Paycheck Protection Program Flexibility Act Modifies Paycheck Protection Program

On May 28, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the "Act") was passed by the U.S. House of Representatives. On June 3, 2020, the Act was passed by unanimous consent by the Senate. The Act now awaits signature by the President. The Act makes significant changes to the Paycheck Protection Program ("PPP"), as enacted as part of the CARES Act, including provisions related to loan forgiveness. The more significant changes introduced by the Act include:

• The "covered period" for making permissible expenditures (payroll costs, rent, utilities, and mortgage interest) in connection with loan forgiveness has been changed from the original 8 week period following loan origination to a 24 week period following loan origination (or December 31, 2020, if earlier). A borrower can elect to have the original 8-week period continue to apply.
• The amount that must be expended on payroll costs for loan forgiveness has been reduced from 75% (as provided in SBA guidance) to 60%. However, as drafted, the Act provides that a borrower must spend at least 60% of the loan proceeds on payroll costs (during the covered period). The language of the Act suggests that if a borrower does not meet the 60% threshold, then none of the loan will be forgiven. Under existing SBA guidance, the amount of loan forgiveness is reduced — but not eliminated entirely — if less than 75% of the loan proceeds are used for payroll costs. That is, under existing guidance, loan forgiveness is not completely eliminated if the 75% threshold is not met. Senators had raised concerns about this issue; however, the Senate acquiesced to pass the House version to avoid sending the legislation to a conference committee. At this time, it is unknown if the SBA will issue guidance providing for a reduction in loan forgiveness, rather than eliminating loan forgiveness altogether if the 60% threshold is not met. Senator Marco Rubio has previously requested guidance whether the Department of the Treasury can adopt the more flexible forgiveness standard through administrative regulations.
• A borrower now has until December 31, 2020 (instead of June 30, 2020) to restore their workforce levels and wages to pre-pandemic levels in order to avoid a reduction in the loan forgiveness amount due to a decrease in such levels during the covered period.
• The Act provides that the amount of loan forgiveness will be determined without regard to a proportional reduction in the number of full-time equivalent employees if the borrower, in good faith, is able to document (i) an inability to rehire individuals who were employees of the borrower on February 15, 2020 and an inability to hire similarly qualified employees for unfilled positions before December 31, 2020, or (ii) an inability to return to the same level of business activity as the borrower was operating at before February 15, 2020 , due to compliance with requirements or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to COVID-19.
• Loans made after the effective date of the Act will have a minimum maturity of 5 years (previously, loans had a 2 year maturity). The interest rate on PPP loans remains unchanged at 1%.
• Under the Act, a borrower that has a PPP loan forgiven will be eligible for the deferral of payroll taxes as provided in the CARES Act. Previously, such deferral was prohibited if a borrower was afforded loan forgiveness.

As of June 4, 2020, approximately $130 billion in PPP funding allocation remained available. Thus, small business that have not previously received a PPP loan can still apply.

Originally published Jun 4, 2020

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