An Overview of the Paycheck Protection Program Flexibility Act of 2020

The President signed the Paycheck Protection Program Flexibility Act of 2020 on June 5th. This Act covers important changes to the requirements for forgiveness under Paycheck Protection Program (“PPP”) Loan, and offers further clarification on eligible expenses and FTE employee reduction to your loan forgiveness. The below overview is an update to our previous resource pages; SBA Paycheck Protection Program (PPP) Loans – Clarity, Relief & A Surety’s Perspective, which includes the previous clarification on the PPP loan forgiveness along with a perspective from the Surety industry.

Key changes under the Paycheck Protection Program Flexibility Act of 2020;

  • Current PPP borrowers can choose a 24-week period, rather than an 8-week period to spend PPP funds.
  • New PPP borrowers will have a 24-week covered period which cannot extend beyond December 31, 2020.
  • The payroll expenditure requirement is now 60%, rather than 75%. If at least 60% of loan proceeds are not spent on payroll costs, there is no loan forgiveness.
    • Note that technical modifications in the future could restore partial forgiveness for loans that do not meet the 60% threshold.
  • The June 30th deadline to restore workforce levels and wages is extended to December 31st.
  • There are two new alternatives for a borrower to restore a potential reduction in forgiveness:
    • An inability to find qualified employees to replace those let go; and,
    • An inability to restore the business operations to February 15, 2020 levels due to COVID-19-related operating restrictions.
  • The PPP loan term is extended from two years to five years. An updated loan agreement with the bank may be required. (Borrowers should reach out to bankers regarding loan modifications.)
  • Companies that participate in the Payroll Protection Program Loan program will be eligible to defer the company portion of payroll taxes throughout 2020. This is a change from being eligible for the payroll tax deferral only through the date a company receives loan forgiveness.

Changes to eligible forgiveness expenses and clarification on FTE employee reduction to your loan forgiveness:

Please note, with regards to eligible expense, some language under the new act lends itself to interpretation and further clarification is anticipated.

Payroll Related Expenses:

  • Wages – Eligible payroll costs include payroll costs paid and incurred during the covered period, which is the 24-week (or previously 8–week) period commencing on the date the business receives PPP funds from a financial institution. Payroll costs are considered incurred on the day an employee’s pay is earned. In addition, payroll costs incurred during the 24-week period and paid on or before the next regular payroll date are eligible for forgiveness. This means that each payroll paid during the 24-week period counts toward forgiveness, as do payroll costs incurred during the last pay period of the 24-week period that are paid in the first regular payroll period following the 24-week period.
    • Borrowers who pay their employees biweekly or more frequently also have the option to elect an Alternate Covered Period. This period starts with the first day of the employee’s pay period, following the date the loan proceeds are received.
  • Health Insurance – Eligible costs include costs paid or incurred during the 24-week (or previously 8–week) period. These costs include self-insurance programs and employer-sponsored group health plans, reduced by employee contributions. It appears that accrued costs paid during the 24-week period will count toward forgiveness.
  • Retirement – Eligible costs include costs paid or incurred during the 24-week period. There do not appear to be any limitations on retirement contributions, including accrued costs, paid during this period. This may be an opportunity for companies to pay 2019 accrued retirement; we recommend discussing this option with your CPA and Plan Administrator for further guidance.
  • Employer-Level State Taxes – Eligible costs include amounts assessed on employee compensation and paid by the borrower. This appears to include state-level employer taxes paid by the borrower through a payroll company, rather than only taxes paid directly to the state agency. State withholding taxes are not included.

Non-Payroll Related Expenses:

  • Rent – Eligible costs include rent or lease payments pursuant to an obligation in force before February 15, 2020, for real or personal property. Vehicle and equipment leases will count.
  • Mortgage Interest – Eligible costs include interest on any business mortgage obligation in place before February 15, 2020, for real or personal property. Vehicles and equipment will count.
  • Utilities – Eligible costs include electricity, gas, water, telephone, internet, and transportation costs where service began before February 15, 2020. There is still no guidance regarding what costs are included in “transportation,” other than gas for business vehicles which was indicated in previous guidance.

Reductions in FTE Employees Clarification;

  • The amount of loan forgiveness will be determined without regard to a proportional reduction in the number of full-time equivalent employees if, in good faith, you are able to document an inability to return to the same level of business activity you were 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 from March 1, 2020 to 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.

As always we are here to help and welcome any questions you may have. However, if you have specific questions on your PPP loan and the forgiveness application process, we also recommend that you consult with your CPA, Banker and Attorney.

You may view the new Act here.