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If You Don’t Like the PPP Now, Wait a Few Minutes…Major Changes to PPP Loan Program as Congress Passes Payroll Protection Program Flexibility Act

Corporate and Securities Alert | June 5, 2020
By: Ryan J. Udell and Adam J. Chelminiak

On June 5, 2020, President Trump signed into law the Payroll Protection Program Flexibility Act of 2020 (the Flexibility Act). The Flexibility Act provides much-needed flexibility for the Paycheck Protection Program (PPP) and its millions of business participants.

The PPP offers loans to small businesses that have been adversely impacted by the COVID-19 pandemic and the measures taken by various governmental authorities to stem the spread of the virus so that they could keep their employees on the payroll during an eight-week period after receiving the funds. The PPP was particularly alluring to borrowers because the loans could be forgiven. But as the duration of lockdown orders and the accompanying economic aftershocks have extended longer than initially anticipated, particularly in those sectors that depend on in-person business such as restaurants, hospitality and other “main street” retail establishments, many recipients of PPP loans have found it challenging to use the PPP funds for payroll and other authorized purposes within the eight-week period after they had received the PPP funds, as is necessary to preserve eligibility for forgiveness. The Flexibility Act makes several key changes to the PPP program in order to allow borrowers who need a longer re-opening runway to do so without jeopardizing their ability to qualify for loan forgiveness.

This alert outlines the key changes to the PPP made by the Flexibility Act.

Extension of Covered Period

The Flexibility Act extends the “covered period” under Section 1102 of the CARES Act during which a borrower is able to use PPP loans from June 30, 2020 to December 31, 2020. Although not entirely clear in the Flexibility Act itself, a letter of Congressional Intent for H.R. 7010 added to the Congressional Record confirms that Congress’s intent is to retain the June 30, 2020 deadline to apply for a PPP loan and that the extension of the covered period in the Flexibility Act only contemplates allowing recipients to continue using the funds for permitted purposes until December 31, 2020. With approximately $100 billion remaining, if you have not applied for a PPP yet and are considering doing so, the clock is ticking.

Most importantly, the Flexibility Act lengthens the covered period under Section 1106 of the CARES Act in which the borrower can spend proceeds that are eligible for forgiveness to the earlier of (i) 24 weeks following origination of the loan or (ii) December 31, 2020. This expanded covered period for forgiveness purposes applies prospectively as well as to previously-issued PPP loans. However, the Flexibility Act allows a borrower that received a PPP loan prior to its enactment to elect to continue using the original eight-week covered period.

This extension of the covered period for forgiveness purposes offers the borrower a better opportunity to have the loan forgiven as there will be a significantly longer amount of time than the original eight-week period during which PPP funds can be used and remain eligible for forgiveness. Similarly, a borrower now has until December 31, 2020 (rather than June 30, 2020) to restore compensation and/or rehire employees in order to qualify for the statutory exemption from reduction in loan forgiveness. Conversely, stretching the covered period does create some additional risk for the borrower as it assumes that there will not be a second wave of COVID-19 infections or lingering economic disruptions that will strain the borrower’s ability to maintain headcount and compensation levels through the end of the covered period.

Exemption from FTE-Based Forgiveness Reduction

Under the PPP, the maximum amount of forgiveness is reduced based on a reduction in a borrower’s average full-time equivalent (FTE) headcount during the covered period as compared to an earlier reference period (the FTE Reduction). That reduction in forgiveness, however, can be avoided if the borrower restores its FTE headcount by December 31, 2020 (note that this deadline was June 30, 2020 prior the Flexibility Act). Guidance from the Small Business Administration (SBA) had already introduced a “safe harbor” in the case of employers who were unable to restore their headcount because employees that were laid off did not accept offers to return to earlier positions (as we discuss in detail here and here).

The Flexibility Act adds two statutory exemptions that allow a borrower to avoid the FTE Reduction.

First, a borrower is exempt from the FTE Reduction if it can document both (i) an inability to rehire individuals who were employees on February 15, 2020 and (ii) an inability to hire similarly-qualified employees for unfilled positions by December 31, 2020. We believe this exemption is generally consistent with the regulatory safe harbor previously introduced by the SBA, except that under this statutory exemption the borrower must demonstrate an inability to hire similarly-qualified replacements in addition to the previously-employed individual(s) declining an offer to return and, interestingly, there is no express requirement to offer the employee(s) the same compensation or notify the applicable unemployment office if the employee(s) rejects the offer. We believe that it was not Congress’s intent to relax these requirements or otherwise supersede the SBA’s regulatory exemption, but we will await definitive guidance on the matter.[1] And as noted above, the Flexibility Act does not make any provision for a second wave of COVID-19 infections in the fall/winter and any reductions a business may need to make as a result.

Second, a borrower is exempt from the FTE Reduction if it is able document an inability to return to the same level of business activity as the borrower was operating at prior to February 15, 2020 due to compliance with requirements established or guidance issued by HHS, the CDC or OSHA related to COVID-19 between March 1, 2020 and December 31, 2020.

Payroll/Non-Payroll Allocation

Interim final rules issued by the SBA introduced a requirement that borrowers use at least 75% of PPP loan funds on payroll costs, and no more than 25% on eligible non-payroll costs (e.g. covered mortgage interest, covered rent payments, covered utility payments, etc.). This requirement functioned as a sliding scale, meaning any portion of funds in excess of 25% that were used for non-payroll purposes were not eligible for forgiveness, but forgiveness was not entirely eliminated.

The Flexibility Act changes the required ratio to 60% payroll costs and 40% non-payroll costs. However, it (apparently inadvertently) also makes the 60% payroll cost requirement a “cliff” — borrowers must now spend at least 60% of the PPP loan on payroll costs or none of the loan will be eligible for forgiveness. Multiple members of Congress, including a co-sponsor of the bill in the House, have stated that the intent was to reduce the payroll threshold to 60%, but retain the sliding scale. As a result, it is possible that technical corrections may be made to restore the sliding scale. In any event, in most cases, with this allocation and the extended covered period, a business should be able to spend the funds on items that are eligible for forgiveness, but if a bank or the SBA in a review determine that certain expenses were not eligible and such determination results in less than a 60/40 split, a potentially draconian result could occur.

Maturity Date

As an implicit acknowledgement that businesses may continue to struggle for some time, the Flexibility Act extends the maturity for any unforgiven portion of a PPP loan made after its enactment to a minimum of five years. Existing PPP loans with a two-year maturity are not modified by the Flexibility Act, but lenders and borrowers are not prohibited from mutually agreeing to modify the maturity terms of such loans. Lenders may view this a logistical and cost headache, but only a small subset of borrowers should now retain a loan balance after forgiveness determinations.

Deferral Period Aligned with Forgiveness Determination

Currently, payments of principal, interest and fees on all PPP loans that are not forgiven are deferred for a minimum of six months following the date of origination. However, because the process for reviewing forgiveness applications can take up to 150 days, a borrower is faced with the possibility that it could be required to start making principal repayments before knowing whether the loan would be forgiven. The Flexibility Act avoids this confusion by increasing the deferral period to the date on which the amount of forgiveness is remitted to the lender.

Forgiveness Application Deadline

The borrower is now required to apply for loan forgiveness within 10 months after the last day of the covered period as defined under Section 1106 of the CARES Act (i.e., 24 weeks or December 31, 2020). Otherwise, the full amount of the PPP loan will need to be repaid. The CARES Act and previous SBA guidance had not previously specified a deadline to apply for forgiveness.

It is also worth noting that there has been an open question as to how early a borrower can apply for forgiveness, including whether it can be submitted before the end of the covered period. The Flexibility Act does not address that question; however, the answer may become more pressing now that the covered period is significantly longer than eight weeks. As a practical matter, we think it is unlikely that the lender or the SBA will approve a borrower’s application for forgiveness prior to the end of the forgiveness covered period given that it will not be possible to calculate whether the reduction in forgiveness based on either decreases in average FTE headcount or decreases in salary/wages during the covered period should apply until the conclusion of the covered period.

Payroll Tax Deferral

The Flexibility Act also provides businesses with the ability to preserve additional cash flow by permitting recipients of PPP loans to continue to defer certain federal payroll taxes until December 31, 2020. Prior to the Flexibility Act, a PPP borrower could not defer payroll taxes for periods after it had received a forgiveness determination from the lender (see our more detailed discussion on the payroll tax deferral here, which remains accurate except for this change).

If you have questions or would like more information, please contact Ryan J. Udell (; 215.864.7152), Adam J. Chelminiak (; 215.864.7078) or another member of the Corporate and Securities Group.

As we continue to monitor the novel coronavirus (COVID-19), White and Williams lawyers are working collaboratively to stay current on developments and counsel clients through the various legal and business issues that may arise across a variety of sectors. Read all of the updates here.

[1] SBA’s interim final rule announcing the exemption from FTE Reduction with respect to employees that the borrower offered to rehire described the exemption as an exercise of the SBA’s and the Treasury’s authority under 1106(b)(6) of the CARES Act to grant de minimis exemptions from reductions in PPP forgiveness. Accordingly, it appears that the SBA’s regulatory exemption continues to be valid in addition to the statutory exemption for rehires created by the Flexibility Act.

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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