On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) was signed into law after nearly unanimous passage of the legislation by Congress.¹ The PPPFA significantly overhauls the original PPP loan program created under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including extending the time period for borrowers to spend the PPP loan proceeds, providing more flexibility for loan forgiveness, allowing loan forgiveness recipients to continue deferring payment of the employer portion of Social Security payroll tax, and extending the timeline for the availability of PPP loans for new applicants. It is anticipated that further changes and clarifications to the PPP loan program will be forthcoming to incorporate changes to the program required by the PPPFA, including modifications to the Interim Final Rules, Frequently Asked Questions, and Loan Forgiveness Application of the Small Business Administration (SBA). 

The following is a summary of the key changes to the PPP loan program under the PPPFA.

Extension of Time to Spend PPP Loan Proceeds to 24 Weeks or December 31, 2020

The PPPFA makes it easier for borrowers to spend PPP loan proceeds and qualify for loan forgiveness by extending the "covered period" during which PPP loan proceeds must be spent to 24 weeks from the date of origination of the PPP loan or until December 31, 2020, whichever is earlier. The original PPP loan program and loan forgiveness rules required PPP loan funds to be spent during an eight-week "covered period" beginning on the date of origination of the loan or an eight-week "alternative covered period" beginning on the first day of the first payroll period following origination of the loan. The PPPFA allows borrowers who received a PPP loan before the date the PPPFA became law to keep the same eight-week "covered period" they had before enactment of the PPPFA if they so choose. It is important to note that borrowers who elect the new longer 24-week covered period may be required to comply with requirements to maintain employment levels and salary and wage levels through this longer "covered period" or restore full-time equivalent (FTE) employee counts and salary/wages by December 31, 2020.

Loan Forgiveness Flexibility

Reduction in Amount of Loan That Must Be Spent on Payroll Costs to 60 Percent

The PPPFA also makes it easier for borrowers to qualify for loan forgiveness by reducing the percentage of the PPP loan proceeds that must be spent on payroll costs from 75 percent (which was set by the SBA's April 2, 2020 Interim Final Rule) to 60 percent. The PPPFA does not change the categories of eligible expenses (both payroll and non-payroll) for which PPP loans can be used,² but it increases the amount that can be spent on non-payroll expenses from 25 percent (which was set by the SBA's April 2, 2020 Interim Final Rule) of the total loan amount to 40 percent.

Extension of Time to Rehire Employees and Restore Wages to December 31, 2020

Under the original PPP loan program, borrowers were required to maintain the average FTE employees they had prior to the COVID-19 pandemic (based on one of two reference periods of the borrower's choosing) and maintain salary and wages for all employees making $100,000 or less on an annualized basis at any time during 2019 in amounts at least 75 percent of the salary and wages they received in the quarter before applying for the PPP loan, or face a proportionate reduction in the amount of the PPP loan that would otherwise be forgiven. The CARES Act and implementing rules under the original PPP loan program provided a safe harbor that would eliminate this loan forgiveness reduction penalty to the extent borrowers restored FTEs and/or salaries and wages, as applicable, by June 30, 2020. The SBA rules implementing the original PPP loan program also provided a safe harbor for borrowers who made good-faith written offers to rehire workers that were declined, allowing borrowers to count such positions as having been rehired for purposes of determining the amount of eligible loan forgiveness.

The PPPFA extends the deadline for rehiring and restoring wages and salaries from June 30, 2020 to December 31, 2020. The PPPFA also adds additional categories to the rehiring safe harbor that allows borrowers to treat unfilled positions as if they were filled with rehired employees for purposes of determining the amount of eligible loan forgiveness. The PPPFA allows borrowers to treat unfilled positions as if they were filled by the new December 31, 2020 deadline if the borrower can in good faith establish and document that a) they were unable to rehire individuals who were employees of the borrower on February 15, 2020 and hire similarly qualified employees for the unfilled positions or b) they were unable to return to the same level of business activity that the borrower had before February 15, 2020 due to compliance with COVID-19-related worker or customer safety requirements or guidance established or issued by the Secretary of Health and Human Services (HHS), the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OSHA) during the period beginning on March 1, 2020 and ending on December 31, 2020.

10 Month Loan Forgiveness Application Deadline

The PPPFA gives borrowers up to 10 months after their "covered period" ends (e.g., 10 months after the earlier of 24 weeks after the PPP loan proceeds are received from the lender or December 31, 2020 if the borrower elects to take advantage of the new longer "covered period" under the PPPFA or 10 months after the original eight-week "covered period" if a borrower who received a PPP loan before enactment of the PPPFA elects to keep the same eight-week "covered period" they had before enactment of the PPPFA) to apply for loan forgiveness. If a borrower fails to apply for forgiveness before the end of the 10-month loan forgiveness application deadline, the borrower will be required to make payments of principal, interest, and fees on the full amount of the PPP loan.

Continued Availability of Payroll Tax Deferral Regardless of Loan Forgiveness

The CARES Act permits employers to defer deposit and payment of the 6.2 percent employer's portion of Social Security payroll tax for the period from March 27, 2020 through December 31, 2020. Fifty percent of the deferred amount is due December 31, 2021, and the remaining 50 percent is due December 31, 2022.

As originally enacted, however, the CARES Act prevented an employer that received a PPP loan from deferring additional payroll tax once the lender issued a decision to forgive the PPP loan. The PPPFA retroactively eliminates this restriction. Accordingly, an employer may now continue to defer the payroll tax for the entire period from March 27, 2020 through December 31, 2020 regardless of whether it has a PPP loan forgiven during this period.

Extension of Maturity Date and Deferral of Principal and Interest Payments

The PPPFA extends the minimum maturity date on new PPP loans originated on or after June 5, 2020 (the date the PPPFA was enacted) from two years (which was set by the SBA's April 2, 2020 Interim Final Rule) to five years. While the PPPFA does not automatically extend the term of PPP loans originated before enactment of the PPPFA, it explicitly states that nothing in the PPPFA, the CARES Act, or the SBA's PPP loan program rules shall be construed to prohibit lenders and borrowers from mutually agreeing to modify the maturity terms of existing PPP loans consistent with the PPPFA. Accordingly, borrowers with PPP loans funded before enactment of the PPPFA should consider contacting their lenders to discuss a potential extension of the maturity date of their PPP loan.

The PPPFA also extends the deferral of payment of principal, interest, and fees on PPP loans from the original six-month period (which was set by the April 2, 2020 Interim Final Rule) to the earlier of the 10-month deadline to apply for loan forgiveness (if the borrower does not apply for loan forgiveness) or the date on which the amount of the loan forgiven is remitted to the lender by the SBA.

Extended Time Period for Availability of PPP Loans through Remainder of 2020

The PPPFA extends the deadline for applying for a PPP loan from June 30, 2020 to December 31, 2020, subject to the availability of PPP loan funds, which remain on a first-come, first-served basis. According to the SBA Paycheck Protection Program (PPP) Report summarizing the amount of PPP lending through June 6, 2020, approximately 4.5 million PPP loans have been processed for an aggregate of $511.3 billion in principal, leaving approximately $147.7 billion of the $659 billion appropriated by Congress for the PPP loan program available for further PPP loans. It is important to note that borrowers are still only allowed to apply for a PPP loan once. As a result, borrowers with outstanding PPP loans, or parties who were previously approved for a PPP loan and either declined the loan or have repaid the PPP loan, cannot apply for a second PPP loan following enactment of the PPPFA.

[1] The PPPFA was passed by the U.S. House of Representatives on May 28, 2020 by a vote of 417-1 and by the Senate on June 3, 2020 by unanimous consent. 

[2] PPP loans can still be used only for the following four categories of expenses:

• Payroll costs, including benefits;
• Interest on mortgage obligations, incurred before February 15, 2020;
• Rent, under lease agreements in force before February 15, 2020; and
• Utilities, for which service began before February 15, 2020.