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On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act, which will implement substantial changes to the Paycheck Protection Program (PPP). The bill extends the time that businesses have to spend PPP loan funds and alters the forgiveness rules, including a reduction in the percentage of the loans that must be used for payroll.

Paycheck Protection Program

The CARES Act provided much-needed economic relief for employers and employees during the COVID-19 pandemic. The most significant provision of the Act for employers is the Paycheck Protection Program (PPP) which provides loans administered by the Small Business Administration (SBA) to help employers cover payroll costs and other expenses during period from February 15, 2020 through June 30, 2020.

The PPP provided for forgivable loans in an amount equal to 2.5 times the average monthly payroll covered expenses for the 12 months prior to the loan application. The amount of loan forgiveness would be reduced proportionally based on calculations involving reductions in full-time employees and wages in excess of 25% for certain employees. The PPP also provided that any reduction in loan forgiveness could be avoided if the employer rehired all laid off or furloughed employees, or increased their previously reduced wages, no later than June 30, 2020.

The SBA and Department of the Treasury later clarified that 75% of any forgiveness amount must be used for covered payroll costs by capping the amount of non-payroll costs eligible for forgiveness at 25%.

Paycheck Protection Program Flexibility Act Changes

The Paycheck Protection Program Flexibility Act extends the covered period from February 15, 2020 to December 31, 2020. The period during which PPP loan funds may be used is extended from eight weeks to 24 weeks after the disbursement of the PPP loan, or up until December 31, 2020, whichever period ends earlier. Borrowers who received a PPP loan before the enactment of the Flexibility Act may elect to use an eight-week forgiveness period.

The Flexibility Act also amends the CARES Act to provide that any reduction in the amount of loan forgiveness is avoided if the employer rehires all employees laid off between February 15, 2020 and April 26, 2020, and increases their previously reduced wages, no later than December 31, 2020.

The Flexibility Act creates an additional exemption to the loan forgiveness reduction that states that the amount of loan forgiveness will be determined “without regard to a proportional reduction in the number of full-time equivalent employees” if the borrower, in good faith:

  • Can document an inability to rehire individuals who were employees on February 15, 2020 and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
  • Can document an inability to return to the same level of business activity as the borrower was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period between March 1, 2020 and December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

These exemptions are important for businesses that are unable to return to full operation because of restrictions on customer capacity or similar reopening restrictions.

Another significant change made by the Flexibility Act is that borrowers need only use 60% (reduced from the previous 75% requirement) of the PPP loan amount for payroll costs. This means that 40% (increased from the previous 25% ceiling) of the PPP loan amount can be used for non-payroll costs (rent, mortgage interest, and utilities).

PPP loan recipients must submit applications for forgiveness within ten months after the last day of the covered forgiveness period.


The Flexibility provides PPP loan recipients additional flexibility and time to use PPP loan funds and still have the loan forgiven. Borrowers will now have 24 weeks from the disbursement of their loan to use the PPP funds. The bill also creates flexibility by reducing the amount of loan money that must be used for payroll purposes. This development is significant most especially for loan recipients that have not been able to reopen, or only recently reopened.

This article provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact situation.

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