The President has signed into law the Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act), which proposes to extend the period borrowers must spend the forgivable Paycheck Protection Program (PPP) loans until December 31, 2020.
The Flexibility Act also proposes to amend the controversial 75/25 rule imposed by the SBA that currently requires PPP borrowers to use at least 75 percent of their loan proceeds on payroll costs. The Act proposes to change this ratio to 60/40.
The Flexibility Act also proposes other important changes to the PPP, such as removing the restriction on payroll tax deferment for employers who receive PPP loan forgiveness.

Both the House and Senate have passed a bipartisan bill to modify elements of the PPP established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The legislation, intended to provide a “quick fix” to obstacles faced by small businesses seeking relief under the forgivable loan program, was signed into law by President Trump on June 5, 2020.

The Flexibility Act
Representatives Dean Phillips (D-MN) and Chip Roy (R-TX) introduced the Flexibility Act on May 26, 2020. The bill, H.R. 7010, passed in the House on May 28, 2020. The Senate passed the bill without amendment on June 3, 2020. The Flexibility Act includes the following provisions:

  • The Flexibility Act will extend the “covered period” borrowers have to use PPP loans and qualify for loan forgiveness from eight weeks following the disbursement of the loan to the earlier of 24 weeks from loan disbursement or December 31, 2020. A borrower who received a loan before the bill’s enactment could elect to continue using the eight-week covered period. Sen. Ron Johnson (R-WI) entered a letter into the Congressional Record to clarify that the Flexibility Act does not permit the Small Business Administration (SBA) to accept or approve PPP applications after June 30, 2020.
  • The Act similarly will extend, until December 31, 2020, the CARES Act’s June 30, 2020, deadline to rehire employees and reverse salary cuts of greater than 25 percent. Under the CARES Act, a failure to rehire and reinstate salaries by June 30, 2020, will cause a proportional reduction in loan forgiveness. We summarized the relevant provisions of the current loan forgiveness application here. In proposing to extend this safe harbor until December 31, the Act seeks to address the widespread concern that many businesses will remain shuttered beyond June 30 due to continuing state and local lockdown orders.

-  Moreover, the Flexibility Act will exempt borrowers from the proportional reduction in loan forgiveness due to a reduction in employees if the borrower is able to document in good faith that for the period of February 15 to December 31, 2020, the borrower was unable to: rehire employees who had been employed on February 15, 2020, or hire similarly qualified employees for unfilled positions by December 31, 2020; or

-  return to the same level of business activity at which the borrower was operating before February 15, 2020, due to compliance with federal requirements or guidance set forth between March 1 and December 31, 2020, relating to standards of sanitation, social distancing, or other worker or customer safety requirements related to COVID-19.

  • The Flexibility Act will provide that at least 60 percent of PPP loan proceeds must be used for payroll costs to qualify for loan forgiveness. This provision is substantially different from that of another recent House bill—H.R. 6886—that would have eliminated entirely the 75/25 rule adopted by the SBA, under which PPP borrowers must spend at least 75 percent of their PPP loan proceeds on payroll and no more than 25 percent on allowable non-payroll costs. Many small businesses, particularly those in high-rent regions whose payroll does not represent 75 percent of monthly expenses, have expressed frustration with SBA’s limitation, as have businesses thus far unable to reopen that still have significant rent and utilities obligations.
  • The Act eliminates the six-month deferral of payments due under PPP loans and replaces it with deferral until the date on which the amount of loan forgiveness is remitted to the lender. If a borrower fails to apply for loan forgiveness within 10 months after the last day of the covered period for PPP loan forgiveness, the borrower must begin to make payments of principal, interest and fees on its PPP loan.
  • The Act will extend the minimum loan term to five years, enlarging the two-year maturity date imposed by the SBA. This amendment to the PPP will take effect on the date of the bill’s enactment and apply to any PPP loan made on or after such a date. Lenders and borrowers, however, will not be prohibited from mutually agreeing to modify the maturity terms of prior-disbursed PPP loans.
  • The Act also removes the CARES Act provision restricting employers who receive PPP loan forgiveness from deferring payroll taxes incurred between March 27, 2020, and December 31, 2020.

Pillsbury’s experienced multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.

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