The Paycheck Protection Program — A Viable Lifeline for Healthcare Providers?
In March 2020, during the wake of the wake of the COVID-19 crisis, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act. The CARES Act, which earmarked $2.2 trillion in federal funding to help struggling American businesses, rolled out the Paycheck Protection Program in an attempt to incentivize businesses to retain employees during the crisis.
The Paycheck Protection Program (PPP) was enacted as part of the CARES Act to incentivize small businesses to retain their employees[1] by providing [2] funds to cover up to eight weeks of employee payroll expenses (“the covered period”), including benefits. Since its creation, the PPP has gone through two rounds of funding, issuing over 4.6 million loans which totaled to $514 billion.[3] To date, the PPP has approximately $130 billion in remaining funds, which it will continue to distribute to eligible businesses who file the PPP application.[4]
PPP Eligibility and General Background
In order to be eligible to receive a PPP loan, a business must have less than 500 employees[5] or have an annual revenue which falls within the North American Industry Classification System Codes (NAICS) annual revenue size standard.[6] In addition, the business must have been in operation since February 15, 2020. In order to obtain a PPP loan, eligible businesses must apply through a BA7(a) lender or through a participating federally insured depository institution, federally insured credit union, or Farm Credit System institution. If the business is approved, it can expect to receive funding within 10 business days or earlier. The amount of PPP funding which an eligible business receives equals the lesser of 2.5 times (250%) the business’s average monthly payroll costs or $10 million. Businesses that qualify for PPP funding (“borrowers”) receive PPP loans[7] which can be fully forgiven if the borrower complies with certain spending, employee retention, and employee compensation requirements. Any portion of the PPP Loan which is not forgiven is subject to a 5-year term at 1% interest with no interest payments due until the SBA disburses the forgiveness loan amount or until 10 months after the last day of the borrower’s covered period.
Initial Requirements for PPP Loan Forgiveness
In order to qualify for full loan forgiveness under the original PPP, eligible businesses had to spend all of their PPP funds during the covered period, which was defined as the eight weeks from the date when the borrower received PPP funding or as the first day of the pay period following the disbursement of the PPP funds. In addition, borrowers had to spend at least 75% of the PPP funding on payroll costs,[8] and could not spend more than 25% of the funding on non-payroll costs, such as interest on mortgages, rent, and utilities.
Similarly, the PPP Loan Forgiveness program limited the amount of loan forgiveness[9] for which a business was eligible if, between the period of February 15, 2020 and April 26, 2020, the business reduced the compensation of employees (who earned $100,000 per year or less) by 25% or more, or if the business reduced its number of full-time employees.[10] The PPP rules stipulated, however, that if the borrowing business reversed these changes by June 30, 2020, it would regain its eligibility for full loan forgiveness.
Given the numerous restrictions and caveats of the original PPP, many small businesses were hesitant to take advantage of the free funding which the program provided. For example, many businesses could not spend the PPP funds within the eight-week covered period because they were forced to close as a result of COVID safety restrictions. In addition, many businesses had already terminated their workers by the time that they received their PPP funding, defeating the purpose for which the program was created.
The Paycheck Protection Program Flexibility Act
In an attempt to resolve some of these complications, Congress passed the Paycheck Protection Program Flexibility Act (PPPFA) on June 5th, 2020. The PPFA clarified the PPP and made it easier for businesses to obtain PPP aid and to qualify for full loan forgiveness. The PPPFA made numerous modifications to the PPP, which are outlined below:
● Increase of Covered Period Duration and Maximum Forgivable Compensation Amount: The PPFA extended the period for which a borrower can obtain PPP loan forgiveness (“the covered period”) from eight (8) weeks from the date that the PPP loan is disbursed[11] to 24 weeks after the PPP loan is disbursed OR December 31, 2020, whichever is earlier.[12] The forgivable compensation cap which could be received for each employee was increased from $15, 385 to $20, 833.
● PPP Loan Maturity Date Extended: The PPPFA changed the maturity date of the loan, or the date by which a loan must be fully paid off, from two (2) years from the date that the borrower requested loan forgiveness to five (5) years from the date that the borrower requested loan forgiveness.
● Loan Forgiveness Application Deadline Established: The CARES Act did not include a deadline for borrowers to apply to have their loans forgiven. After the passage of the PPPFA, borrowers must now apply for forgiveness within 10 months of the earlier of the last day of their covered period or December 31, 2020.
● Extended Deferral on Principal, Interest and Fee Payments: Under the original PPP, borrowers could defer the principal, interest, and fee payments on their PPP loans for a six-month period. Under the PPFA, borrowers do not have to start making payments of principal, interest, and fees on their loans until the SBA pays the bank which issued the initial PPP loan the loan forgiveness amount or until 10 months after the last day of the borrower’s covered period, whichever is sooner.[13]
● Deadline for Restoration of Reduced Employees or Compensation Extended: The PPFA changed the date by which borrowers had to restore their reduced employee headcount and/or compensation levels in order to remain eligible for full loan forgiveness from June 30, 2020 to December 31, 2020.
● Exceptions to Employee/Compensation Restoration Rule: The PPFA expanded the exceptions under which a borrower could reduce its full-time employee headcount without jeopardizing its loan forgiveness eligibility. Under the PPFA, borrowers do not lose their eligibility for full loan forgiveness if they can show that their reduction in employee headcount or compensation was caused by an inability to:
Rehire workers who were employed as of February 15, 2020, and to find similarly qualified workers by December 31, 2020; or
Return to the same level of business activity as before February 15, 2020 because of sanitation, social distancing, or other COVID-19 safety requirements.
● Percentage of PPP Funds Which Could be Used for Payroll Costs: The PPPFA decreased the percentage of total allocated PPP funds which the borrower had to spend on payroll costs (in order to qualify for full loan forgiveness) from 75% to 60%, and increased the amount of the funding that could be spent on non-payroll costs from 25% to 40%.
● Removal of Prohibition on Borrower Participation in Payroll Tax Deferral Provision: Under the original PPP, borrowers were prohibited from applying for payroll tax deferrals on payroll tax deposits which were made after the PPP loan was forgiven. Effectively, the rule barred borrowers from participating in the Payroll Tax Deferral Program which was created under the CARES Act. The PPPFA removed this prohibition, permitting borrowers who receive full loan forgiveness to defer payment of 50% of 2020 payroll taxes until December 31, 2021 and 50% until December 31, 2022, and self-employed individuals may defer the payment of 50% of the Social Security tax on their 2020 net earnings from self-employment until December 31, 2021.
Given the significant amount of funding that remains available through the PPP (i.e., $130 billion) and the relatively lenient terms for obtaining full or partial PPP loan forgiveness, eligible healthcare providers and suppliers should not hesitate to take advantage of this unique opportunity. To learn more about the Paycheck Protection Program, eligibility requirements, and the application process, please visit the PPP Section of the Small Business Administration website, at https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.
[1] To date, the PPP has received $350 billion in initial funding and $310 billion in supplemental funding.
[2] In order to qualify as a “small business” for purposes of the PPP loan, a business has to employ fewer than 500 employees. Eligible businesses include nonprofits, veterans' organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors. In addition, some businesses with more than 500 employees are eligible if they belong to certain industries.
[3] See Paycheck Protection Program, Small Business Administration (last updated June 19, 2020), at https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program. The first round of PPP funding occurred in early April 2020 and oversaw the distribution of $ 349 billion in PPP funds. The Government allocated an additional $ 310 billion to the second round of PPP funding, which took place in late April 2020. However, only $180 billion of that funding has been issued thus far.
[4] See Stacy Cowley, $130 Billion in Small-Business Aid Still Hasn’t Been Used, New York Times (June 10, 2020), at https://www.nytimes.com/2020/06/10/business/Small-business-loans-ppp.html.
[5] Solo entrepreneurs, independent contractors and owners of sole proprietors can qualify for PPP funding.
[6] For a list of NAICS revenue size standards for the healthcare industry, see SBA Table of Small Business Size Standards, https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019.pdf, at page 38.
[7] Under the PPP, the borrower’s loans are deferred for six months. The borrower does not have to provide any collateral or personal guarantees in order to qualify for the loans and is not required to pay any fees. In addition, the CARES Act allowed PPP loans to have a term of up to 10 years after the date loan forgiveness was requested, but the Small Business Administration (SBA) limited the loan term to two years.
[8] Payroll costs include payment of group health care benefits during periods of paid sick, medical or family leave, as well as insurance premiums. However, the PPP does not reimburse a business for wages paid to 1099 employees (i.e., independent contractors). Rather, those contractors can apply for a PPP loan on their own behalf.
[9] Borrowers who reduced their full-time employee headcount and/or employee salaries and wages would have their loan forgiveness amount decreased by the number of employees who were let go or by the cumulative decrease in employee compensation.
[10] This rule does not include those employees who voluntarily quit, refused to return to work, were terminated for cause, or who voluntarily requested reduced hours.
[11] Or eight weeks from the “alternative payroll covered period” which begins on the first day of the pay period following the date that the PPP funds were disbursed.
[12] However, the PPPFA allows businesses who received the PPP loan before June 5, 2020 to keep their original CARES eight-week forgiveness period.
[13] However, interest continues to accrue on the PPP loan during the payment deferral period.
