June 8th, 2020

Paycheck Protection Program Flexibility Act of 2020

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Author: Andrew L. Schwartz, Mark W. Schweighofer, Rebecca O'Neill

On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (“Act”), which amends key provisions of the Small Business Act and the CARES Act that relate to the Paycheck Protection Program (“PPP”).  The Act is intended to enable borrowers to use PPP loans more effectively, and to bolster their ability to maximize PPP loan forgiveness, by relaxing some of the more rigid rules governing how PPP loan proceeds may be spent in addition to certain business operations matters.

Below is a summary of the changes brought about by Act and subsequent guidance, and what they mean for businesses that are currently in the process of spending their PPP loans. Please see our COVID -19 resource page with our other discussions on the PPP loan for a full analysis of the topic. 

Timeframe for Applying for PPP Loan

Under the Act, the deadline for applying for a PPP loan was June 30, 2020; however, on July 4, 2020, President Trump signed Bill S.4116 into law, which extended the PPP loan application deadline to August 8, 2020. 

Eligibility for PPP Loans

Under the First Interim Final Rule published April 15, 2020, a business with a 20% or more owner who had been convicted of any felony in the previous 5 years was barred from applying for a PPP loan.  Under the Additional Revisions to First Interim Final Rule, published June 18, 2020, the Small Business Administration (“SBA”) reduced this 5-year timeframe to 1 year, except with respect to convictions for felonies involving fraud, bribery, embezzlement, false statement on a loan application or application for federal aid. 

Changes Affecting PPP Loan Forgiveness

(A) Covered Period for Spending PPP Loan Proceeds:
Prior to the enactment of the Act, the CARES Act and all subsequent SBA and Treasury guidance provided that borrowers were eligible for PPP loan forgiveness on loan proceeds that were spent on permitted payroll and non-payroll costs during the 8-week period after receipt of the PPP loan proceeds (“Covered Period”).  With respect to the payroll costs only, borrowers were permitted to begin the 8-week PPP loan period on the first day of the payroll period occurring after receipt of the funds (“Alternative Payroll Covered Period”).    

The Act amends the definition of Covered Period in Section 1106 of the CARES Act by extending the 8-week period to the earlier of: (i) 24 weeks after receipt of the PPP loan proceeds; and (ii) December 31, 2020.  The concept of the Alternative Payroll Covered Period for payroll costs applies to the 24-week period, as well. This change  allows borrowers to spend the PPP loan proceeds over 24 weeks instead of 8 weeks; however, the Act allows borrowers who received a PPP loan prior to the date of the enactment of the Act (June 5, 2020) to choose to keep the original 8-week Covered Period.  Maintaining the original 8-week Covered Period may be beneficial for borrowers who are on track to exhaust their PPP loan proceeds within the original 8-week Covered Period and/or who anticipate that they may experience reductions in workforce beyond the 8-week period that could appreciably reduce PPP loan forgiveness. 

Note that under prior SBA guidance, the cap on forgiveness for cash compensation paid to each self-employed individual or owner-employee is 8/52 of 2019 net profits capped at $15,385 per owner-employee.  This amount was intended to equal $100,000 annualized for an 8-week period since that was the original Covered Period in the CARES Act. Under the SBA’s Revisions to the Third and Sixth Interim Final Rules published June 19, 2020, for businesses using the 24-week Covered Period, the forgiveness amount has been increased to 2.5 months (2.5/12) of 2019 net profits, not to exceed $20,833 per owner-employee. 

(B) Spending the PPP Loan Proceeds:
Under the CARES Act and prior guidance, in order for PPP loan expenditures to be eligible for forgiveness, 75% of such expenditures were required to be used on permitted payroll costs.  Forgiveness would be reduced in the event payroll costs fell below this threshold.  Under the Act, this amount has been decreased to a 60% threshold, which is a welcome change for borrowers who have found it difficult to reach or maintain such a high percentage of payroll costs as a result of the economic impact of COVID-19.  The threshold decrease will also allow borrowers to spend more of their PPP funds on other permissible expenses, such as rent, utilities and interest payments on certain qualifying debt.  However, note that as drafted and read literally, the Act appears to require that payroll costs equal 60% of the full PPP loan amount rather looking to PPP expenditures.  This inconsistency was initially cause for alarm, as it appeared to replace the prior sliding scale with a cliff – meaning that if less than 60% of the total PPP loan expenditures consisted of payroll costs, forgiveness would be eliminated entirely.  However, the Revisions to First Interim Final Rule published June 16, 2020, which revised Interim Final Rule published April 14, 2020, confirmed that the 60% threshold is not a cliff:

“While the Flexibility Act provides that a borrower shall use at least 60 percent of the PPP loan for payroll costs to receive loan forgiveness, the Administrator, in consultation with the Secretary, interprets this requirement as a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness.”

To illustrate the 60/40 rule, assume a borrower received a $100,000 PPP loan, of which $50,000 was used for payroll costs.  $50,000/0.6 = $83,888, or put another way, $50,000 is 60% of $83,888, which is the maximum PPP loan forgiveness amount.   If instead borrower had used $80,000 of the $100,000 PPP loan for payroll costs, the relevant calculation would be as follows: $80,000/0.6 = $133,333.  In this case, the entire PPP loan amount ($100,000) is eligible for forgiveness because at least 60% of the PPP loan was spent on payroll costs.  Note that this example is for illustrative purposes only, and assumes no reduction in FTEs or salary, described below. 

(C) Reduction in Full-Time/Full-Time Equivalent Employees & Salary of Certain Employees:
Under the CARES Act and subsequent guidance, a borrower’s PPP loan forgiveness amount is proportionately reduced by the decrease in the weekly average of full-time equivalent employees (“FTEs”).  To determine if there has been a reduction, borrowers are required to compare the weekly average number of FTEs during the Covered Period (recall this was defined as the 8-week period originally) with the average weekly number of FTEs in one of two time periods: (1) February 15, 2019 through June 30, 2019; and (2) January 1, 2020 through February 29, 2020 (seasonal businesses may use either period or a consecutive 12-week period between May 1, 2019 and September 15, 2019).  The CARES Act initially provided a safe harbor for FTE reductions occurring from February 15, 2020 through April 26, 2020: in the event the reduction of FTEs occurring during that time period is restored by June 30, 2020, the reduction will not be counted for the purpose of PPP loan forgiveness. 

The CARES Act also provides that PPP loan forgiveness will be decreased in the event a borrower reduces, by more than 25%, the cash compensation of one or more employees who received no more than $100,000 in cash compensation on an annualized basis in all pay periods of 2019.  As with the FTE reduction, the CARES Act initially provided a safe harbor for applicable salary reductions occurring from February 15, 2020 through April 26, 2020, whereby such reductions will not affect PPP loan forgiveness if the cash compensation is restored to pre-February 15, 2020 levels by June 30, 2020. 

The Act has extended the safe harbor restoration deadline for FTE and applicable salary reductions from June 30, 2020 to December 31, 2020.  However, this deadline extension may be of limited utility for borrowers, as the Act does not eliminate the original February 15, 2020 – April 26, 2020 time period.  That is, the safe harbor continues to apply only to reductions in FTEs and salary occurring during the February 15, 2020 – April 26, 2020 time period, and not to FTEs/salary reductions occurring after April 26, 2020.  Accordingly, borrowers should exercise caution in determining whether to use the longer Covered Period, particularly if they have already utilized most of their PPP funds and face the prospect of potential layoffs in the coming months, as using the longer period requires borrowers to maintain staffing and compensation levels in accordance with the tested period for a longer period of time as compared to the original 8-week timeframe.     

However, irrespective of the safe harbor, the Act provides additional protection from reductions in PPP loan forgiveness in the event of a reduction in workforce if the borrower can, in good faith, document (i) its inability to rehire employees who were employed by the borrower on February 15, 2020; and (ii) the borrower’s inability to hire replacement employees with similar qualifications on or before December 31, 2020.  Additionally, borrowers can avoid reduction in PPP loan forgiveness due to a reduction in workforce if they can properly substantiate that compliance with COVID-19-related public health laws or guidance issued from March 1, 2020 through December 31, 2020 prevented the borrowers from engaging in business activities at the business’ historical level, measured as of February 15, 2020.  Note that the Act specifically limits the public health laws and guidance to those issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention and the Occupational Safety and Health Administration. 

Finally, note that prior SBA guidance provides that termination of employment for reasons other than COVID-19, such as poor performance or retirement, also will not affect PPP loan forgiveness if properly documented.    

Loan Maturity Date

The Act extends the loan maturity date for PPP loans received on or after June 5, 2020 from two years after the origination date of the PPP Loan to five years after such date.  The Act provides no automatic maturity date extension for PPP loans received prior to June 5, 2020, but states that the maturity date can be extended by mutual agreement of the lender and borrower.

Extension of Deferral Period

Under the CARES Act, borrowers receive an automatic deferral of PPP loan payments (i.e., principal, interest and fees) of between 6 and 12 months.   The Act has extended the deferral period until the SBA has made a final decision regarding the borrower’s eligibility for PPP loan forgiveness.  This is helpful to borrowers because they are not forced to begin making payments on the PPP loan pending review of their PPP loan forgiveness application. 

The Act also states that borrowers who do not apply for forgiveness within ten months after the last day of the Covered Period  (either the 8-week or 24-week period) must begin to make payments on the PPP loan at that time.

Payroll Tax Deferral

The Act allows borrowers to avail themselves of the CARES Act’s payroll tax deferral even if they receive PPP loan forgiveness.  Under the CARES Act and prior SBA guidance, this was prohibited. 

The Act and subsequent guidance have provided much needed flexibility on key issues for businesses seeking to use PPP loan proceeds efficiently and effectively during the COVID-19 crisis. 

You can find more on issues affecting businesses and individuals in our COVID-19 Resource Center.