Congress passed a second round of funding for the Payroll Protection Program (PPP) last week after the initial $349 billion was depleted in less than two weeks of the program’s launch. The next round of money includes $310 billion to replenish PPP funds, as well as an additional $60 billion to fund more low-interest Economic Injury Disaster Loans (EIDL) through the Small Business Administration (SBA). Both programs are part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), a $2 trillion economic relief package to protect Americans workers and families against the public health and economic impacts of COVID-19.
As part of our ongoing efforts to support healthcare organizations in their COVID-19 response efforts, Phreesia held a webinar with law firm Goodwin Procter LLP, “CARES Act and Your Medical Practice: What You Need to Know. The webinar featured Andrew Pusar and Kevin Grumberg, partners at Goodwin Procter, who discussed details of the CARES Act Relief Programs and how healthcare organizations can take advantage of the stimulus legislation. They also answered questions about eligibility requirements, independent contractors, how payroll costs will be calculated, how employees will be counted, the use of the proceeds and what medical practices should do to prepare their applications.
What follows is a lightly edited transcript of the webinar’s audience Q&A, as well as additional questions that Goodwin Proctor attorneys answered after the event.
Q: For what period do you measure the monthly payroll costs to determine the loan value?
A: Applicants can use the average monthly average payroll for either the last 12 months or the calendar year 2019. The choice is up to the applicant, but the loan value remains subject to the required adjustments, particularly disregarding compensation on salaries over $100,000.
Q: I understand the 75% of pay requirement for loan forgiveness, but is there a threshold for the number of employees that must be maintained?
A: The 75% requirement applies to both permitted use of proceeds and what uses of proceeds are eligible for forgiveness. At least 75% of loan proceeds must be used for “payroll costs” and no more than 25% of the forgivable loan amount can be used for anything other than “payroll costs” (said another way, at least 75% of the amount of the loan to be forgiven must be used for “payroll costs”).
With respect to headcount and/or salary reduction, yes, this is a concern. Generally, speaking, the amount of the loan that is eligible to be forgiven will be reduced pro rata for reductions in headcount and for the amount of wage reductions in excess of 25%; provided that, if those reductions were made between February 15 and April 25 and are reversed (including the hire of new employees) and prior to June 30, they will be ignored. There are specific reference periods for measuring headcount and wage reduction and it can be trickier than it appears on first glance. Companies should consult with their accountants and/or attorneys on the calculations.
Q: Can you get monies from both the Cares Act and the EIDL?
A: You cannot borrow loans under both programs for the same purpose. However, COVID 19 EIDLs cover losses and Paycheck Protection Loans are cover, by and large, payroll costs. If you have borrowed a COVID-19 EIDL (after January 31, 2020), the PPP program does permit you to refinance that EIDL into your PPP loan. However, care should be taken in doing so, including that you should consider whether (or not) you have used your COVID-19 EIDL proceeds on payroll costs that are eligible to be forgiven.
Q: If you get the $10,000 from the EIDL and the PPP, will the $10,000 grant from the EIDL be subtracted from the forgiveness portion of the PPP?
A: Yes. The (up to) $10,000 advanced under a COVID-19 EIDL is not required to be repaid (and is sometimes referred to as a “grant”), and if you refinance your COVID-19 EIDL into your PPP loan, the amount that is forgivable under the PPP loan will be reduced by that amount.
Q: Can K-1 partners be included on the application and receive funds for their payroll?
A: The SBA has issued guidance that while members of a partnership are NOT employees of that partnership, in the interest of minimizing the volume of applications, partners should not apply directly themselves on the basis of self-employment. Rather, their self-employment income should be reported as payroll costs of the partnership (i.e., one application to cover amounts for all partners and employees of the partnership). With that said, this question and the related calculations remain complicated, at the intersection of employment law and tax law, as well as the CARES Act, so you should consult with your attorney and/or accountant on this question.
Q: Regarding the exclusion of incomes over $100K in the PPP, does this mean that funds cannot be used to pay employees who earn more than $100K per annum AT ALL, or that funds can only be used for the pro-rated portion of such salaries up to $100K?
A: From a use of proceeds perspective, “payroll cuts” includes wages not in excess of $100K, so those excess amounts should count towards using the loans for permitted purposes. However, treatment of $100K earners for the purposes of determining what amount of the loan is eligible for forgiveness has further nuance to it, and fulsome regulations on forgiveness have yet to be published. You should consult with an attorney/accountant to ensure you are treating those payroll costs properly.
Q: Can you apply for a PPP loan directly from the SBA?
A: No, you must apply through an SBA-approved lender. The SBA provides a guaranty of the loan to certain approved lenders; it does not make PPP loans.
Q: What does the owner who does not take a salary from the practice do to qualify under the PPP?
A: To the extent they view themselves as self-employed or a sole proprietor, PPP does contemplate them applying in their own right for their personal behalf. The SBA’s recent guidance indicates that the “payroll costs” calculation to determine the loan size of a self-employed person will be based on his or her completed Form 1040 Schedule C for calendar year 2019 (whether or not filed with the IRS at the time of application). However, this can be complicated, so we recommend you speak with your accountant or attorney.
Q: We dropped about 10 FTEs on Jan 1, 2020. Therefore, we will naturally have a drop in FTEs from 2019 average to the 8-week measurement period. Are we comparing cost from the 2019 average to the 8-week average? Or FTEs? What if you have new employees who were not employed in 2019?
A: Employee counts are based on headcount, not specific employees, so if some employees leave and other employees are hired, the new hires will “count”. You count employees for different purposes in connection with PPP loans: (a) first, to determine the size of your business (and this count includes all part-time, full-time and other employees, (b) second, indirectly in determining the loan amount for which you may be eligible (i.e., in connection with “payroll costs”, and (c) third, measuring whether there has been a headcount reduction that will reduce the amount of the loan eligible to be forgiven. With respect to headcount reductions, you would be comparing your average full time equivalent headcount during the 8-week measurement period to your average full time equivalent headcount during one of two periods of your choice: either Feb 15, 2019 to June 30, 2019 or Jan 1, 2020 to Feb 29, 2020. With that said, you should consult with an attorney or your accountant to make sure you are making the appropriate calculation for each scenario.
Q: If I am a shareholder in a surgery center (minor shareholder) and also the owner of my practice, do I need to designate as an affiliate?
A: Whether or not you are an “Affiliate” for purposes of determining size status of an applicant for a PPP loan will depend on a review of the facts and circumstances surrounding your ownership, and in particular your control rights, of the center, as well as the relationship between the practice entity and the surgery center.
Q: Are independent contractors or other ‘employees’ who receive 1099s included in the PPP application?
A: For purposes of determining payroll costs, individuals who receive 1099s (i.e., independent contractors) are excluded. Note that the SBA has its own rules for determining whether an “independent contractor” should be counted as an employee for the purposes of determining size status. So, you may want to consult with an attorney. Note that independent contractors can apply separately on their own personal behalf for a PPP loan (as self-employed).
Q: Can I apply with two different banks and see which application gets processed first?
A: The form application includes a certification that the applicant has not and will not receive another loan under the Paycheck Protection Program–you should make sure that certification remains true at all times.
Q: Does the PPL allow for health insurance costs as well?
A: Yes. Group health care benefits are included in the definition of “payroll costs” for determining loan size and forgiveness amounts.
Q: When calculating forgiveness, do you apply the $100K cap and do you calculate the expenses incurred during the 8-week period or expenses paid in the 8-week period?
A: With respect to the incurred vs. paid distinction, the CARES Act states that forgiveness will extend to costs incurred and payments made. At this time, full guidance on forgiveness has yet to be published, so it is unclear whether this implies cash or accrual based accounting; early indicators point to cash basis, but that could change. Regrading the $100K threshold, please see the response to Question #6 above.
Q: Are small businesses established in 2020 eligible for this program? How can you prove the payroll amount?
A: Yes, they are. If you were not in business during the period beginning on February 15, 2019 and ending on June 30, 2019, then your loan size will be determined based on your average monthly “payroll costs” during the period of January 1, 2020 to February 29, 2020.
Q: Can a practice qualify for the loan even if it can continue to operate the business without the loan? Does a businesses’ analysis change, and can it still qualify, if it is owned by large companies with adequate sources of liquidity to support the business’s ongoing operations?
A: The SBA has firmly indicated that, in addition to reviewing applicable affiliation rules to determine eligibility (which may be impacted by institutional investor ownership), all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. And while the CARES Act does not mandate that borrowers must be unable to obtain credit elsewhere, borrowers still must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. The SBA has indicated, for example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. We recommend that any company thoroughly consider this matter at the board (or equivalent) level in light of this guidance and be prepared to respond to the SBA should it request the applicant’s basis for its certification. Note that for borrowers who have already been approved, or have received funds, that have doubts on this issue, the SBA has said that a borrower’s repayment of its loan in full by May 7, 2020 will result in that borrower being deemed by SBA to have made the required ‘necessity’ certification in good faith.