Congress Passes Paycheck Protection Program Flexibility Act

On Thursday, May 28, 2020, the House passed the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”) 417-1, and, on Wednesday, June 3, 2020, the Flexibility Act passed the Senate. The bill is expected to be signed into law.

Below is a summary of the key changes to the Paycheck Protection Program (“PPP”), which will be effected by the Flexibility Act if it becomes law. We will be monitoring SBA guidance for new updates based on the Flexibility Act once enacted.

NOTE: Except for item (7) below, each of the following changes will apply to all PPP loans, regardless of whether the PPP loan was made before or after the date the Flexibility Act is enacted.

1. Extended “covered period”

The Flexibility Act extends the “covered period” of the loan for forgiveness purposes from the current 8-week period to the earlier of 24 weeks from the date of PPP loan origination or December 31, 2020. Existing PPP borrowers can choose to keep the original eight-week period or to use the extended period. Note: the final date to apply for a PPP loan remains June 30, 2020, as indicated in the Congressional Record dated June 3, 2020.

2. 60% for payroll costs

To be eligible for loan forgiveness, the borrower must now use 60% (as opposed to the 75% previously imposed by the SBA) of the loan proceeds for payroll costs and may use up to 40% of the loan amount for non-payroll costs (i.e., covered mortgage obligations, covered rent obligations and covered utility payments). However, the language of the Flexibility Act suggests a 60% “cliff”, meaning that borrowers must spend at least 60% on payroll or no portion of the loan will be eligible for forgiveness. Under current SBA guidance, a borrower is required to reduce the amount eligible for forgiveness if less than 75% of loan funds are used for payroll costs, but forgiveness is not eliminated entirely if the 75% threshold is not satisfied. Members of Congress have indicated that the intent of the Flexibility Act was not to eliminate the sliding scale, and technical fixes to restore a sliding scale at the 60% threshold are anticipated.

3. Loan payment deferral period

The 6-month deferral period before PPP loan payments are due now begins on the date of the PPP loan and ends on the date that the SBA remits the loan forgiveness amount to the lender. If a borrower does not apply for forgiveness within 10 months after the last day of the borrower’s covered period, the deferral period ends on the date that is 10 months after the last day of the borrower’s covered period.

4. New deadline of December 31, 2020 to eliminate headcount and salary/wage reductions

The safe harbor deadline to eliminate reductions in headcount and salary or wages of employees has been extended from June 30, 2020 to December 31, 2020. Borrowers now have until December 31, 2020 to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness.

5. New safe harbor to avoid FTE-related reductions in loan forgiveness

The Flexibility Act adds a new safe harbor to the FTE reduction calculation. Specifically, during the period beginning February 15, 2020 and ending December 31, 2020, the amount of loan forgiveness will be determined without regard to proportional reductions in the number of FTE employees if the borrower, in good faith, can document the following:

(i) an inability to rehire employees who were employed by the borrower as of February 15, 2020, and (ii) 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 and guidelines issued by the Secretary of Health and Human Services, Centers for Disease Control and Prevent or OSHA during the period beginning on March 1, 2020 and ending on December 31, 2020, related to the maintenance of standards for sanitation, social distancing or other worker or customer safety requirements related to COVID-19.

6. Deferral of payroll tax payments

The bill allows PPP borrowers who obtain loan forgiveness to defer payment of their payroll taxes. Such deferral was originally prohibited under the CARES Act.

7. Extended maturity to 5 years for new PPP loans

New PPP loans made after the date the Flexibility Act becomes law will have a minimum term of 5 years. The CARES Act originally provided for a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness. In its first Interim Final Rule, SBA applied a loan term of 2 years to all PPP loans. Borrowers with existing PPP loans who desire to extend the term of their loan should discuss with their lenders, as the Flexibility Act provides that borrowers and lenders can mutually agree to amend the loan documentation to provide for a 5-year term instead of a 2-year term (although there is no obligation imposed on either the lender or the borrower to do so).