House Passes the Paycheck Protection Program Flexibility Act

Update: Congress Passes the Paycheck Protection Program Flexibility Act

Covered Period

Under the existing version of the CARES Act legislation authorizing the PPP and related SBA rulemaking to date, loan proceeds used to meet payroll and other qualified expenses are eligible for forgiveness only if incurred within an eight-week “covered period” following loan disbursement, which is beginning to run out for the earliest borrowers. The House bill would extend the covered period to 24 weeks.

Employee Headcount and Wage Flexibility

Under the CARES Act, the portion of a PPP loan eligible for forgiveness generally is reduced if the borrower has cut employee wages or headcount, but there is a safe harbor if levels are restored by a certain date, which under the current version of the law is June 30, 2020. The House bill would extend this date to December 31, 2020 (or to the end of the borrower’s 24-week covered period, if later).

In addition, the House bill would broaden the circumstances under which an employer may count its good-faith inability to restore or maintain headcount as equivalent to actual employment.  Under existing SBA guidance contained in the loan forgiveness application released by the SBA on May 15, an employer may include in headcount any positions for which it made a good-faith, written offer to rehire during the covered period that was rejected and any employees who, during the covered period, were fired for cause, voluntarily resigned or requested and received a reduction in hours. The House bill appears compatible with these items and additionally mandates that headcount reduction be disregarded to the extent of a documented, good-faith inability to rehire former employees, to hire similarly qualified employees or to return to the same level of business activity as existed on February 15, 2020 due to compliance with worker or customer safety requirements of public authorities relating to COVID-19.

Proportion of Loan that May Be Used for Non-Payroll Expenses Increased

Although the CARES Act itself did not mandate that any particular proportion of expenses paid with PPP loan proceeds consist of payroll costs in order to be eligible for forgiveness, the SBA issued rules limiting the non-payroll costs to 25% of the forgiveness amount. The House bill would increase that proportion to 40% and decrease the minimum payroll-cost proportion from 75% to 60%.

Loan Maturity

Although the CARES Act itself merely set an outside limit of ten years on the maturity of the unforgiven portion of any PPP loan, the SBA exercised its rulemaking authority to set a uniform maturity of two years. The House bill would override the SBA rule to set a minimum maturity to five years, although applying the change to loans already made would require action on the part of borrowers and lenders to amend the terms of their loans.

The SBA Focus Group of the COVID-19 Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the PPP loan program is implemented.