Amendments to CARES Act — Paycheck Protection Program Flexibility Act

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This Article is based on information available as of June 11, 2020.  The information is subject to change as additional guidance is provided.

NOTE—The Paycheck Protection Program Flexibility Act of 2020 amends the CARES Act, and this Article updates the information in the following Articles previously published:

The Paycheck Protection Program Flexibility Act of 2020 ("PPPFA") become law on Friday, June 5, 2020, after having been unanimously passed by the House of Representatives on May 28, 2020, unanimously approved by the Senate on June 3, 2020, and signed by the President on June 5, 2020.  This Act modifies critical provisions of the CARES Act and the Interim Final Rules implementing the CARES Act, adopted by the Small Business Administration ("SBA") regarding loan forgiveness.   On June 11, 2020, the SBA issued an Interim Final Rule (the "Revised Final Rule") revising the First Interim Final Rule that it posted on April 2, 2020, to conform with the PPPFA.  The Revised Final Rule can be located here.

  1. New minimum repayment term. The PPPFA establishes a minimum loan term for PPP Loans of 5 years for any PPP Loan made on or after June 5, 2020.  Thus, this specific amendment does not apply to existing PPP Loans.  But there is allowance for existing PPP Loans by providing that the PPPFA shall not be construed to prohibit lenders and borrowers from modifying the terms of existing PPP Loans to conform with the new minimum loan term requirements.
  2. Covered Period extended to 24 weeks. As enacted, the CARES Act required that loan proceeds be expended on Payroll Costs and other approved non-payroll expenses during an 8-week "Covered Period."  The PPPFA changes the definition of the Covered Period to begin on the date of the origination of the PPP Loan and ending on the earlier of 24 weeks after origination or December 31, 2020.  This lengthening of the Covered Period provides borrowers with greater flexibility to conserve the PPP Loan proceeds until reopening its business and not having to pay idle employees.  In addition, with a longer Covered Period, borrowers will be able to expend all of the PPP Loan proceeds on approved expenditures and therefore have greater likelihood of getting the entire PPP Loan forgiven.  For PPP Loans that were made before the PPPFA was enacted borrowers have the option of electing to use the original 8-week Covered Period.
  3. Minimum expenditure on Payroll Costs set at 60%. The SBA had established that a minimum of 75% of PPP Loan Proceeds had to be expended on Payroll Costs and, if the borrower did not meet this requirement, loan forgiveness would be reduced.  The PPPFA changed the requirement, now mandating that at least 60% of PPP Loan proceeds be used for Payroll Costs and up to 40% may be used for allowed non-payroll expenses (mortgage interest payments, rent and utility payments).  In the Revised Final Rule the SBA confims its interpretation of this requirement in the PPPFA that the requirement is a proportional limit on payroll costs as a share of the borrower's loan forgiveness amount and is not a threshold for receiving loan forgiveness.  Thus, the prior guidance on the reduction in loan forgiveness had the 75% threshold not been met, should remain applicable, with the substitution of 60% for 75%.
  4. Deadline to rehire employees pushed to December 31, 2020. In addition to extending the Covered Period, the PPPFA gives borrowers until December 31, 2020, to rehire employees extending the rehire deadline from June 30, 2020.  Borrowers now have until the end of the year to rehire furloughed employees and not adversely affect PPP Loan forgiveness.  The PPPFA did not change the "Payroll Costs" calculation, thus salaries are still capped at $100,000 annualized.
  5. Additional FTEE exceptions. Under the CARES Act and the SBA Rules, borrowers were required to rehire the same number of employees on their payroll by June 30, 2020 and failure to do so would result in a proportional reduction in loan forgiveness.  The PPPFA extends the period to rehire employees to December 31, 2020 and adds two new exceptions, bringing the total to three exceptions that do not adversely affect loan forgiveness resulting from a reduced number of employees:
      1. Inability to rehire employees who were on the payroll on February 15, 2020 (e.g., the furloughed employee who refuses to return to work);
      2. Inability to hire similarly qualified employees on or before December 31, 2020; and
      3. Inability to return to a pre-February 15, 2020 level of business by December 31, 2020 because of requirements for sanitation, social distancing, or any other customer safety requirement related to COVID-19.

For each category of inability to hire employees the Borrower must document the reasons and the good faith effort by the Borrower.  The SBA previously issued guidance on what was required to document the refusal of a former employee to return to work.  At this point there is no guidance on what a business must do to demonstrate the inability to rehire similarly qualified employees or demonstrate the inability to return to previous levels of business activity.

  1. Payment deferral period extended. The deferral of the obligation to make principal and interest payments on a PPP Loan was extended from the original 6 months until the date on which the SBA purchases the forgiven PPP Loan from the lender.  For borrowers who do not apply for loan forgiveness the deferral period is extended until the end of the 10th month following the end of the Covered Period.
  2. Deferral of payment of payroll taxes. The PPPFA deleted the prohibition on deferring the payment of payroll taxes imposed on borrowers that obtained a PPP loan.

The PPPFA eases many of the limitations on businesses that receive PPP Loans making it easier for a borrower to receive forgiveness for the full amount of its PPP Loan.  With these changes to the CARES Act we should expect the SBA to issue additional rules implementing the amendments and a new PPP Loan Forgiveness Application.

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