On June 3, 2020, the U.S. Senate passed the Paycheck Protection Flexibility Act ("PPFA"), which was previously passed by the House of Representatives. The President is expected to sign the PPFA into law. The PPFA makes substantial changes to the terms of loans made under the Paycheck Protection Program ("PPP") pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The changes provide substantial relief to PPP borrowers in the form of increased time and flexibility in the use of loan proceeds to obtain maximum loan forgiveness.

The PPFA makes the following changes to PPP loans:

  • Extends the Maturity Date for New Loans: PPFA extends the maturity of new PPP loans made after the effectiveness of the PPFA to five years instead of two years. The borrower and lender of an existing PPP loan may mutually agree to modify the terms of an existing PPP loan to extend the maturity to five years but are not obligated to do so.
  • Extends Covered Period: PPFA extends the period during which qualifying loan expenditures may be forgiven from eight weeks from the date a loan is originated to twenty-four weeks from the date a loan is originated or December 31, 2020, whichever is earlier. Borrowers of loans in place before the effective date of the PPFA will have the option to continue using the original eight-week covered period.
  • Deadline for Applications Remains Unchanged: PPP loans must still be borrowed before June 30, 2020. The language of the PPFA suggested that loans would continue to be available (subject to availability of funds) through December 31, 2020. However, various members of Congress have indicated that the bill's intent is not to extend the availability of funds beyond the original June 30 deadline.
  • Extends the Safe Harbor for Rehiring and Restoring Decreased Salaries: PPFA extends the safe harbor date for restoring the full amount of full-time equivalent employees or eliminating any salary reductions above 25 percent from June 30 to December 31 to get total loan forgiveness.
  • New Safe Harbors Included: PPFA adds two new safe harbors for borrowers with a decrease in full-time equivalent employees. Borrowers can calculate loan forgiveness without regard to such reduction in employees if:
    • The borrower can document (i) an inability to rehire individuals who were employees of the borrower on February 15, 2020, and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
    • The borrower 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.
  • Increased Eligibility of Non-Payroll Costs: PPFA eliminates the requirement that 75 percent of the forgivable amount be comprised of payroll costs, and replaces it with a requirement that 60 percent of the loan amount must be used for payroll costs. Based on the language of the PPFA, if a borrower fails to use at least 60 percent of the loan amount for payroll costs, no part of the loan will be forgivable. However, there is some indication that Congressional intent was to have the 60 percent test apply to the forgivable amount and not the full loan amount. A technical fix or guidance from the Small Business Administration confirming this interpretation may be forthcoming.
  • Extension of Payment Deferral: PPFA extends the deferral or repayment of any principal, interest, and fees from six months to the date on which the lender receives the forgivable amount from the Small Business Administration. If a borrower does not apply for forgiveness within ten months of the end of the covered period, repayment will begin.
  • Makes PPP Borrowers Eligible for Payroll Tax Deferral: PPFA now permits borrowers with forgivable PPP loans to defer the payment of payroll taxes pursuant to Section 2302 of the CARES Act.

The passage of the PPFA provides significant flexibility to PPP borrowers. Borrowers should consider how the PPFA will impact their use of PPP funds for various covered purposes. We expect that the Small Business Administration will issue additional guidance regarding the implementation of the PPFA and will provide further updates when appropriate.

Originally published June 4, 2020

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