Paycheck Protection Flexibility Act: Changes to the Paycheck Protection Program

On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act (the “Act”), to amend sections of the Paycheck Protection Program (“PPP”). The Act:

  • Prospectively extends PPP loan maturity from two years to five (lenders and borrowers may mutually agree to modify the terms of existing loans to a five-year maturity);
  • Extends the Covered Period from June 30 to December 31;
  • Changes rules with respect to forgivability:
    • Implements a deadline for borrowers to apply for forgiveness within 10 months of the last day of the Covered Period;
    • Imposes a requirement that 60% of the forgiveness amount must be expended on eligible payroll costs as a threshold to obtaining forgiveness;
    • Extends the safe harbor to cure full-time equivalent employee (“FTE”) and salary/wage reductions to December 31, 2020;
    • Adds a new exemption for borrowers to avoid a proportional reduction of forgivability based on reductions in FTE;
  • Extends deferral of payments on PPP loans to the date the lender receives forgiven funds from the SBA; and
  • Allows PPP borrowers to take advantage of the CARES Act payroll tax deferral program.

While many are celebrating the increased flexibility, we will really see how these changes come into play when the Small Business Administration (“SBA”), in consultation with the Treasury, provide further guidance through FAQs and/or Interim Final Rules. It is this forthcoming guidance that will truly allow borrowers to make informed decisions with respect to the utilization of PPP loan proceeds and their decisions of when and how to apply for forgivability.

While we play the waiting game, we put together the chart below to illustrate the before-and-after:
 The CARES Act and current SBA/Treasury Interim Final Rules and FAQsThe Paycheck Protection Program Flexibility Act
Loan Term

To the extent a borrower does not receive full forgiveness, the term of the loan is the amount of time—from the date of receipt of the PPP loan proceeds—the borrower has to repay the PPP loan at a 1% interest rate

2 years5 years
“Covered Period”

As applied to the PPP loan terms, in general (for example, payroll costs include compensation not more than $100,000, as prorated for the covered period)

Through June 30, 2020Through December 31, 2020
“Covered Period”

As applied to the forgiveness analysis, including determining how long, from the date a borrower receives PPP loan proceeds, it has to spend such PPP loan proceeds for forgiveness purposes and the period for comparison to determine FTE counts and salary reductions

  • 24 weeks or
  • December 31, 2020 or
  • To the extent a borrower received a PPP loan prior to the Act’s passage, such borrower may elect to keep its 8-week Covered Period
Exemptions/Exceptions for FTE Reductions and Salary Reductions

A FTE/Salary-based reduction in PPP loan forgiveness will not apply if the borrower has eliminated the FTE and/or Salary/Wage reductions by June 30, 2020


The FTE Reduction is attributable to (and not filled by a new employee hire) (i) an employee rejecting borrower’s written offer of rehire, (ii) borrower’s firing an employee for cause, (iii) an employee voluntarily resigning, and/or (iv) an employee voluntarily requesting reduced hours

A FTE/Salary-based reduction in PPP loan forgiveness will not apply if the borrower has eliminated the FTE and/or Salary/Wage reductions by December 31, 2020


The FTE Reduction is attributable to (and documented as such)

  • an inability to rehire individuals who were employees of the borrower’s on February 15, 2020 and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
  • an inability to return to the same level of business activity as borrower was operating at or before February 15, 2020 due to compliance related to COVID-19 worker and/or customer safety (only applicable from March 1, 2020 through December 31, 2020)


The FTE Reduction is attributable to (and not filled by a new employee hire) (i) an employee rejecting borrower’s written offer of rehire, (ii) borrower’s firing an employee for cause, (iii) an employee voluntarily resigning, and/or (iv) an employee voluntarily requesting reduced hours (unless the SBA removes these exceptions with a change to its interim final regulations)

Payroll Costs v. Nonpayroll Costs

For forgiveness purposes, a certain percentage of PPP loan proceeds must be spent on payroll costs and the remaining percentage can be spent on non-payroll costs (as such terms are defined and discussed in our Guide which can be downloaded for free here)

75% Payroll Costs

25% Nonpayroll Costs

The SBA provides for a corresponding reduction for failure to meet this threshold

60% Payroll Costs

40% Nonpayroll Costs

Congress seems to establish a complete exclusion of forgiveness for failure to meet this threshold

Time to Submit Application for Forgiveness and Deferral of PPP Loan Repayments

The amount of time—after the last day of the Covered Period—that a borrower has to (i) apply for forgiveness and (ii) defer principal, interest, and fee payments on the PPP Loan portion that was not forgiven

6 months10 months
Employer Payroll Deferral ProgramBorrowers may not also take advantage of the Employer Payroll Tax Deferral Program (CARES Act Section 2302(a))Borrowers may participate in the Employer Payroll Tax Deferral Program, and elect to defer payment of employer payroll taxes due between March 27, 2020 and December 31, 2020 to December 2021 and December 2022

While the Act will certainly be beneficial to some borrowers, many unanswered questions remain.  For example, if a borrower elects to retain its 8-week Covered Period, does it have a December 31, 2020 date to cure any FTE and Salary/Wage? The language in the statute requires borrowers to remedy FTE counts and/or salary levels “not later than” the June, then December, date.  In its initial rules, SBA set June 30 as the date of measurement.  The SBA could follow suit here and require Borrowers wait until December 31 if they intend to take advantage of the opportunity to cure or could enact a more flexible rule, allowing borrowers to demonstrate they cured the reduction at some point before December 31.

Many borrowers who are near the end of their 8-week period have been told for months that June 30, 2020 is such date. But if that is now changed to December 31, 2020, is the borrower stuck in limbo for the next six months before applying for forgiveness?   Will there be an alternative? And what does “an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020” mean exactly? Does it mean “inability to rehire individuals” because the former employees refuse offers? Or because the borrower doesn’t have work for them to do? Or maybe something else entirely?

The Act does not address these questions, but hopefully forthcoming SBA Interim Final Rules and/or FAQs will provide some clarity and answers, which we will be sure to update you on accordingly.


If you have questions concerning issues raised by the Coronavirus pandemic and/or issues concerning your participation with any of the CARES Act or any other government program enacted in response to Coronavirus, please reach out.

We are available to assist with any questions you have concerning the CARES Act and related enforcement.

About the Attorneys

Michelle F. Schwerin represents individuals and businesses in a variety of tax matters, including tax liability disputes, innocent spouse claims, claims for penalty abatement, refund claims and litigation, preparer and promoter penalty investigations and tax collection matters.

For additional information about Michelle, please visit her profile.

Danielle M. Durban specializes in entity formation and structuring, business disputes, commercial transactions, copyrights, and trademarks. She is committed to thoroughly understanding each of her client’s business goals, mission, and values in order to provide effective and efficient solutions unique to each client’s business.

For additional information about Danielle, please visit her profile.

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