Payment Protection Program Flexibility Act of 2020: Silver Bullet or Can of Worms?

This blog has been updated to reflect rulings and guidance from the U.S. Treasury, the Small Business Administration and other U.S. government agencies as of June 8, 2020.

On June 5, 2020, the President signed into law the Payment Protection Program Flexibility Act of 2020 to build on and improve the original Payment Protection Program (PPP) legislation enacted earlier this year. For businesses that have been prevented from spending PPP loan proceeds on eligible expenses because of government-mandated restrictions and closures, this new legislation offers a lifeline in the form of additional flexibility and extensions of deadlines for use of the funds.

But some of the PPP’s original requirements have not changed, and borrowers still face exposure to reductions in their loan forgiveness amount.

Here are some key changes and areas for borrowers to consider as they evaluate the new and original PPP requirements:

Extension of Covered Period. The Covered Period was extended from eight weeks to 24 weeks or December 31, 2020, whichever comes first. Similarly, the safe harbor deadline for restoring average full-time equivalent employee (FTEE) and salary/hourly wages was extended to December 31, 2020 from June 30, 2020.

This gives borrowers that continue to experience reduced operations more time to spend their loan proceeds as they return to pre-COVID levels of activity.

However, it also means borrowers will have to maintain average FTEE headcount and salary/hourly wages over a longer period, which may result in lower loan forgiveness amounts. For example, borrowers who spend their loan proceeds by week 16 of the 24-week Covered Period will have to maintain FTEE and salary/hourly wages for an additional eight weeks. If they are unable to avoid layoffs or furloughs during their Covered Period, their loan forgiveness amount could be reduced.

Borrowers with loan origination dates prior to the date of enactment of the new PPP legislation can elect to keep their Covered Period at eight weeks. 

Borrowers who have already spent at least 60 percent of their loan proceeds on payroll costs by the end of eight weeks should be cautious about extending their Covered Period if they are uncertain about their ability to maintain FTEE and salary/hourly wages over the following 16 weeks or meet the qualifications for safe harbor.

Rehire Exemption. The new legislation includes an exemption that allows the loan forgiveness to be determined without regard to a proportional reduction in the number of FTEEs if the borrower, in good faith, is able to document: (i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; AND (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020. This provision appears to restrict earlier guidance in the Forgiveness Application that gave borrowers an exception for FTE reduction for any positions where the borrower made a good-faith, written offer to rehire an employee during the Covered Period (or the Alternative Payroll Covered Period), which was rejected by the employee.

Employment level. The new legislation prohibits consideration of employment level in determining loan forgiveness when the borrower can “document an inability 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 related to “maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.” 

This appears to be an “out” for a business that may not return to pre-COVID level of operations during its Covered Period. However, the caveats within this exemption are very limiting. For example, business activity that was negatively impacted by consumer sentiment, supply-chain disruption, or a decline in discretionary spending as a result of COVID-19 would not qualify the business for this exemption.

Loan maturity dates. Lenders are not required to modify the maturity date of an existing PPP loan to a minimum of five years, as is permitted for a new PPP loan. While lenders and borrowers may mutually agree to extend the terms on existing loans, it is unclear whether lenders will be willing to do this. For the 4.5 million PPP loans approved as of June 6, 2020 totaling over $511 billion, an extension to the maturity date may be unlikely.

For assistance with the Payment Protection Program Flexibility Act of 2020 or if you have questions, contact us. We are here to help.

© 2020