Congress has now passed the Paycheck Protection Program Flexibility Act of 2020 (PPPFA),[1] with the Act passing the Senate by unanimous consent in the early evening hours of June 3, 2020. The Act changes a number of provisions in the original PPP loan program enacted as part of the CARES Act. The President is expected to sign the bill into law.

Update: The President signed the bill into law on June 5, 2020, which now becomes the date of enactment for items where that date is referenced in the law.

Change in Loan Maturity

The SBA had previously provided that PPP loans would have a 2-year maturity, even though the law provided for a maximum maturity of up to 10 years. Congress has now modified the law to provide that PPP loans will have a minimum maturity of 5 years.[2]

The Act provides the following effective date for this provision:

The amendment made by this section shall take effect on the date of the enactment of this Act and shall apply to any loan made pursuant to section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)) on or after such date. Nothing in this Act, the CARES Act (Public Law 116–136), or the Paycheck Protection Program and Health Care Enhancement Act (Public Law 116–139) shall be construed to prohibit lenders and borrowers from mutually agreeing to modify the maturity terms of a covered loan described in subparagraph (K) of such section to conform with requirements of this section.[3]

Thus, while lenders and borrowers are not required to modify loans to provide for a longer payment period, the law will allow such a modification to be made. With the law being signed into law on June 5, 2020, that becomes the date of enactment.

Covered Period Extension for a PPP Loan

The Act has modified the covered period in the PPP loan program definition found at Small Business Act §7(a)(36)(A)(iii) to change the ending date from June 30, 2020 to December 31, 2020.[4] The covered period in this section now runs from February 15, 2020 to December 31, 2020. A covered loan is a loan made under this program during the covered period, and this covered period is referenced in other portions of the PPP loan provisions found in the CARES Act Section 1102.

Forgiveness Changes

The separate CARES Act Section 1106 covered period is also modified by the PPPFA. Under the CARES Act this covered period was the 8-week period beginning with the date of origination of the PPP loan. The date of origination was later defined by the SBA as the date that funds were received by the borrower from the loan. This covered period is the period that a borrower had to spend the funds for appropriate uses to obtain forgiveness.

Under the revised rule, that period is now tripled for most loans. The new provision reads:

(3) the term ‘covered period’ means, subject to subsection (l), the period beginning on the date of the origination of a covered loan and ending the earlier of—

(A) the date that is 24 weeks after such date of origination; or

(B) December 31, 2020[5]

However, as noted above, “subsection (l)” modifies this period to allow those who had the PPP loans before this revision was passed to retain the 8-week covered period. That provision provides:

An eligible recipient that received a covered loan before the date of enactment of this subsection may elect for the covered period applicable to such covered loan to end on the date that is 8 weeks after the date of the origination of such covered loan. [6]

With the law being signed into law on June 5, 2020, that becomes the date of enactment.

Why would a borrower want an 8-week period rather than a 24-week period? A key reason is that the FTE reduction rule measures average FTEs during the covered period. So while 24 weeks gives borrowers a longer period during which they can spend the money and qualify for forgiveness, it also increases the period over which the employer

Must maintain the FTE level under CARES Act Section 1106(d)(2) and
Must avoid a reduction of salary and wages under CARES Act Section 1106(d)(3)

if the employer cannot meet the restoration of FTEs and salary/wages under CARES Act Section 1106(d)(5). The restoration deadline under that section is moved by the PPPFA from June 30, 2020 to December 31, 2020.[7]

Added Exemption Based on Employee Availability

The PPPFA adds a new relief provision that will prevent a reduction in forgiveness in additional circumstances.

The new provision, found at revised CARES Act Section 1106(d)(7), provides:

(7) EXEMPTION BASED ON EMPLOYEE AVAILABILITY.—During the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness under this section shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if an eligible recipient, in good faith—

(A) is able to document—

(i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and

(ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or

(B) is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established 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 the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.[8]

This change may serve to grant relief if the employer is unable to rehire employees or has to reduce staff to comply with requirements imposed on a business to control COVID-19, such as reducing the number of customers served to enable social distancing.

Requirement to Spend 60% of Loan Proceeds on Payroll Costs

Update: The SBA has decided they can read this provision to not require the “cliff” problem described below, but rather treat the 60% test as requiring spending that percentage of proceeds received to get any forgiveness. See our article on the joint announcement from the Treasury Secretary and SBA Administrator issued on June 8, 2020.

In what could be either good news or bad news for a borrower, the PPPFA added a minimum payroll cost requirement for use of the funds in order to obtain forgiveness. Under the rules established by the SBA for the original PPP loan program, a minimum of 75% of the amount forgiven for a PPP loan had to be paid for payroll costs.

Example of Original Forgiveness 75% Test

Arrow, Inc. obtained a PPP loan of $100,000. During the covered period, Arrow Inc. spends $60,000 on payroll costs and $40,000 on other allowable costs. Under the original rules for forgiveness for the PPP program, Arrow, Inc. is eligible for forgiveness of $80,000 ($60,000 is 75% of $80,000) and would need to repay the $20,000 additional portion of the loan under the repayment terms.

Under the PPPFA, the law now provides, in revised CARES Act Section 1106(d)(8):

(8) LIMITATION ON FORGIVENESS.—To receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs, and may use up to 40 percent of such amount for any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), any payment on any covered rent obligation, or any covered utility payment.[9]

While the percentage is reduced to 60%, the test is no longer simply on the amount forgiven. Rather, now a borrower who fails to spend 60% of the amount borrowed on payroll costs will not receive any forgiveness.

Example Under New Provision

In the earlier example, Arrow, Inc. would now qualify for full forgiveness of the loan, as they spent 60% of the borrowed funds on payroll costs and used the remaining funds for other covered costs.

Note that since the requirement is that a minimum be spent on payroll costs, Arrow could have spend $75,000 or even the entire $100,000 on payroll costs and still receive full forgiveness.

However, if Arrow, Inc. only spends $59,999 on payroll costs and $40,001 on other allowable costs, Arrow would be required to repay the entire loan under the revised provision added by the PPPSA.

Extension of Deferral Period

The PPPFA also expands the deferral period found in Section 7(a)(36)(M) of the Small Business Act, now providing that the SBA will require lenders under this program to “provide complete payment deferral relief for impacted borrowers with covered loans, including payment of principal, interest, and fees, until the date on which the amount of forgiveness determined under section 1106 of the CARES Act is remitted to the lender.”[10]

A similar deferral rule applies to loans sold on the secondary market.[11]

However, if a borrower waits too long to apply for forgiveness, the law will require payments to begin. The PPPFA adds Section 7(a)(36)(M)(iv) of the Small Business Act which reads:

(v) RULE OF CONSTRUCTION.—If an eligible recipient fails to apply for forgiveness of a covered loan within 10 months after the last day of the covered period defined in section 1106(a) of the CARES Act, such eligible recipient shall make payments of principal, interest, and fees on such covered loan beginning on the day that is not earlier than the date that is 10 months after the last day of such covered period.

Payroll Tax Deferral Available Through End of the Year for Borrowers With Forgiven PPP Debt

The PPPFA removed the provision found at CARES Act Section 2302(a)(3)[12] that required borrowers who received forgiveness of debt to cease the deferral of payment of employer old age, survivors and disability insurance (OASDI).

Now all employers may defer the payment of such taxes for wages paid after March 27, 2020 and before January 1, 2021, paying half of the deferred balance on December 31, 2021 and the other half on December 31, 2022.

[1] HR 7010, “Paycheck Protection Program Flexibility Act of 2020,” Passed United States Senate June 3, 2020, https://www.congress.gov/bill/116th-congress/house-bill/7010/text (retrieved June 3, 2020)

[2] HR 7010, Act Section 2(a)

[3] HR 7010, Act Section 2(b)

[4] HR 7010, Act Section 3(a)

[5] HR 7010, Section 3(b)(1)

[6] HR 7010, Section 3(b)(3)

[7] HR 7010, Section 3(b)(2)

[8] HR 7010, Section 3(b)(2)(B)

[9] HR 7010, Section 3(b)(2)(B)

[10] HR 7010, Act Section 3(c)(1)

[11] HR 7010, Act Section 3(c)(2)

[12] HR 7010, Act Section 4(a)