On June 5, 2020, the Paycheck Protection Program (“PPP”) Flexibility Act became law, again changing major features of the PPP Loan Program. As its name suggests, the new law was enacted primarily to (i) provide borrowers with the opportunity to use more of their PPP funds on certain overhead expenses by reducing the amount required for payroll costs and (ii) expand the period during which the loan funds may be used for expenses eligible for loan forgiveness.
Its key provisions include:
- Expansion of the period during which PPP loan funds may be used for payroll and non-payroll costs from June 30, 2020, as authorized under the original statute, to December 31, 2020.
- Expansion, at the election of the borrower, of the “covered period” during which payroll and nonpayroll costs eligible for forgiveness may be incurred or paid. Borrowers whose loans were funded before June 5, 2020 may choose to retain the original 8-week (56-day) covered period or may choose to use a 24-week covered period (but in no case extending beyond December 31, 2020).
- Reduction of the “75 percent payroll costs” threshold set by an SBA rule to a “60 percent payroll costs” threshold. As implemented in the SBA Loan Forgiveness Application released before this statutory change, the 75 percent payroll costs rule dictated that of the total loan amount to be forgiven, 75 percent had to constitute eligible payroll costs. Under this framework, the total forgivable amount of the loan would decrease proportionally based upon the amount included in the Forgiveness Application expended for payroll costs. Under the new statutory threshold, it appears that failure to spend at least 60 percent of loan funds on eligible payroll costs will render the borrower’s entire PPP loan ineligible for forgiveness.
- Extension of the deadline from June 30, 2020 to December 31, 2020 for employers to return FTEs and salary/wage amounts to their pre-COVID-19 levels (based upon certain reference periods) to avoid reductions of their loan forgiveness.
- Creation of a new safe harbor for FTE reductions that permits employers to avoid penalties on loan forgiveness amounts if they are able to document that their business has not returned to pre-February 15, 2020 levels due to compliance with certain HHS, CDC, and OSHA guidance on: social distancing, work place sanitization, and other “worker or customer safety requirement[s] related to COVID-19.”
- Extending the deferral period on loan principal and interest repayment to the date a borrower files its Loan Forgiveness Application, provided that the borrower files for forgiveness no later than 10 months after the end of the “covered period” during which the borrow could have incurred or paid costs eligible for forgiveness.
- Requiring, for loan made after enactment of the PPP Flexibility Act, that SBA permit borrowers to elect 5-year terms for repayment of PPP loan amounts that are not forgiven and authorizing modification of existing loans where borrowers and lenders may so agree. SBA had originally stated by rule that such repayment periods would be only 2 years.
- Permitting borrowers to defer their share of FICA taxes to December 31 in accordance with § 2302 of the CARES Act regardless of whether they obtain PPP loan forgiveness (removing a prior limitation from the CARES Act to the contrary).
We anticipate the most significant strategic decision this statutory change will trigger is whether an existing borrower will continue to apply the 8-week “covered period” or adopt the 24-week period. The benefit of the longer period will be the ability to accumulate an overall greater amount of payroll costs for purposes of meeting the required payroll costs threshold (now 60 percent). Further, since the June 30, 2020 deadline for reinstating salary/wage reductions in order to avoid forgiveness penalties has been extended to December 31, 2020, choosing a longer “covered period” would provide a greater opportunity to restore salaries/wages and avoid potential penalties. On the other hand, under current SBA guidance for loan forgiveness calculations, if a borrower elects a longer period, the negative impact upon loan forgiveness of salaries/wages that are not reinstated will be magnified. As the current guidance adjusts annual reductions to “covered period” specific values, the longer covered period will lead to a higher overall penalty.
Additionally, given that this program continues to evolve, for borrowers that can readily meet the 60 percent payroll costs threshold in only 8 weeks, it may be administratively less burdensome to simply retain the 8-week period and be out of the program before yet more changes are made.
We will be closely watching for further developments. Members of Congress have suggested that certain “technical amendments” to the PPP statute are necessary, in particular to soften the consequences of failing to meet the new 60 percent payroll threshold. In addition, we anticipate that either a new SBA interim final rule or revised SBA Loan Forgiveness Application will be published soon and will be most helpful in shedding additional light on how the SBA will implement the changes to the statute.
NEW WEBINAR: On Thursday, June 11, 2020 at 3 PM ET, FTLF is hosting an update webinar on these new flexibilities. Learn More or Register Here.
For questions, please do not hesitate to contact FTLF attorneys:
 H.R. 7010 – 116th Congress (signed into law Jun. 5, 2020).