Paycheck Protection Program Flexibility Act of 2020:  Needed Changes for the CARES Act PPP Loans

Scott A. Johnson

Picture of man's hands signing document.   Nothing stays the same forever, but when it comes to the Paycheck Protection Program nothing stays the same for more than a few days.  On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 into law (PPPFA).  The PPPFA had been percolating in Congress since almost immediately after the passage of the CARES Act, and makes several much needed changes to assist business owners receiving Paycheck Protection Program (PPP) loans.  

   The PPPFA modifies the terms for repayment of unforgiven portions of PPP loans, establishing a minimum five-year term for repayment of PPP loans.  The CARES Act allows for a maximum repayment period of 10 years from the date an application of loan forgiveness is made, but does not specify any minimum repayment period.  When PPP loans first began being offered, the Small Business Administration (SBA) established a two-year term from the date of a loan forgiveness application for repayment of unforgiven loan amounts.  The PPPFA modifies this by codifying a minimum five-year repayment term for unforgiven loan amounts.  This modification is not automatically retroactive; however, for loans originated prior to the effective date of the PPPFA, the borrower and lender are allowed to modify the loan repayment term, subject to the pre-existing maximum loan repayment term of 10-years. 

   Continuing with changes to PPP loan repayment terms, the PPPFA extends the deferral period for loan repayment from six months to the date any portion of the loan amount that is forgiven is remitted to the lender.  The CARES Act provides that once an application for loan forgiveness is made with a lender, the lender has 60 days to consider the application and make a determination on loan forgiveness.  Assuming the lender determines a borrower is entitled to forgiveness of its PPP loan, the SBA is required to remit the amount of loan forgiveness to the lender within 90 days.  As discussed in greater detail below, this extension of the deferral period became necessary due to a corresponding extension of the time period to use the PPP loan proceeds.  Without this extension, a borrower could become responsible for loan repayment before a determination on its loan forgiveness application is made.  In the event that a borrower fails to submit an application for loan forgiveness, its obligation to commence repayment of the loan is deferred for a period of 10 months from the end of the period during which the borrower is entitled to use the proceed of the loan. 

   The next set of changes all pertain to calculation of loan forgiveness for PPP loans.  The CARES Act provided that borrowers who used their PPP loan proceeds for certain purposes during the eight-week period following origination of the loan, but in any case prior to June 30, 2020, (referred to as the “covered period”), can apply to have those loan proceeds forgiven.  The PPPFA extends the covered period from eight weeks to 24 weeks, without an outside date for such period being extended from June 30, 2020, to December 31, 2020.  For loans originated prior to the enactment of the PPPFA, borrowers still may elect to use the eight-week period for calculation of their loan forgiveness.  

   Following the enactment of the CARES Act, the SBA promulgated interim final rules for regulation of PPP loans that, among other things, required at least 75% of PPP loans be used for payment of eligible payroll expenses and 75% of the loan forgiveness amount must be attributable to eligible payroll costs.  The PPPFA reduces the required amount of PPP loan proceeds that must be used for payroll expenses, specifying that in order for a borrower to be eligible for loan forgiveness it must use at least 60% of the loan proceeds for payroll purposes.  

   The CARES Act provides the maximum forgivable amount of a borrower’s PPP loan will be reduced proportionally due to reductions in staffing during the covered period and for reductions in employee wages during the covered period.  It also provides an exemption from this reduction in forgiveness if the borrower eliminates reductions in staffing and employee wages by June 30, 2020.  The PPPFA extends the period of time for meeting this exemption to December 31, 2020.  The PPPFA also adds an exemption to reduction on loan forgiveness for borrowers who in good faith desire to eliminate their reductions in staffing, but are either unable rehire employees or to hire qualified individuals for unfilled positions, or are unable to return to levels of business activity existing prior to February 15, 2020, as a result of compliance with requirements or guidelines of Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention or the Occupational Safety and Health Administration.  

   The final change made by the PPPFA is to permit PPP loan borrowers to defer 2020 payroll taxes.  The CARES Act includes provisions allowing an employer to defer payment of 2020 payroll taxes, with 50% being due by December 31, 2021, and the remainder due December 31, 2022.  However, recipients of PPP loans were excluded from the right to take advantage of this deferment.  The PPPFA eliminates this exclusion. 

   The SBA is expected to modify and issue new regulations in the coming days and weeks to implement the CARES Act as modified by the PPPFA.  

   Should you have any questions regarding how PPPFA may affect your business, please contact Mr. Johnson.



At the date of publication the above information was correct.  It is quite possible the information above has changed as COVID-19 is a rapidly evolving situation. 

The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.