Overview of Paycheck Protection Program Flexibility Act of 2020

On June 5, 2020, Congress enacted the Paycheck Protection Program Flexibility Act of 2020 (the “Flex Act”), amending certain provisions of the Paycheck Protection Program (“PPP”) authorized under the CARES Act. The Flex Act, together with recent guidance and interim final rules issued by the U.S. Small Business Administration (the “SBA”), provides significant concessions to borrowers and grants borrowers an increased ability to receive forgiveness on all or portions of PPP loans, as well as other borrower-favorable changes to the CARES Act.

A list of the most significant changes are identified below:

1. Extension of Covered Period

   The Flex Act extends the definition of “covered period” from ending on June 30, 2020 to December 31, 2020. This extension extends the time during which PPP borrower eligibility is determined, the time frame during which loan proceeds may be used, and other qualification requirements. Notwithstanding this extension, the SBA and Department of the Treasury has since stated that the last date on which a PPP loan can be approved remains June 30, 2020, and borrowers are encouraged to apply for a PPP loan prior to such date.

2. PPP Loan Forgiveness

   Among the most significant changes, the Flex Act increases the likelihood borrowers will qualify for loan forgiveness, whether partial or full, by extending the timeframe during which qualified payments may be forgiven, reducing the amount that must be spent on payroll expenses, and offering certain safe harbors, all described below:

   • Extension of Covered Period for Forgiveness

     The Flex Act extends the time period during which borrowers will be eligible for loan forgiveness, increasing the period of time during which payments made for eligible purposes qualify for loan forgiveness from the initial 8-week period to the earlier of: (i) 24 weeks from the date of loan origination, or (ii) December 31, 2020. As a result, borrowers will now have significantly more time to make qualifying payments from PPP loan proceeds that will qualify for forgiveness.

     Borrowers who received a PPP loan prior to June 5, 2020 may use the initial 8-week covered period instead of the extended period, however these borrowers must affirmatively elect to use the 8-week period, as the above timelines automatically apply to all PPP loans.

   • Reduction of Required Payroll Expenses from 75% to 60%

     In addition to the extension of time during which PPP loan proceeds may be eligible for forgiveness, the Flex Act, together with the interim final rules adopted by the SBA on June 10, 2020, reduces the required amount of PPP proceeds that must be used for qualifying payroll expenses from 75% to 60%, and borrowers are now eligible to receive forgiveness for up to 40% of PPP loan proceeds that are used for qualifying payments of interest on mortgage obligations, rent payments, and utility payments.

     This 60% payroll limit is not a threshold level that must be met in order to qualify for forgiveness, but rather is a proportional limit on non-payroll costs that are eligible for forgiveness, with a maximum of 40% of a borrower’s total forgivable amount that may be used for qualifying non-payroll expenses. As such, even if a borrower does not use 60% of its PPP loan proceeds on payroll expenses, it nonetheless is eligible for forgiveness for the total amount of the qualifying payroll expenses with a proportional reduction of qualifying non-payroll expenses eligible for forgiveness. For example, if a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54%) of its loan on payroll costs, then because the borrower used less than 60% of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60% of the forgiveness amount and $36,000 in nonpayroll costs constituting 40% of the forgiveness amount).

     As such, even if borrowers do not use 60% of their PPP loans toward payroll expenses, they will nevertheless qualify for partial forgiveness.

   • Safe Harbors Related to Decreases in Full-Time Equivalent Employees

     Under the CARES Act, the amount of a borrower’s PPP loan eligible for forgiveness would have been reduced if the number of full-time equivalent employees of the borrower was reduced during the covered period and the borrower did not eliminate that reduction by June 30, 2020. Borrowers now have until December 31, 2020 to replace full-time equivalent employees in order to avoid a reduction in forgivable amount.

     If a borrower is unable to eliminate the reduction in full-time equivalent employees by December 31, 2020, the borrower may nevertheless avoid a reduction in a borrower’s forgivable amount if the borrower meets one of the safe harbors set forth in the Flex Act and related interim final rules, briefly described below:

     • The borrower is able to document, in good faith, that it was unable to rehire individuals that were employees on February 15, 2020 and can document that it is unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020;
     • The borrower is able to document, in good faith, that the borrower is unable to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements 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; or
     • The borrower is able to document that the reduction of full-time equivalent employees is due to an employee that is: (i) fired for cause, (ii) voluntarily resigns, or (iii) voluntarily requests a schedule reduction.

     As such, borrowers who may be unable to retain the same number of full-time equivalent employees during the covered period may nevertheless qualify for full, or partial, forgiveness.

   • Timeline for Application for Forgiveness

     Pursuant to the Flex Act, to qualify for forgiveness, borrowers must apply for forgiveness within 10 months of the last day of the covered period applicable to their PPP loan (either the last day of the 8-week period, if elected by borrowers who obtained a PPP loan prior to June 5, 2020, or the earlier of 24-weeks after the loan origination or December 31, 2020).

3. Additional Changes
   • In addition to the significant concessions to borrowers related to forgiveness, the Flex Act also amended the CARES Act to provide:
     • Deferral of PPP Payments. The time period during which PPP loan payments are deferred, including payment of principal, interest, and fees, has now been extended from 6 months to the date on which the amount of forgiveness is remitted to the lender by the SBA. If a borrower does not apply for forgiveness, the deferral lasts until 10 months after the last day of the borrower’s covered period, at which point the borrower must begin making such payments.
     • Deferral of Employer Payroll Taxes. Borrowers that receive forgiveness of any portion of a PPP loan are now eligible for the deferral granted under the CARES Act of payment of employer payroll taxes until December 1, 2021 (for 50%) and December 1, 2022 (for the remaining 50%). Previously, borrowers that received forgiveness under a PPP loan were ineligible for such deferral.
     • Maturity of Loan. PPP loans granted after June 5, 2020 are now subject to a minimum maturity of 5 years. Borrowers that received a PPP loan prior to such date may modify the maturity of their PPP loan with approval of the lender, however lenders are not required to agree to do so.