Latest Update on the Paycheck Protection Program Flexibility Act of 2020

This alert was originally published on June 4, 2020, and is being updated as new information becomes available.

Certain provisions of the coronavirus/COVID-19 economic stimulus legislation are subject to the issuance of government regulations, government guidance and other government action; thus, certain details regarding the legislation may be clarified or added.

On June 5, 2020, certain key provisions of the CARES ACT regarding the Paycheck Protection Program (PPP) were amended by passage of that certain Paycheck Protection Program Flexibility Act of 2020, as supplemented by those certain revisions to the first Interim Final Rule (the “1^st Rule IFR ”) issued by the Small Business Administration (SBA) on June 11, 2020, as further supplemented by those certain revisions to the third and sixth Interim Final Rule published by the SBA on June 19, 2020 (collectively, the “Flexibility Act”). While the Flexibility Act provides, among other things, certain borrower-favorable timeframe extensions, it does not appear to extend the PPP loan application deadline. Instead, the 1^st Rule IFR appears to confirm that June 30, 2020, remains the last date on which a PPP loan application can be approved. This alert highlights the major PPP changes resulting from the enactment of the Flexibility Act.

1. Extension of the Covered Period
   • The Flexibility Act amends the definition of “covered period” that appears in Section 1102 of the CARES Act governing loan use, loan eligibility, and related requirements by extending the covered period from “the period beginning on February 15, 2020 and ending on June 30, 2020” to “the period beginning on February 15, 2020 and ending on December 31, 2020”.
   • The extended covered period ensures that borrowers now have until December 31, 2020, to expend the PPP loan proceeds on eligible expenses. 

2. Extension of the Loan Forgiveness Period
   • The Flexibility Act extends the original loan forgiveness covered period from an eight-week period to a period that begins on the date the PPP loan was originated (i.e., receipt by the borrower of the loan proceeds) and ends on the earlier of (i) the date that is 24 weeks after such date of origination or (ii) December 31, 2020. Current PPP borrowers^[1] may elect to have their loan forgiveness covered period be the original eight-week period.
   • While the 24-week loan forgiveness covered period provides borrowers additional time to incur and pay for forgiveness-eligible costs such as payroll costs, interest payments on mortgages existing before February 15, 2020, rent under leases in place before February 15, 2020, and payments for utilities for which service began before February 15, 2020; consequently, it also extends the period of time for which borrowers may need to maintain its employment and wage levels.
   • Similarly, borrowers now have until December 31, 2020, to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by December 31, 2020–a change from the previous deadline of June 30, 2020. 

3. Amending the 75 percent/25 percent (Payroll/Non-Payroll) Rule
   • Originally, the SBA imposed a requirement that PPP borrowers use at least 75 percent of their loan proceeds on payroll costs.
   • The Flexibility Act changes this ratio to at least 60 percent on payroll costs and a maximum of 40 percent for eligible non-payroll expenses.^[2]

4. Extension of the Maturity on a PPP Loan
   • The Flexibility Act amends the Cares Act to provide a minimum maturity of five years for all PPP loans made on or before its enactment, or two years, if the loan was made prior to the enactment.
   • The maturity on existing PPP loans can be extended from two years to five years if the lender and borrower mutually agree to the longer maturity date.
   • For purposes of determining the maturity date, the 1^st Rule IFR clarifies that the date the SBA assigns a loan number to the PPP loan will be the date that the loan is considered to have been “made.” 

5. Changes to the Rehiring Safe Harbor
   • The Flexibility Act includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce.[3] During the period between February 15, 2020, and December 31, 2020, the amount of loan forgiveness under Section 1106 shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if an eligible recipient, in good faith: 
     • (1) 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
     • (2) 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 operating restrictions related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19. 

6. Extension of Deferment Period
   • Loan payment deferral is extended from (and repayment need not begin until) what was originally six months after origination, to “the date on which the amount of forgiveness determined under Section 1106 of the CARES Act is remitted to the Lender.” There is no indication that a borrower is required to take any additional steps in order to avail itself of this extended deferment period.
   • Additionally, if an eligible recipient fails to apply for forgiveness of a covered loan within 10 months after the last day of the covered period as defined in Section 1106(a) of the CARES Act, such eligible recipient shall make payments of principal, interest, and fees on such covered loan beginning on the day that is 10 months after the last day or such covered period. 

7. Payroll Tax Deferment
   • The Flexibility Act also removes the restriction on payroll tax deferment for employers who receive PPP loan forgiveness. Under the Flexibility Act, those employers who received a PPP loan can now defer payroll tax. This deferment was prohibited by the original text of the CARES Act.^[4] 

8. Forgiveness Applications
   • On June 16, 2020, the SBA posted a revised PPP loan forgiveness application as well as relevant instructions implementing the new Flexibility Act. In addition to the foregoing, the SBA also published a new “EZ” version of the PPP loan forgiveness application which streamlines the forgiveness process for borrowers that meet at least one of the following three requirements:
     • Is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application;
     • Did not reduce annual salary or hourly wages of any employee by more than 25 percent and did not reduce the number of employees or the average paid hours of employees (excepting (i) reductions that arose from an inability to rehire individuals who were employees on February 15, 2020, if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020, and (ii) reductions in an employee’s hours that the borrower offered to restore and the employee refused); or
     • Did not reduce annual salary or hourly wages of any employee by more than 25 percent and was unable to operate at the same level of business activity as before February 15, 2020, due to compliance with operating restrictions related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

The Flexibility Act has provided much-needed guidance as we approach “forgiveness season.” As always, if you have further questions, we recommend that you seek the advice of counsel to discuss your specific situation.

To see our prior alerts and other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here. 

[1] The phrase “current PPP borrowers” denotes borrowers who received a PPP loan before the enactment of the Flexibility Act (June 5, 2020).

[2] Eligible non-payroll expenses consist of (i) business mortgage interest payments, (ii) business rent or lease payments for real or personal property, and (iii) business utility payments.

[3] Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. See Paycheck Protection Program Loans Frequently Asked Questions, FAQ #40, U.S. Department of Treasury, published May 3, 2020.

[4] See CARES Act, Section 2202(a)(3) (since deleted and removed via the Flexibility Act).