Paycheck Protection Program Flexibility Act: Complete Guide for Small Business Borrowers

As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.

Just when you thought you knew everything there was to know about Paycheck Protection Program loans and what it takes to get them forgiven, things changed. The House of Representatives and Senate recently passed — and President Trump signed into law — the Paycheck Protection Program Flexibility Act (PPPFA) of 2020. The new act makes changes to the Paycheck Protection Program (PPP) that give loan recipients more freedom about how — and when — loan proceeds are spent. It also makes it easier for small business owners to get loans forgiven. The change comes in response to concerns raised by small business owners. Many were not able to spend loan dollars in compliance with program requirements in the time defined by the original Cares Act Paycheck Protection Program. They also questioned the rules around what expenses PPP loan money could be used to cover. The Department of the Treasury took those concerns into consideration and treasury experts worked with members of the House, Senate and representatives of President Trump‘s administration to craft the new bill. The changes arrive in the nick of time. The eight week loan forgiveness period that’s a central part of the original PPP loan program ends soon for the first people who borrowed money through it.

Overview: Paycheck Protection Program Flexibility Act

The PPPFA provides the more than 4.4 million business owners who borrowed pandemic stimulus money through the PPP — and future borrowers — additional time to qualify for loan forgiveness. It also eases restrictions on how much of the loan money must be used to cover payroll costs versus non-payroll expenses. PPPFA will help many more borrowers get their loans forgiven. It could also encourage additional business owners to take advantage of the coronavirus economic security program.

PPPFA: The details

Here’s everything you need to know about the PPPFA.

The PPP loan forgiveness period is expanding.

The forgiveness period (the time during which PPP loan dollars must be spent under program specifications and not have to be paid back) has been extended from eight weeks to the earlier of:

• Twenty-four weeks from the loan origination date (the date of disbursement of loan funds)

OR

• December 31, 2020.

This gives borrowers far more time to qualify for loan forgiveness. Note: If they prefer, business owners can have their loan forgiveness period remain the eight weeks as originally defined in the Paycheck Protection Program section of the CARES Act.

There is no change to the PPP loan application deadline.

The PPPFA does not change the deadline for submitting PPP loan applications. Lenders approved by the Small Business Administration (SBA) to participate in the PPP loan program are permitted to accept application forms through June 30, 2020. If you haven’t applied for a PPP loan, you only have until the end of June to submit a loan request.

Limits on forgivable expenses have been eased.

The original PPP legislation required that 75 percent of forgivable loan expenses be used for payroll costs, including retirement plan contributions, sick leave pay and health care insurance premiums. Many business owners found this unacceptable because it didn‘t provide adequate funds to cover fixed non-payroll costs, such as mortgage interest, rent and utility payments. The new PPPFA requires that only 60 percent of forgivable expenses be used to cover payroll costs, leaving 40 percent for non-payroll expenses. Note: The new legislation does not directly change the terms of existing PPP loans. However, it’s expected that the SBA will issue additional guidance to make changes retroactive so they apply to current loans. Contact your lender to learn more about this or check out the SBA’s FAQs about PPP loans.

The time frame for restoring FTEs and wage-related expenses is extended.

Under the original CARES Act PPP legislation, businesses had until June 30, 2020 to restore their full time employee (FTE) headcount and salary levels to where they were on February 15, 2020. The PPPFA extends the employee retention deadline to December 31, 2020. The extension reduces the pressure on small business owners to increase their employee headcount during the coronavirus pandemic.

The PPPFA provides two exceptions for rehiring employees.

Under the new small business act, borrowers are NOT required to restore their number of employees to February 15, 2020 levels if:

1. The borrower can’t find qualified employees to fill open positions after making a good faith effort. This includes businesses that are unable to recruit people with specific skills OR ones who can’t hire workers because prospective employees are concerned about the risks of contracting COVID-19 in the workplace during the pandemic.
2. The borrower cannot restore business activity to February 15, 2020 levels because of social distancing, sanitation or customer safety requirements.

The requirements related to the second exception must have been established during the period beginning on March 1, 2020, and ending December 31, 2020 by:

• The Secretary of Health and Human Services
• The Director of the Centers for Disease Control and Prevention
• The Occupational Safety and Health Administration.

Note: Both exceptions leave room for interpretation, but could allow employers to meet the PPP loan employee retention requirements without having to rehire employees. Contact your loan provider to explore your options.

The PPPFA extends PPP loan maturity and the deferment period.

• Maturity. The maturity term for any remaining loan amounts once the forgiveness period is over is now five years instead of the original two.
• Deferment period. The amount of time borrowers don’t have to make loan payments, including principal, fees and interest payments, has been extended from six months to up to ten months after the date the covered period ends. (This is based on additional guidance from the SBA. Determining the deferment period is complicated. Check with your loan provider to find out when your loan deferment period is in effect.) There are no penalties for loan prepayment.

The one percent interest rate on unspent loan dollars at the end of the forgiveness period — and all other PPP loan terms — remain the same. It’s unclear how lenders will amend outstanding promissory notes to reflect PPPFA changes. If you have a PPP loan, contact your lender to find out how your loan details will be amended.

Employer payroll taxes are deferred for two years.

The PPPFA allows PPP borrowers to take advantage of the payroll tax deferrals permitted under the CARES Act for companies not participating in the PPP. All businesses can now defer 50 percent of their share of payroll taxes until 2021 and the remaining 50 percent until 2022.

The PPPFA does not address certain PPP legislation gaps.

Open issues include:

• The earliest date borrowers can submit a loan forgiveness application. It’s unclear whether borrowers can apply for forgiveness before the eight week period after loan origination ends.
• Whether the new 60 percent wage-related spend level applies to forgiven and non-forgiven funds. It’s not clear whether 60 percent of non-forgiven funds must be used for wage-related expenses.
• When and how promissory notes will be amended to reflect PPPFA changes. Check with your lender to find out for sure.

The PPPFA makes it less likely borrowers will put themselves at risk.

The greater flexibility provided by the PPPFA makes it less likely that borrowers will push the limits on forgivable loan expense claims. Instead of being tempted to claim things like extraordinary bonus payments, prepaid rent or other questionable expenses, borrowers can now wait a few pay periods to have additional payroll and other permitted expenses included in their forgiveness calculation.

The SBA recently issued rulings that impact PPP loans.

The Small Business Administration (SBA) recently released two rulings related to PPP loans small business owners should be aware of. They provide guidance and clarification on:

• Employee bonus and hazard pay. The SBA now allows forgiveness for payments to furloughed employees and bonuses or hazard pay paid to workers during the covered period as long as total compensation does not exceed $100,000 annually. This doesn’t apply to self-employed people, sole proprietors and independent contractors.
• Calculating salary and full-time equivalent (FTE) employee reductions. Salary reduction now applies only to a decline in employee salary and wages not related to a reduction in the number of employees. It only covers reduced pay amounts. This change prevents business owners from being double penalized.

Need to know: The SBA recently issued a statement making it clear that it can review PPP loans for things like borrower eligibility, loan amounts, use of proceeds and loan forgiveness amounts against their interim final rules and other regulations. This gives them more power to ensure loan proceeds are used as intended.