On June 3, 2020, the United States (U.S.) Senate passed the Paycheck Protection Program (PPP) Flexibility Act of 2020 (Flexibility Act). The bill (H.R.7010) had previously passed the U.S. House of Representatives on May 28, 2020. The bill will need to be signed by President Trump in order to become enacted.
The Flexibility Act would make a number of changes to the Paycheck Protection Program, as summarized below:
- Covered Period Extended to 24 Weeks: The Flexibility Act will change the definition of “covered period” in Section 1106 of the CARES Act on loan forgiveness. A borrower would have a covered period that begins on the origination date of the covered loan and ends the earlier of 24 weeks after origination of the loan or on Dec. 31, 2020. The Flexibility Act also states that a borrower who received a covered loan prior to the enactment of the Flexibility Act has the option to continue using the eight-week covered period in the CARES Act.
- Loan Period – Five Years: Loans issued after the Flexibility Act becomes law will have a five-year minimum maturity date. For loans issued before the date this law is signed, the maturity date does not change from the previously issued loan documents – in most cases two years.
The Flexibility Act specifically states that lenders and borrowers are not prohibited “from mutually agreeing to modify the maturity terms of a covered loan” to the minimum five-year period. The result is covered loans originated after enactment of the Flexibility Act will have a minimum five-year maturity date and loans originated prior to enactment of the Flexibility Act have the ability to be modified. However, one caveat is that the minimum five-year maturity would begin at the date the borrower applies for forgiveness of the loan and not the date of the loan’s origination.
- Covered Period Extended to Dec. 31, 2020: When signed into law, the definition of “covered period” from Section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) would be amended by extending the end date from June 30, 2020, to Dec. 31, 2020. The extension of the date, as clarified by a letter signed by the Chairmen of the Senate Committee on Small Business and Entrepreneurship and members of the Small Business Committee, does not extend the application deadline, which remains at June 30, 2020.
- FTE Restoration by Dec. 31, 2020: Borrowers would now have until Dec. 31, 2020, to restore salary/wage and Full-Time Equivalent (FTE) reductions to the levels they were at Feb. 15, 2020. Borrowers previously had until June 30, 2020, to restore salary/wage and FTEs.
- FTE Reduction Penalty - Two Added Exemptions: Under the original forgiveness rules, if a borrower reduced FTEs between Feb. 15, 2020, and April 26, 2020, then the amount eligible for forgiveness could be reduced significantly. The Flexibility Act will add two additional exemptions to avoid the penalty if the borrower can provide documentation associated with employee availability or business activity:
Nonpayroll Cost Cap Now 40 Percent: When enacted into law, the limitation on forgiveness of nonpayroll costs to 25 percent of the total forgiveness will increase to 40 percent, as the Flexibility Act states “an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs.” On the current loan forgiveness application, the 25 percent limitation was only applied to the forgiveness amount; however, the Flexibility Act changes the limitation to apply to the entire loan amount and if 60 percent of the loan is not used for payroll costs, forgiveness may be disallowed entirely. Deferral Period Extended: The deferral period for payments on the PPP loan will be extended from six months to “the date on which the amount of forgiveness determined under section 1106 of the CARES Act is remitted to the lender.” In light of the extension of the deferral period, the Flexibility Act also added a limitation that if a borrower fails to apply for forgiveness within 10 months of the last day of the covered period, the borrower will start making payments after the 10 months. Payroll Tax Deferral Participation: The Flexibility Act would allow PPP borrowers to fully participate in Section 2302(a) of the CARES Act and delay payment of employer payroll taxes. Previously, borrowers could only defer payroll taxes through the date the borrower received a decision from the lender that some or all of the PPP loan is forgiven.
- In the first exemption, the borrower will not experience a reduction in forgiveness if it can document the inability to rehire former employees who were employees on Feb. 15, 2020, and cannot hire “similarly qualified employees for unfilled positions on or before December 31, 2020”; or,
- In the second exemption, the borrower must document that it is unable to return to the same level of business activity that the business was operating at before Feb. 15, 2020. The decrease in business activity must be due to compliance with guidance issued by federal agencies during March 1, 2020, through Dec. 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 these exemptions do not apply to the salary/wage reduction test, but only to the FTE reduction test.
For questions or additional information about the PPP application process and other guidance issued by the Treasury and the SBA, please contact us at CARESActQuestions@dhg.com.
 “Senate Passes Changes to Small Business PPP Loan Program.” Bloomberg, June 3, 2020.