New PPP Modification Makes PPP Loans More Flexible For Borrowers; Additional Issues For Borrowers And Questions To Be Answered

By Harrison S. Lauer

On Friday, June 5, the President signed into law the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”) making the provisions of the Paycheck Protection Program (“PPP”) more flexible for borrowers. Changes under the Flexibility Act include: (1) expanding the time periods for lenders in making PPP loans, for borrowers in incurring expenses that are forgivable under the program, and for the deferral of principal and interest under PPP loans, (2) increasing the portion of non-payroll expenses that may be forgiven and correspondingly reducing the portion that must be for expended for payroll, (3) extending the date for the safe harbors to restore employment and salary levels and adding new safe harbors, and (4) providing that a borrower will not be precluded from deferring payroll taxes if the borrower’s PPP loan has been forgiven.

Lawmakers approved the Flexibility Act on a bipartisan basis. The House voted in favor of the bill by a margin of 417-1, the Senate approved of the house version without objection, and the President signed the document into law two days later.

While the Flexibility Act provides many benefits to current and new PPP borrowers, it also raises some unanswered questions that presumably will need to be addressed by lawmakers and the SBA going forward. The new law also provides some options for borrowers that will require them to make some key decisions in the upcoming days.


The Flexibility Act amends the PPP provisions enacted under the CARES Act (the “Act”). The PPP provides for loans of up to $10 million to borrowers with up to 500 employees, subject to some exceptions, to be used for specified costs including payroll, employee benefits including pension and healthcare expenses, rent, utilities, and mortgage interest. See the below links for more information on the PPP.

PPP Update: Second Round Of Funding Proceeds Quickly; Treasury Resolves To Audit Larger Borrowers; Guidance On Certifications; New Interpretations

Paycheck Protection Program Update– SBA Issues Its Rule

What Businesses And Non-Profits Need To Know About The CARES Act

The amendments under the Flexibility Act affect both existing and new PPP borrowers and provide for the following:

Expansion of the Covered Period to 24 Weeks. Expands the “covered period” under the forgiveness provisions of the Act from 8 weeks to the earlier of 24 weeks or December 31, 2020. This provision applies both to existing borrowers and new borrowers; however, a borrower which obtained its loan before the enactment of the Flexibility Act may elect to have an 8-week covered period for its loan. This change is intended to provide greater ability of borrowers to obtain forgiveness, particularly those who have been unable to re-employ laid off employees as a result of COVID-19.

Observation: Existing borrowers need to review their loans to determine which alternative is best for them: an 8-week or 24-week covered period. If a borrower will have expended its proceeds on forgivable costs within 8 weeks, electing to retain the shorter period and promptly filing an application for forgiveness would result in a faster resolution. Further, if the borrower has expended its proceeds on forgivable costs including payroll, it may not be able to continue maintaining its employment levels for the balance of a 24 week period. In such case, a 24-week covered period could result in a reduction of forgiveness due to the decline in average full-time equivalent employees (“FTE’s”) during its covered period relative to its pre-COVID base period.

Decrease in the Required Payroll Percentage to 60%. Provides that to receive loan forgiveness, a borrower must use at least 60% of its loan for payroll costs. It may use up to 40% of its loan to pay other eligible costs, including interest on a covered mortgage obligation, payment of any covered rent, or covered utility payment. This changes the current requirement imposed by the SBA under its Interim Final Rule on April 3, 2020, which provided that at least 75% of the total forgiveness expenditures must consist of payroll and no more than 25% of such expenditures could be for other eligible costs.

Observation: As drafted the Flexibility Act would disallow any loan forgiveness if a borrower fails to expend at least 60% of its loan on payroll. Under the current law and interpretations, if less than 75% of the loan is used for payroll, the borrower would be eligible for forgiveness, but the amount would be limited (to an amount equal to payroll expended during the covered period divided by 75%).

Safe Harbor Date Extended to December 31, 2020. Provides that the safe harbor date by which a borrower must restore employment or wage levels to pre-COVID-19 levels in order to eliminate loan forgiveness that would otherwise apply to its loan (from declines in FTE’s or wage levels by more than 25% for any employee) is extended from June 30, 2020, to December 31, 2020. This change is intended to give borrowers additional time to address their employment or wage level declines resulting from COVID.

Observation: The Act had provided that to obtain the benefit of the safe harbor relating to FTE’s, a borrower was required to eliminate the reduction “not later than June 30, 2020.” The language had suggested that the borrower could achieve the safe harbor if it raised its FTE’s to pre-COVID levels at any time before June 30, 2020. The Schedule A Worksheet on the forgiveness application which the SBA published provides for a safe harbor that measures FTE’s “as of June 30, 2020”. The Flexibility Act has amended the Act only to change the June 30, 2020, date to December 31, 2020. This raises a question of whether the SBA will revise its interpretation and allow for a computation of FTE for the safe harbor at any time prior to, or on, December 31, 2020, as the Act seems to permit or require that the computation be made as of December 31, 2020.

New Safe Harbors. Added two new safe harbors that would enable a borrower to eliminate reductions in forgiveness for declines in its FTE’s during the covered period relative to pre-COVID-19 periods. A borrower can eliminate such a reduction if it can document either that:

(A) Inability to Hire/Rehire: it is unable to rehire individuals who were employees of the borrower on February 15, 2020, and also unable to hire similarly qualified employees, on or before December 31, 2020; or

(B) Business Decline Related to COVID-19 Compliance: it is unable to return to the same level of business activity by December 31, 2020, as it was engaged in before February 15, 2020, due to compliance with COVID-19-related requirements or guidance addressing standards for sanitation, social distancing or other worker or customer safety matters.

Observation: Both safe harbors need to be further defined. With respect to the first safe harbor, the Flexibility Act does not specify what similarly qualified employees are or what steps must be taken to hire the same. Must a borrower advertise, on what medium, and for how long when it searches for replacement employees? What is similarly qualified? Do qualifications of potential replacement hires assume reasonable training by the borrower or a work-ready employee? With respect to the business decline safe harbor, does the COVID-19 compliance extend only to the borrower, or also to its customers, suppliers and their business relationships? If the safe harbor includes business losses caused by indirect adverse COVID-19 effects, the standard will be substantially easier for a borrower to meet.

  • Minimum Maturity Of Five Years. Extended the minimum loan maturity date to five years (as opposed to two years) for new borrowers. For existing borrowers, the borrower may negotiate an extension with its lender, but the change is subject to lender approval.

Observation: For borrowers with loans in place as of the date of the Flexibility Act who do not expect to be obtaining forgiveness of all or a part of their loan, you may want to contact your lender to inquire whether it will extend the loan term.

  • Extended Principal and Interest Deferral Period. Extends the period for deferral of interest and principal payments until the date on which the amount of forgiveness is determined and remitted by the SBA to the lender. Currently the deferral period is 6 months. If an applicant does not apply for forgiveness, payments of principal and interest will commence 10 months after the covered period of the borrower.

Observation: While the Flexibility Act provides that principal and interest commences 10 months after the covered period if the borrower fails to apply for forgiveness, it does not state that the borrower will thereafter be precluded from applying for forgiveness. Ten months following the covered period does not appear to be a deadline for forgiveness applications, only a commencement date for principal amortization and interest payments.

  • Extended Date for Loan Applications. Extends the end date to apply for loans from June 30, 2020, to December 31, 2020.

Observation: Since the covered period for loan forgiveness is extended from 8 weeks to the earlier of 24 weeks or December 31, 2020, under the Flexibility Act, this extension of the deadline for the making of new loans (to December 31, 2020) would appear to be impractical. Any loan made after roughly mid-July would have a covered period that would be shortened because 24 weeks after funding would fall after December 31, 2020. The lawmakers and SBA need to clarify how the extended date for loan applications will correspond with the newly covered period for forgiveness.

  • Payroll Tax Deferral. Eliminates the provisions in the Act that prohibited a borrower from deferring payment of the employer portion of its 2020 social security taxes (i.e., taxes incurred between March 27, 2020, and December 31, 2020) if the borrower obtains forgiveness of its PPP loan. Previously, the SBA had interpreted the Act as permitting a borrower to continue deferring such payments after obtaining a PPP loan and until the lender decided to forgive the loan. After the lender makes such a decision, the borrower would begin paying such taxes. The portions deferred prior to forgiveness would continue to be deferred under the provisions of the Act. The Flexibility Act has removed all such restrictions and allows for the deferral of the borrower’s social security taxes irrespective of whether the borrower receives PPP loan forgiveness.

Observation: In effect, this is a multi-year loan from the government without interest.


The Flexibility Act leaves a number of unanswered questions. Future modifications, interim rules, Q&A, revised forgiveness applications and other guidance need to address the following:

  • All or Nothing 60% Payroll Expenditure Requirement?-If a borrower does not expend more than 60% of its PPP loan proceeds on payroll over its covered period, will that borrower be precluded from obtaining any forgiveness of its loan as the Flexibility Act apparently provides?
  • Safe Harbor Timing-Will Schedule A and the Schedule A Worksheet on the forgiveness application be modified to reflect that borrowers may show compliance with the safe harbor on or at any time before December 31, 2020?
  • Deadline for Forgiveness-Will there be a deadline for applying for loan forgiveness?
  • Business Reduction Safe Harbor-Can a borrower whose business has declined between February 15, 2020, and December 31, 2020, meet this safe harbor by showing only indirect adverse effects of COVID-19 compliance (as for example through loss of customers and suppliers or industry declines) rather than inability to fully operate due to government ordered prevention measures (e.g., social distancing of employees or customers reducing operational capacity, such as government orders restricting restaurant seating to no more than 50% capacity) and what level of support will be needed to document this?
  • New Forgiveness Application; Revisions to Guidance-When will the new loan forgiveness application and related revisions to rules and other guidance be published?

Houston Harbaugh attorneys are available to help with this and other business issues as you proceed through the pandemic. Contact the attorney with whom you regularly deal or the below author of this article: Harrison S. Lauer, Houston Harbaugh,; (412) 288-2229.

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