By Amberly Morgan

Update: The Paycheck Protection Program Flexibility Act was signed into law on June 5, 2020 following the U.S. Senate passage by voice vote the Paycheck Protection Program (PPP) Flexibility Act of 2020 (H.R. 7010). The House of Representatives had approved this bill with near unanimity on May 28. Generally, the PPP provides low-interest, forgivable loans to small businesses affected by the COVID-19 pandemic. The new bill responds to complaints that the strict requirements on how employers spend the PPP funds disqualify them from obtaining the promised loan forgiveness, given the ongoing inability for many businesses to reopen. The bill is expected to be signed into law.

What changes would the bill make to the PPP?

The bill relaxes a number of the program’s requirements. Specifically, the bill:

  • Reduces the percentage of the loan that must be used on payroll expenses. The first Interim Final Rule interpreting the PPP required borrowers to spend at least 75% of loan proceeds on payroll costs. No more than 25% of non-payroll costs would be eligible for loan forgiveness. H.R. 7010 allows borrowers to spend up to 40% on allowable non-payroll costs, such as covered rents, utilities and mortgage interest. This change is especially welcome to borrowers that have been unable to reopen but are still obligated to pay rent, mortgages and utilities.
  • Provides more time for borrowers to spend loan funds and meet forgiveness requirements. The PPP requires borrowers to spend loan proceeds during an eight-week Covered Period. Additionally, subject to certain Safe Harbor provisions, the PPP required borrowers to maintain headcount and wages within the Covered Period relative to specified reference periods in order to obtain full loan forgiveness. Now borrowers have the option to extend the Covered Period until the earlier of 24 weeks after loan origination or the end of the year. This flexibility better meets the needs of borrowers that have been unable to reopen but need the PPP funds in order to do so.
  • Increases the time to repay unforgiven loan amounts. The PPP statutory text provides that any loan balance not forgiven would have a maximum maturity of 10 years. The SBA determined that loans would mature in two years. The bill amends the PPP to provide for a minimum maturity of five years, but also allows lenders and borrowers to mutually agree to modify the maturity terms.
  • Lengthens the term of payment deferral. The PPP provides that borrowers are not required to make loan payments (including principle, interest and fees) for at least six months and up to one year.  Under H.R. 7010, such payments can be deferred until the amount of forgiveness is remitted to the lender by the SBA or until at least 10 months after the last day of the borrower’s Covered Period if the borrower has not yet applied for loan forgiveness. This removes the requirement that borrowers make payments on loan balances while awaiting a decision on loan forgiveness.
  • Extends the Safe Harbor for restoration of headcount and wages. The PPP provides a Safe Harbor that allows borrowers an extended time to restore full-time equivalent (FTE) employees and salary or wages that were reduced between February 15, 2020 and April 26, 2020, while still obtaining loan forgiveness. The bill extends this Safe Harbor from June 30, 2020 until December 31, 2020. This addresses difficulties employers are having related to rehiring workers, finding replacement workers, and continued delays in reopening.
  • Expands protections for borrowers unable to rehire staff or unable to return to pre-COVID business levels due to social distancing measures. Borrowers unable to restore headcount will potentially be able to obtain full loan forgiveness.  Under the terms of the bill, if the borrower can document, in good faith, the inability to re-hire individuals who were the borrower’s employees as of February 15, 2020 and an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020, then reductions to FTEs will not impact loan forgiveness. Similarly, reductions to FTEs will not impact loan forgiveness if the borrower is able to document an inability to return to the same level of business activity as prior to February 15, 2020 due to compliance with worker or customer safety requirements related to COVID-19.
  • Permits borrowers to defer payroll taxes. PPP recipients who received any amount of loan forgiveness were previously not able to defer payment of payroll taxes as provided in section 2303 of the CARES Act. The new amendments would remove that restriction.

Next Steps

The bill is now official and its amendments take effect as if they were included in the original CARES Act, the law that created the PPP.  Employers should evaluate their use of PPP funds in light of these new changes and consult with knowledgeable counsel to evaluate the available options for using loan funds and maximizing loan forgiveness.