President Trump today signed into law the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act), which was passed by the House of Representatives last week and by the Senate on Wednesday night.

The PPP Flexibility Act provides welcome flexibility to many borrowers under the Paycheck Protection Program (PPP), but the new provisions may delay the forgiveness application process for some borrowers until 2021, and the longer covered period could actually reduce the amount of forgiveness that some borrowers may qualify for. We expect the Small Business Administration (SBA) to release an updated loan forgiveness application (and perhaps other additional guidance as well) to implement the PPP Flexibility Act.

Below are several key highlights and takeaways from the PPP Flexibility Act.

Extension of Covered Period

The PPP Flexibility Act extends the covered period in which certain expenditures will qualify for loan forgiveness from eight weeks to 24 weeks, though borrowers who obtained their PPP loans before June 5, 2020 may still elect to use the eight-week covered period instead. This 24-week period (like the eight-week period under the original CARES Act framework) begins on the date of loan origination. (The PPP Flexibility Act also sets an outside date for the end of the covered period at December 31, 2020, but because PPP loans can only be made through June 30, 2020, the 24-week period will expire for all borrowers prior to December 31, 2020, unless the PPP is further expanded.)

For PPP borrowers that have already used a substantial portion of their PPP funds on the assumption of an eight-week covered period, electing the eight-week covered period may be preferred, as doing so would eliminate forgiveness-related risk posed by the potential of business interruptions that could occur over an extended 24-week period.

Additionally, borrowers that have reduced their employee compensation levels or number of full time equivalent employees (FTE) in response to economic impacts from the COVID-19 pandemic and are uncertain of a recovery that would support restoring those levels by December 31, 2020 may want to consider electing the eight-week covered period even if they will not be able to use the full amount of their PPP loan proceeds during that period. The benefit of 16 additional weeks over which to spread forgivable expenses should be weighed against the potential impact of the extended covered period on the borrower’s average compensation and FTE levels during the covered period, which could result in larger reductions in the forgivable amount if the borrower is ultimately unable to qualify for the Salary/Hourly Wage Reduction and FTE Reduction safe harbors (as further described in this alert), either because its workforce reductions were not undertaken before April 26 or because such reductions are not restored to prior levels by December 31.

It is unclear whether the SBA will update its guidance regarding the so-called Alternative Payroll Covered Period to allow for certain borrowers with biweekly or more frequent payroll cycles to use an alternative 24-week period for purposes of payroll costs.

Use of Loan Proceeds on Non-Payroll Costs

The PPP Flexibility Act overrides prior SBA regulations establishing requirements that (1) borrowers must use 75% of PPP loan proceeds for payroll costs and (2) no more than 25% of the amount of PPP loan forgiveness may be for non-payroll costs. Under the PPP Flexibility Act, the borrower will be permitted to use up to 40% of loan proceeds on non-payroll costs and still receive loan forgiveness for the full amount of qualifying expenses paid or incurred during the covered period. The PPP Flexibility Act requires that at least 60% of PPP loan proceeds be used for payroll costs in order for the borrower to qualify for loan forgiveness.

Extension of Payment Deferral

The PPP Flexibility Act mandates the deferral of all PPP loan payments until after the SBA has completed its initial forgiveness review, which may take up to 90 days. If the borrower has not applied for forgiveness within 10 months after the end of its forgiveness covered period, then the borrower will be required to start making payments at that time. (Our prior alert had noted that borrowers could find themselves in the position of being required to start making payments on their PPP loans while their forgiveness applications were still pending – under the PPP Flexibility Act, this will no longer be a concern.)

Extension of Safe Harbor Dates

Under the PPP Flexibility Act, the Salary/Hourly Wage Reduction and FTE Reduction safe harbors (as further described in this alert) will now be pegged to restoring compensation or FTE levels, as applicable, by December 31, 2020, rather than June 30, 2020. There is no option for borrowers to elect to use the original June 30 date instead, and the December 31 safe harbor date applies regardless of whether a borrower uses an eight-week covered period or a 24-week covered period. Accordingly, if a borrower wishes to take advantage of these safe harbors to remedy workforce reductions, such borrower will not be able to apply for forgiveness until 2021.

Additional Exemptions from FTE Reduction

The PPP Flexibility Act introduces two other exemptions from the FTE Reduction. There will be no FTE Reduction applied if the borrower, in good faith, is able to document either of the following:

  • An inability to rehire individuals who had been employed by the borrower on February 15, 2020 and an inability to hire similarly qualified employees for unfilled positions by December 31, 2020.
  • An inability to return to the same level of business activity as the business was operating at before February 15, 2020 due to compliance with requirements or guidance issued by Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration between March 1, 2020 and 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.

Additional guidance from the SBA would be helpful in providing clarity as to how these two exemptions will be interpreted. Particularly unclear, for example, is to what extent indirect impacts (such as restrictions on the ability of suppliers to operate at full capacity, or even residual demand impacts) would be considered in determining whether a borrower is able to return to a pre-pandemic level of business operations.

Longer Loan Maturity for New Loans

The maturity date of PPP loans originated after the enactment of the PPP Flexibility Act must be at least five years (and no more than 10 years). Under existing SBA regulations, all PPP loans originated to date have a maturity of two years.

Payroll Tax Deferral

The PPP Flexibility Act also amends Section 2302 of the CARES Act to permit businesses that receive PPP loan forgiveness to also defer payroll taxes for the period beginning March 27, 2020 and ending December 31, 2020. One-half of the deferred amount must be deposited by December 31, 2021, and the other half of the deferred amount must be deposited by December 31, 2022. Under the original CARES Act provisions, this payroll tax deferral had been unavailable to businesses that received PPP loan forgiveness.

For an overview of the SBA’s PPP forgiveness guidance as in effect prior to the enactment of the PPP Flexibility Act, see our prior alert.

The Bass, Berry & Sims CARES Act Task Force will continue to monitor developments in PPP forgiveness rules and guidance. If you have questions about the PPP and your business, please contact the authors or your relationship attorney at the firm.