PPP Flexibility Act Becomes Effective, Modifying Options for Borrowers and Providing Additional Benefits

COVID-19 Update

Date: June 05, 2020

Key Notes:

  • The Paycheck Protection Program Flexibility Act is now law.
  • The Act extends the “covered period” for calculating forgiveness and extends existing and prospective loan terms.
  • The new legislation lowers the required amount to be used for payroll costs under the new 60/40 rule.
  • The Act extends the safe harbor for re-hiring FTEEs and creates other borrower-friendly FTEE exclusions.
  • Unintended consequences from the changes in the rules may arise; continued monitoring of upcoming legislative fixes or SBA/Treasury guidance is imperative.

The Paycheck Protection Program Flexibility Act (Act) was signed into law on June 5, 2020. The Act is structured as an amendment to the original CARES Act, which created the PPP loan program. While the Small Business Administration and Treasury Department have issued numerous follow-up interpretations of the CARES Act through interim final rules and FAQs as detailed in our prior alerts, these new changes were formally enacted into law. The purpose of the Act is to provide borrowers more flexibility in their use of PPP loan proceeds, increase their ability to obtain forgiveness of loan amounts and reduce the burden of any repayment. Key changes are captured below.

Extending the Covered Period

The CARES Act originally provided that borrowers had only an eight-week “covered period” in which to spend all of the PPP loan proceeds to obtain forgiveness of those amounts. However, many small businesses remained shuttered for a majority of the covered period and have still been unable to reopen, greatly limiting their ability to make the best use of the loan proceeds and obtain forgiveness. The Act extends the covered period to 24 weeks, providing borrowers additional time to spend the loan proceeds on permitted uses and obtain forgiveness. Borrowers that received their PPP loans prior to the Act can still choose to operate under the eight-week covered period.

Changes to Existing and Prospective Loan Terms

The Act increases the minimum repayment period for unforgiven loan amounts from two years to five years with a maximum of 10 years, though borrowers and lenders can mutually agree to other terms. Additionally, under the original CARES Act, payments were only deferred for six months from receipt of the loan proceeds, which is potentially before any decision on forgiveness would be reached. Under the Act, payment is deferred until the lender renders a decision on what amount of the loan will be forgiven, with one exception noted below. So, if the full loan amount is forgiven, borrowers will not be required to make any payments. If a borrower fails to apply for forgiveness within 10 months of the end of the covered period, then the deferral will cease and payments will become due based on the full amount of the loan. While this does not establish an absolute deadline for applying for forgiveness, it does provide an incentive for borrowers to do so within this time period.

The New 60/40 Loan Use Forgiveness Rule

The original CARES Act did not include any requirement that a certain percentage of loan proceeds be used for payroll costs to obtain forgiveness, but subsequent SBA guidance created the requirement that 75% of the amount forgiven must be for payroll costs and only 25% of the amount forgiven could be used for nonpayroll costs, including rent, mortgage interest and utilities. Under this guidance, a borrower could obtain partial forgiveness of the PPP loan, with the total forgiven amount capped such that 75% of the amount forgiven was used for payroll costs.

The Act reduces the amount that must be spent on payroll costs to 60% (the 60/40 rule). Now, provided that at least 60% of the loan proceeds were used for payroll costs and the use of the loan proceeds otherwise complies with all PPP requirements, forgiveness will be granted. Based on the text of the Act, it appears that at least 60% of all loan proceeds must be used for payroll costs to obtain forgiveness for any portion of the loan. This is a significant departure from prior guidance, which made clear that forgiveness was not an all or nothing proposition, but would be lessened on a sliding scale depending on the amount of loan proceeds used for payroll costs. Although some legislators have indicated they want to fix this unintended reading in a potential subsequent technical change to the Act’s language in the next few weeks, this could have a substantial impact on whether borrowers with existing PPP loans choose to operate under the eight-week covered period or extend to the 24-week covered period to comply with this new rule to obtain forgiveness. Until that change happens, or the SBA or Treasury provide explicit guidance on this issue, borrowers should carefully reevaluate their forgiveness eligibility under this new rule.

Safe Harbor Deadline for Reduction Formula for FTEE Re-Hires Extended and Other Borrower-Friendly FTEE Exclusions

In addition to extending the length of the covered period, the Act also extends the deadline by which borrowers can restore full-time equivalent employee headcount levels to avoid a reduction in forgiveness. Under the original CARES Act, amounts eligible for forgiveness would be reduced by a percentage equal to the percentage reduction in FTEE headcount between February 15, 2020 and April 26, 2020, unless the FTEE level was restored no later than June 30, 2020 as detailed in a prior client update. The Act extends the deadline to restore FTEE headcount to December 31, 2020.

Recent guidance has also confirmed that certain reductions in FTEE headcount will not reduce the loan forgiveness amount sought, including employees that rejected a written offer to return, voluntarily resigned or were fired for cause. The Act provides other new exemptions from forgiveness reduction based on lower FTEE headcount. Now, if the borrower can attest in good faith that the business is unable to hire qualified employees OR that the business is unable to return to the same level of business activity due to compliance with requirements established or guidance issued by federal health agencies related to the maintenance of sanitation, social distancing or other worker or customer safety requirement, borrowers will not be penalized for a reduction in FTEE headcount. Exactly what factors lenders and the SBA will consider in evaluating any of these assertions by borrowers is unknown, but these new exceptions may provide a basis for some borrowers to avoid the forgiveness penalty based on a reduction in FTEE headcount.

Deferral of Payroll Taxes
The CARES Act permits taxpayers to defer certain employer payroll taxes, but borrowers that received forgiveness of PPP loans were exempted from this benefit. The Act deletes that exemption so that forgiveness of a PPP loan will not prevent a borrower from taking advantage of the employer payroll tax deferral as provided in the CARES Act. Unfortunately for borrowers, there has still not been a change to the IRS notice that no deduction will be allowed for payroll expenses that would otherwise be deductible if those expenses were paid with PPP loan proceeds and the loan is forgiven.

Keep Abreast of What’s Next

Thompson Hine is staying abreast of continuing developments related to the CARES Act and the PPP. Please visit our COVID-19 Task Force page for details on this and other information and resources.


For more information, please contact:

Jennifer L. Maffett-Nickelman

Riccardo M. DeBari

Lindsay Karas Stencel

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