On June 5, 2020, the President signed the Paycheck Protection Program (PPP) Flexibility Act of 2020. The Act modifies the PPP prior guidance from the SBA is several ways and significantly improves the opportunity for forgiveness.
1. Expansion of the Forgiveness Period
The Act expands the period during which PPP funds may be spent in order to be eligible for forgiveness from eight (8) weeks to the earlier of (a) twenty-four (24) weeks from the loan origination date and (b) December 31, 2020. Borrowers can also choose to use the original eight (8) week period.
2. Relaxed Use of Funds Requirements
Following enactment of the original legislation, the SBA issued guidance stating that to be eligible for forgiveness, at least 75% of the loan funds must be used to satisfy payroll costs. The Act reduces the required payroll cost percentage to 60%.
3. Opportunities to Avoid the Headcount and Wage Reduction Forgiveness Penalties
Even if a borrower uses the PPP funds as required to be eligible for forgiveness, a reduction in employee headcount causes a reduction in the forgivable amount. The percentage reduction is calculated by dividing the borrower’s monthly average full-time equivalent employees (“FTEs”) during the forgiveness period by its FTEs during the period from February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020 (as the borrower elects). A borrower is similarly subject to a dollar for dollar reduction in forgiveness based on wage reductions during the forgiveness period imposed on employees who earned less than $100,000 in 2019.
The original legislation provided a safe harbor if the borrower achieves equivalent FTEs and wages by June 30, 2020. In acknowledgement of the continuing restrictions on business activities and the challenges of rehiring in the current environment, the Act moves the safe harbor testing date to from June 30, 2020 to December 31, 2020.
In addition, the Act provides additional opportunities to avoid the reduction in headcount penalty if the borrower documents an inability to (a) 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 (b) return to the same level of business activity it was engaged in on before February 15, 2020 due to compliance with requirements for sanitation, social distancing, or safety related to COVID-19 issued by Health and Human Services, the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration.
4. Extension of Maturity Date and Payment Deferral Period
The maturity date loan funds that are not forgiven is extended from two (2) years to five (5) for loans issued after the Act. Loans previously issued may be modified subject to lender’s consent. In addition, the payment deferral period was extended from six (6) months to the date on which the forgiveness amount is remitted to the lender.
If the borrower does not apply for forgiveness within ten (10) months after the last day of the forgiveness period, it is required to make a payment of principal, interest, and fees on the date ten (10) months after the last day of the covered period.