What You Should Know About the New Paycheck Protection Program Flexibility Act (PPPFA)

Brian A Boyd, ChFC®, CFP®

June 08, 2020

The Paycheck Protection Act, now know as the PPP, was enacted as part of the CARES Act on March 27th. The program was enacted quickly in response to the sharp economic downturn caused by the coronavirus pandemic. The program has been widely deemed successful, however it became clear over the last two months that many of the original provisions would not lead to the desired outcome.

Just last week, the Senate passed H.R. 7010, or the Paycheck Protection Program Flexibility Act (PPPFA), which first passed the House on May 28th. With bipartisan support, this has now been signed into law by the President.

We’ll highlight the important changes, updates, and technicalities it provides to the business community.

1. Extension of Covered Periods

CARES Act parameters made it difficult for many businesses to allocate their Paycheck Protection Program funds since many stores, restaurants, and shops were still shuttered. Most of those closures were due to state and local regulations around COVID-19, so business owners didn’t have much choice.

Under the original PPP, employers had to spend these funds over eight weeks by June 30th, 2020, a near impossibility. Now, with Section 3(a) of the PPPFA, the timeline or covered period under which businesses can spend loan proceeds has been extended to 24 weeks, or until December 31, 2020.

2. Expansion of Spending Cap

To avoid a “hiring crunch,” or over-paying of employees just to allocate the funds before the deadline, the PPPFA drops the percentage of loans that must be applied to payroll from 75 percent to 60 percent. That means 40 percent of the total loan can now be allocated to rent, utilities, mortgages payments, and interest on loans.

These changes should create a host of new opportunities for businesses, as well as stimulate hiring and employee wages – the intended results.

3. Changes to the Maturity Date

The CARES Act set the maximum maturity period for PPP loans at ten years. However, they didn't outline a minimum maturity date, although the U.S. Treasury later mandated that all PPP loans had a two-year maturity.

Now, the PPP Flex Act extends that two-year loan date to a minimum of five years. The maximum maturity date set by the CARES Act is still ten years.

It's worth noting that Section 2(b) of this new PPP Flex Act allows borrowers and lenders to modify maturity dates on a case-by-case basis, as long as it's by mutual agreement.

4. Safe Harbors for Forgiveness Extended

The initial PPP offered certain "safe harbors" for business owners when it comes to wage and employment levels. When faced with a significant decrease in wages and/or employment that occurred between February 15 and April 26, 2020, employers could avoid a reduction in their forgiveness amount if they start rehiring and paying out by June 30.

Under the new PPPFA, that safe harbor period is extended to December 31, 2020, a useful extension of six months.

Additionally, the PPPFA outlines that loan forgiveness will not be reduced if employers can't rehire (and pay) employees, as long as they can document their offers to try to rehire past employees or bring on new qualified workers.

If the business’s efforts to restart operations, earn, and rehire are thwarted by Covid-19 safety precautions (such as social distancing, sanitation, or other health concerns), loan forgiveness will not be reduced under the PPPFA.

5. Social Security Tax Deferral Extended for Employers

With the PPPFA, employers that receive PPP loan forgiveness may continue to defer their share of payments on Social Security tax until December 31, 2020. That's a significant update since under the original PPP, employers could not defer their Social Security tax payment obligations after any part of their PPP loan was forgiven.

6. Deferral and Extension of Loan Repayment

Under the original PPP guidelines, interest and principal payments could be deferred for six months on any portion of the loan that is not forgiven.

But, under the PPPFA, interest and principal payments on the loan can now be deferred until the loan is forgiven by the lender. This applies unless the borrower fails to apply for loan forgiveness within ten months after the covered period expires.

A Win for Small Business

All in all, this was a huge win for small businesses that received PPP loans. The flexibility will allow these funds to be used in a way that recognizes the varied needs of businesses affected by the shutdown.

There may be additional changes to the rules in the future. We’ll continue to bring you important updates.

Brian