What Coverage Period Can I Use when Applying for Forgiveness?
The Economic Aid Act which became law on December 27, 2020, extends the authority to make PPP loans through March 31, 2021, and revises certain provisions of the original PPP law included in the CARES Act. Revision is important in that unless specifically stated the revisions apply to both round 1 and round 2 loans.
An area of confusion, and many misleading articles in the press and blogs, is the concept of the loan forgiveness “covered period”. The Cares Act originally defined the “covered period” as 8 weeks from the day that PPP loan proceeds were deposited into the borrower’s bank account. The Cares Act allowed a borrower to ask for forgiveness for all eligible expensed disbursed within the 8-week “covered period”. In June 2020, the PPP Flexibility Act became law and included a new definition of the “covered period”. With the change, borrowers who received their loan proceeds prior to June 5, 2020, could choose between a covered period of 8 weeks or a covered period of 24 weeks. All loans disbursed after June 5th were required to use a covered period of 24 weeks. Neither choice is ideal. A selection of 8 weeks would put a borrower at risk of not being able to fully disburse 100% of the loan proceeds and therefore provides less job security to their employees. A selection of 24 weeks could extend well beyond the full disbursement of loan proceeds leaving an employer exposed to an extended period during which forgiveness penalties could be triggered by layoffs. If an employer who had exhausted loan proceeds was forced to lay off employees, the employer would be subject to loan forgiveness penalties despite having spent the loan proceeds on payroll to provide job security during the pandemic.
Definition of The Loan Forgiveness
The Economic Aid Act is designed to eliminate the shortcomings of each choice. The new definition of the loan forgiveness “coverage period” begins on the date the lender deposits the PPP loan proceeds into the borrower’s bank account and ends on any date selected by the borrower that occurs no earlier than 8 weeks from the date of disbursement and no later than 24 weeks after the date of disbursement. This change allows each borrower to create a coverage period specific to their circumstances to use the full proceeds of the loan to protect jobs without risk of penalty in the forgiveness process.
It is important to understand that the choice of coverage period will impact when the first payment on the loan would be due. If a borrower does not submit a request for forgiveness within 10 months from the last day of the selected coverage period, the borrower must begin making principal and interest payments based on the payment schedule established for the loan by the lender.
The new flexibility to choose the length of the coverage period will also serve to reduce the difficulty of applying for forgiveness by removing most borrowers from the complexity of the loan forgiveness calculations that discount forgiveness for reductions in employee earnings or in the number of full-time equivalent employees employed.