forgiveness . . . is remitted to the lender.”
In addition, because the loan forgiveness application process may now extend much further into the future, the Flexibility Act provides that if a borrower fails to apply for loan forgiveness “within 10 months after the last day of the covered period defined in section 1106(a) of the CARES Act,” the borrower must begin making payments of principal, interest, and fees.
Caution. The reference to “section 1106(a) of the CARES Act” appears to start the 10-month clock at the end of the original 8-week Covered Period instead of the new 24-week Covered Period. Additional SBA guidance will be needed to confirm and/or clarify this point.
Deferral of payroll taxes
The CARES Act’s section 2302(a) permits employers to defer the payment of 2020 employer payroll taxes. Fifty percent of the deferred taxes are then due in 2021, with the balance due in 2022. The CARES Act specifically denied this deferral opportunity to employers that received forgiveness of a PPP loan. The Flexibility Act removes this barrier and now permits all employers to qualify for the deferral of employer payroll taxes. The Internal Revenue Service (IRS) has posted a set of frequently asked questions regarding employer payroll tax deferral on its website. Note that these frequently asked questions did not yet reflect the enactment of the Flexibility Act at the time of this writing.
More rules, guidance, and modified forms to come
In the June 8 statement, the SBA and Treasury noted that they will “promptly issue rules and guidance, a modified borrower application form, and a modified loan forgiveness application implementing these legislative amendments to the PPP.”
This article has been updated to reflect additional information provided in the June 8, 2020 statement from the SBA and Treasury.