Today, the President signed the Paycheck Protection Program Flexibility Act of 2020 (“the Act”) into law, making key modifications to the Paycheck Protection Program.
The Act provides borrowers with much greater flexibility to spend their loan proceeds and seek forgiveness, as follows:
Extension of Covered Period: The Act extends the “covered period” to incur costs eligible for forgiveness from eight weeks after loan disbursement to the earlier of 24 weeks after loan disbursement or December 31, 2020. Many companies have encountered difficulty incurring forgivable costs during the eight week covered period due to partial or complete closures of their business by government order. The Act triples the amount of time businesses can use forgivable loans, permitting more time for employers to incur forgivable costs, and facilitates the ability of businesses to restart and ramp up operations, or remain open during restricted operations.
Reduction in the Percentage of the Forgivable Loan That Must Go Toward Payroll Costs: Under the original Program, at least 75% of forgivable loan expenses must be spent on payroll costs. The Act lowers this to 60%, increasing the amount of forgivable loan proceeds that may be used on non-payroll expenses from 25% to 40%. This provides significant relief to companies with lower labor costs, especially as businesses maintain reduced or partially suspended operations, and a high percentage of overhead for rent, mortgage interest, and utilities.
The language of the Act, however, raises concern that if the borrower fails to spend 60% of the loan proceeds on payroll costs, none of the loan will be forgivable. The Act states “to receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs….” Under the original Program, failing to meet the 75% threshold only results in a proportionate reduction of the forgiveness amount, and not a total loss of forgiveness. The Act as written, seems to eliminate the proportionate reduction of the forgiveness amount, and mandate a total loss of forgiveness if 60% of loan proceeds are not spent on payroll costs. Additional legislation or guidance may be necessary to address this potentially unintended consequence of the Act.
Loan Maturity: The Act extends the maturity date of PPP loans that have not been forgiven from two years to five years for borrowers whose loans are disbursed subsequent to the Act’s enactment.
Rehiring Workers: Loan forgiveness is subject to reduction due to a borrower’s decrease in full-time equivalent employees (FTE) compared to one of the several base periods, or reduction in the average annual salary or hourly wage of certain employees during the covered period compared to the first quarter of 2020. The Act extends the deadline for borrowers to restore FTEs or salary/hourly wages to their February 15, 2020 levels from June 30, 2020 to December 31, 2020. This gives borrowers additional time to fully staff its workforce and avoid reduction in loan forgiveness.
Additionally, loan forgiveness will not be reduced due to a reduced FTE count if the borrower documents that they attempted but were unable to rehire individuals who had been employees on February 15, 2020, and they have been unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
Furthermore, forgiveness will not be reduced due to a reduced FTE count if the borrower, in good faith, is able to document that it was unable to return to the same level of business activity in which the business was operating prior to February 15, 2020 due to sanitation, social distancing, or other worker or customer safety requirements related to COVID-19. This will serve as a great benefit to the restaurant and hospitality industry in the event that restaurants are unable to fully open by the end of the year and are not able to restore their FTE count as a result. In this instance, the loss of FTEs would not be taken into account when assessing the forgivability of any PPP loan.
Loan Deferral Period Modified and Forgiveness Deadline Imposed: The Act modifies the deferral period for loan payments of principal and interest from six-12 months to: 1) the date the lender receives the forgiveness amount from SBA or 2) 10 months after the final day of the covered period if the loan recipient did not apply for forgiveness.
The Act continues the ever-changing terms and guidance as it pertains to PPP loans. Many employers have already prepared forgiveness documents. Such documents will likely need to be re-drafted. It, however, may be too late for some who have already submitted forgiveness documents or even returned loan proceeds because they foresaw an inability to spend more than 75% of the loan on payroll costs and did not wish to incur a loan that was not forgivable.