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 3, 2020, the U.S. Senate passed the House version of the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”). The Flexibility Act is expected to be signed into law by the President. The Flexibility Act modifies certain provisions related to the loans made to small businesses under the Paycheck Protection Program (PPP). This alert highlights the major provisions of the Flexibility Act.

  1. Extension of the Covered Period[1]
    • Current PPP borrowers can choose to extend the original eight-week period to 24 weeks, or they can keep the original eight-week period. New PPP borrowers will have a 24-week covered period, but the covered period cannot extend beyond December 31, 2020.
    • Borrowers can use the 24-week period 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. 
  1. 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 and a maximum of 40 percent for eligible non-payroll expenses. 
  1. Extension of the Maturity on a PPP Loan
    • The Flexibility Act gives new borrowers the ability to repay a PPP loan over a period of five years. Originally, the PPP loan maturity was two years.
    • New borrowers now have five years to repay the loan instead of two. Existing PPP loans can be extended up to five years if the lender and borrower mutually agree. The interest rate remains at 1 percent. 
  1. 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.[2] During the Covered Period, 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 Feb 15, 2020; and
        • (ii) an inability to hire similarly qualified employees for unfilled positions on or before Dec 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. 
  1. Extension of Deferment Period
    • Loan payment deferral is extended from 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.”
    • 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. 
  1. 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.[3]

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] Under Section 1106 of the CARES Act (as amended via the Flexibility Act) the “Covered Period” is now defined as the period beginning on the date of the origination of the covered loan (i.e., receipt by the borrower of the loan proceeds) and ending on the earlier of: (a) the date that is 24 weeks after such date of origination or (b) December 31, 2020.

[2] 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.

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