PPP Flexibility Act

The significant changes to the Paycheck Protection Program under the PPP Flexibility Act are as follows:

• The period to expend PPP funds has been extended to 24 weeks after the disbursement of funds.
  • may elect to use the 8-week covered period provided for under the CARES Act, allowing them to continue operating under the law that applied when they received the funds.
• Employers have until December 31, 2020 to reemploy Full Time Equivalent employees (“FTEs”) to pre-COVID-19 levels if the employees were terminated between February 15, 2020 and April 26, 2020.
  • The reference periods for pre-COVID-19 levels are either (i) February 15, 2019 through June 30, 2019 or (ii) January 1, 2020 through February 29, 2020 or (iii) seasonal employers can select any 12-week period beginning on May 1, 2019 and ending on September 15, 2019.
  • If a PPP loan recipient is unable to restore FTEs to pre-COVID-19 levels for either of the following reasons, then the loan forgiveness amount will be calculated without regard to a proportionate reduction in FTEs:
    • The employer cannot rehire individuals who were employees before February 15, 2020 or hire similarly qualified individuals to replace those former employees; or
    • Due to requirements or guidelines established 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 beginning on March 1, 2020 and ending on December 31, 2020, the employer cannot resume the same level of business activity as the business had before February 15, 2020 (the “Government Order Exception”).
  • For purposes of the PPP and PPP Flexibility Act, FTEs are employees (whether one or an aggregate) working forty (40) hours per week.  Thus, one employee working forty (40) hours per week or four employees working ten (10) hours per week are each one (1) FTE.
  • Note that the extension of the date to rehire employees while qualifying for forgiveness does not change the pool of terminated employees to whom the rehire circumstances apply.
• To be eligible for forgiveness, loan recipients must spend at least sixty percent (60%) of the loan amount for payroll costs and the balance, up to forty percent (40%), on covered mortgage, rent, or utility obligations.
  • Unlike the CARES Act, the PPP Flexibility Act provides that if the sixty percent (60%) threshold is not met, the loan recipient is completely ineligible for loan forgiveness.  The CARES Act simply reduced the forgiveness amount.
• Payment obligations for principal, interest, and fees of any PPP loan amounts are deferred until the SBA remits a determination of loan forgiveness to the lender.
• Employers receiving forgiveness of PPP loan amounts are eligible for deferral of payment of the employer’s share of payroll taxes.

While the PPP Flexibility Act recognizes the impact of COVID-19 reopening restrictions, it places PPP recipients in limbo, potentially through the end of 2020, if they are unable to restore FTEs to pre-COVID-19 levels.  The Government Order Exception to FTE restoration appears to require a business to wait until December 31, 2020 to be able to certify that it could not restore its operations due to COVID-19 related health restrictions. 

In the absence of further guidance from the SBA, then, loan recipients should wait until the end of the year to apply for loan forgiveness relying on this exception because the loan recipient must show an inability to restore operations to sufficient levels to require restoring its FTEs to pre-COVID-19 levels for the entire period from March 1, 2020 through December 31, 2020 due to government orders or guidelines.  If, however, the restrictions on reopening are lifted, the business would need to restore its FTEs to pre-COVID-19 levels by December 31, 2020.  Depending on when the restrictions are lifted and future guidance, this could create a difficult situation wherein the loan recipient must scramble to restore jobs in a short timeline.

Finally, it is important to note that regardless of the number of FTEs, the 60% payroll cost requirement will continue to apply for forgiveness.  This, however, is a significant improvement for businesses over the previous 75%.  The “trade-off” for this reduction is that failure to devote a sufficient portion toward payroll costs will forfeit all forgiveness so loan recipients should carefully monitor this percentage