Paycheck Protection Program Flexibility Act of 2020

(Significant changes to the CARES Act, including PPP, become law)

In a June 1 BNN article, we shared news that changes were afoot in Washington that could upend (mostly favorably) many criteria for PPP loan forgiveness. At that time, the House had drafted H.R. 7010 – the Paycheck Protection Program Flexibility Act of 2020 (the “Act”), but the Senate was expected to offer changes. Instead, the Senate passed the House bill late on June 3, sending it to the President, who signed it into law today.

Background/where we stand

This article assumes readers generally are familiar with PPP loans, but a good refresher can be found in a previous BNN article by Joe Jalbert and an update I provided a couple weeks ago. Let’s briefly put the new Act into context:

  1. March 2020’s CARES Act introduced PPP loans and the unique feature whereby, under the right conditions, the loans may be forgiven.
  2. The CARES Act assigned an 8-week “covered period” during which expenditures of loan proceeds potentially could qualify for forgiveness, following an application and related approval.
  3. The SBA/Treasury issued numerous Questions and Answers in the weeks that followed, as well as several ambiguously named “Interim Final Rules.” Consistently, their guidance in equal measure satisfied and confused practitioners and at least once drew the ire of senior members of Congress who noted that their intent was misinterpreted by Treasury.
  4. Just prior to the earliest possible “covered periods” reaching an end last week, the loan forgiveness form and instructions (Form 3508) were released.
  5. On June 3, 2020, the Senate passed the House’s bill. The President signed it into law on Friday, June 5, providing much more leeway to PPP loan borrowers – in nearly all ways but one.

The changes of the Paycheck Protection Program Flexibility Act of 2020

First, it should be noted that the Senate apparently considered a slight alteration to the House bill, but in the interest of expediency (avoiding sending the bill back to the House) it instead entered a clarification in the Congressional Record, which is essentially a transcript of their discussion and formal explanation of their intent. It noted that no new PPP loans may be made after June 30, 2020.

Observation: Yes, there is money left in the PPP to be distributed between now and June 30. According to the SBA, well over $100 billion remained available as of this past weekend. This, and other statistics related to the program, may be found on a May 30 report on the SBA’s website.

Here is a summary of changes made by the Act:

  1. The covered period (during which expenditures potentially may qualify for forgiveness) originally consisted of 8 weeks, beginning with the loan origination date. The Act stretches that to 24 weeks from the loan origination date, but ending on December 31, 2020 if earlier. Those borrowers who already qualify for full forgiveness may opt to remain with the original 8-week period.
    • Observation: Debate exists as to whether exactly 8 weeks’ worth of payroll (under original rules) may be forgiven, or whether an extra week or two can be squeezed out based on compensation accrued at the end of the 8-week period. Although 8 weeks now becomes 24, we have no additional clarity regarding these interpretations, but hopefully less ambiguous wording will be employed on updated instructions to Form 3508 or the next flurry of SBA/Treasury Q&A.
  2. The deadline for rehiring employees (to avoid haircuts on the loan forgiveness amounts) was extended from June 30, 2020 to December 31, 2020.
  3. Employers encountering FTE reductions (which can dramatically reduce forgiveness amounts) gain some exceptions that allow certain FTE decreases to be ignored for purposes of these calculations. Those exceptions apply if an employer was (a) unable to rehire an eligible employee that was previously employed on February 15, 2020 and also was unable to hire a similarly qualified replacement by December 31, 2020; or (b) if the employer was unable to “return to the same level of business activity as such business was operating at before February 15, 2020” due to government-imposed social distancing or similar guidelines.
    • Observation: Those who use one of these exceptions are expected to document their qualification for it. Those employers whose employees refuse to return to work are required under an SBA/Treasury “Interim Final Rule” issued last week to report their rejected offers of reemployment to the appropriate state unemployment office within 30 days. Evidence of that “policing” may be part of the required documentation.
  1. Before the Act, non-payroll expenditures were capped at 25% of total forgiven costs, meaning that 75% of the amount forgiven must relate to payroll. Now, payroll can be as low as 60% of qualifying costs, with non-payroll capped at 40%.
    • Caution: Obviously the percentages described above were intended to prioritize payroll costs. But while the rule change seems more liberal, those who exceed the non-payroll percentage thresholds under the old rules would have received a minor hand-slapping, while those who exceed it under the new rules will experience more of a gut-punch. Prior to the Act, incremental non-payroll costs that exceeded 25% simply didn’t qualify for forgiveness. Up to that level, non-payroll costs did qualify, as did the payroll costs themselves. In other words, the penalty for exceeding the threshold was that forgiven costs merely were reduced somewhat. However, the new rule says that “To receive loan forgiveness . . . an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs . . .” The most reasonable interpretation of this sentence is that borrowers who don’t spend at least 60% of their PPP funding on payroll will be denied any amount of forgiveness at all. Rumor is that some senators wish to have this restriction modified by SBA rules, but that is a downright weak way to get to the right place, and is an approach best reserved for instances where the law is vague or silent. Congressional law remains a higher source of authority than administrative rules, and borrowers should be very, very careful to meet the 60% threshold.
    • More caution: Those who will reach the 60% threshold only by use of the incremental accrued payroll amount described above under the “covered period” should be especially wary of the possible repercussions, now that we may be dealing with an “all or nothing” forgiveness denial rather than just a portion.
  1. The CARES Act offers employers the ability to defer payment of the 6.2% employer “match” of employees’ wage-based Social Security tax. Under the original CARES Act rules, this deferral could not be applied to wages used to qualify an employer for PPP loan forgiveness. The new Act’s modifications alleviate this restriction prospectively and retroactively, applying to all of 2020’s payroll.
    • Recommendation: Affected employers should contact their payroll companies right away to take advantage of the deferral.
  2. The balance of changes in the Act address terms of the PPP loans and related dates:
    1. Borrowers must submit forgiveness applications within 10 months of the last day of the forgiveness period, or be prepared to begin making payments.
    2. Instead of 6 months following the loan origination, borrowers may defer their first loan repayment until the date the SBA communicates its determination of the forgiveness amount to the lender.
    3. New loans will have a minimum maturity term of at least 5 years, rather than 2. Borrowers are under no obligation to do so, but may renegotiate existing loans’ terms as well.


Many employers who have reached the “finish line” of their 8-week covered periods are now eligible to complete the PPP loan forgiveness application. Those who very clearly qualify for the full amount of forgiveness may see no reason to delay. Others may want to take advantage of the increased wiggle room provided by the Paycheck Protection Program Flexibility Act of 2020. As suggested above, be sure to get in touch with your payroll service providers, to ensure that you are deferring payroll taxes pursuant to the Act’s new provisions. Be very mindful of what appears to be an “all or nothing” forgiveness test that turns on meeting the new 60% payroll requirement. Also note that lenders may find themselves in a difficult position as “gatekeepers” of the forgiveness requests. They are faced with a window that just opened and borrowers eager to receive favorable determinations, but application forms that have just been outdated, and a number of issues open for interpretation. It would not be unexpected or unreasonable for lenders to wait a bit longer to process applications, pending what hopefully will be some clear guidance from the SBA. Finally, expect to see a new Form 3508 and related instructions in the very near future, as the existing form will need to be revised.

For more information or a discussion on how this may impact you, please contact your BNN advisor at 800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.