On June 3, 2020, Congress sent to the President for signature the Paycheck Protection Program Flexibility Act of 2020 (Act). The Act amends the Paycheck Protection Program (PPP) to add time and flexibility for borrowers with PPP loans to spend the proceeds and to seek forgiveness of the loan amount. Importantly, these changes are effective retroactively to the date of the original PPP, as though included in the passage of the CARES Act. As a result, all PPP borrowers will benefit from the added flexibility, regardless of when they obtained their loan.

Extension of Loan Application Period. To the extent funding is not exhausted, the Act permits borrowers to apply for a PPP loan up to December 31, 2020.

Covered Period to Spend Loan Proceeds. The Act extends the time that borrowers have to spend loan proceeds from eight weeks to 24 weeks, provided that the ending date of the covered period cannot go beyond December 31, 2020. However, for loans predating the Act, borrowers may elect alternatively to stay with the eight-week covered period that begins on the origination date of their loan.

Payroll Cost Percentage. Many PPP borrowers were struggling with the SBA-created requirement to spend 75 percent of the loan proceeds on payroll costs in order to qualify for full loan forgiveness. The Act provides more flexibility by reducing the percentage of loan proceeds that must be used on payroll costs to a minimum of 60 percent, so borrowers can spend up to 40 percent of the loan proceeds on non-payroll costs, such as mortgage interest, rent, and utilities. However, the Act does not allow partial forgiveness for borrowers who spend less than 60 percent of the loan proceeds on payroll costs, as the SBA’s interpretation of the original CARES Act provisions did.

Covered Period. Under the CARES Act, the ending date for the covered period was June 30, 2020. Loans issued within eight weeks of that date obviously would not have the full covered period to spend the proceeds—a problem that became particularly acute when Congress amended the PPP to add funding. Recognizing this problem, Congress extended the latest possible ending date for the covered period until December 31, 2020. The SBA already had recognized this issue and, through its Interim Final Regulations on loan forgiveness, had allowed covered periods to extend beyond June 30, 2020.

Loan Forgiveness Reduction – FTE Calculation. Under the FTE forgiveness reduction calculation, employers are permitted to exclude any individual who worked for the employer on February 15, 2020 and does not work for the employer during the covered loan period, if the employer documents in good faith either that:

(i) The employer could not rehire the person and could not hire similarly qualified employees for unfilled positions on or before December 31, 2020; or

(ii) The employer was unable to return to the same level of business activity as existed on February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the CDC, or the OSHA, from March 1, 2020 to December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

Note that the second exception would not appear to apply to reduced business activity based on state or local requirements or recommendations if they exceed those issued by the federal government.

Loan Forgiveness – Cure Period. The PPP, as originally written, allowed employers to “cure” reductions in loan forgiveness based on FTE or wage/salary reductions that occurred between February 15, 2020 and April 26, 2020, if such reductions are eliminated by June 30, 2020. The Act extends the ending date of the cure period until December 31, 2020.

Time Period to Submit Loan Forgiveness Application. The Act added a 10-month time limit for borrowers to apply for forgiveness. The 10 months runs from the last date of the covered period—either eight weeks or 24 weeks, depending on the borrower’s choice of which period they are using under the Act. If the borrower fails to apply within the 10-month period, it is obligated to make payments of principal, interest, and fees on the loan beginning on the day that is not earlier than the date that is 10 months after the last day of such covered period.

Extended Deferral Period. The deferral period for principal, interest, and fees is modified to coincide with the date on which the forgiveness amount is remitted to the lender or 10 months after the end of the covered period of the loan if the borrower does not apply for forgiveness.
Extended Repayment Period. The Act extends the loan repayment period to five years (from two years) for loans that are originated after the date the Act is signed. It allows borrowers and lenders of existing loans to agree to this longer period as well.

Delay of Employer Payroll Taxes. The Act eliminated an exception to the CARES Act allowing employers to delay payment of payroll taxes, if the employer has indebtedness forgiven under the PPP.

Effective Date. The amendments contained in the Act are effective as of the passage of the original PPP and apply to loans already disbursed. However, the option to use the eight-week covered period, in lieu of the 24-week covered period, applies only to loans originated before the enactment of the Act.