PPP Forgiveness: What Physicians and Medical Practices Need to Know
There’s no denying that the great Coronavirus shutdown has been tough for most healthcare providers. With the CARES (Coronavirus Aid, Relief and Economic Security) Act Paycheck Protection Program (PPP) loans beginning to hit business bank accounts in waves, relief is finally on the way for some physician practices.
As soon as funds are received, businesses can begin allocating funding to “approved costs”—defined primarily as payroll, and secondarily as standing costs such as utilities or rent. What made this loan so attractive in the first place is the forgiveness clause: if they meet certain stipulations, borrowers may be “forgiven” from repaying the principal—for up to 100% of the loan amount.
Here’s what you need to know to maximize forgiveness and minimize repayment.
Dollars and cents: Understanding PPP-permitted expenses
The CARES Act clearly outlines what borrowers can spend the principal on. Expenses allowed under PPP include:
- Payroll and tips. Employers are required to pay the full amount of W-2 wages employees earned in a standard quarter, excluding any per-employee wages that exceed $100,000 per year. Note that fees paid to independent contractors (1099s) are not included here. See below for the ratio of full-time equivalent (FTE) employees to be maintained.
- Benefits and leave. Paid sick, medical, and family leave and full group benefits are permitted (and required) payables under PPP. This holds true for employees whose income exceeds $100,000—they would receive the maximum $100,000 salary plus their standard benefits.
- Utilities. Businesses may use their PPP funds for any business-related electric, gas, telephone, internet, transportation, and water services set up before February 15, 2020.
- Mortgage interest. Practices that mortgaged their office space prior to February 15, 2020 can use PPP funds to pay their owed interest—but not any owed principal.
- Rent. For leases signed before February 15, 2020, business tenants can apply PPP proceeds to ongoing rent.
In a nutshell, employers should look to first pay employee wages and benefits—and use the remaining funds for the above-listed costs.
Forgiveness rules and exceptions: Spending the loan
Once the loan is disbursed, businesses are required to spend it in full over the subsequent 8-week period, with at least 75% of the amount designated for payroll costs, and no more than the remaining 25% going to allowable non-payroll expenses. This provision is intended to incentivize businesses to retain full-time employees, with minimal reduction in wages.
Any furloughs, layoffs, or pay cuts of over 25% during that 8-week period counts against—and will reduce—the maximum loan forgiveness amount. If you’ve made decisions to furlough, lay off, or cut wages between February 15 and April 26, 2020, you have until June 30, 2020 to re-hire or reinstate employees and restore wages to pre-COVID levels*. If you don’t, you relinquish your forgiveness amount proportionately.
*Note: since the number of pre-COVID employees may fluctuate, there is a formula for determining pre-COVID employee levels to calculate forgiveness:
- First, determine how many full-time equivalent employees (FTEs) you’ve employed during the 8-week period following your PPP loan disbursement. Call this number A.
- Next, pick either of these pre-COVID periods:1/1/20 to 2/29/20 or 2/15/19 to 6/30/19. Calculate how many FTEs you had during your chosen period. Call this number B.
- Divide A by B to identify the percentage of forgiveness you’ll receive. For example:
- a. If A (your post-PPP number) is 8 and B (your pre-COVID number) is 10, you’d have an 80% forgiveness rate on the principal loan amount.
- b. If A is 25 and B is also 25, then your forgiveness rate is 100%.
If you reduced wages more than 25% for any given employee, your forgiveness would be reduced proportionately as well. If the salary of a given employee (employee X) has been reduced over 25% within the 8-week period, this will reduce your forgiveness by the same dollar amount. The caveat is that you may reduce the salary of an employee making greater than $100,000 without affecting forgiveness if their salary continues to exceed that cap.
Your business may have opted to defer Social Security tax under section 2302 of the CARES Act—and if so, you can still qualify for PPP forgiveness. Once your loan is forgiven, you cannot continue to defer and will owe the deferred payment on either December 31, 2021, and December 31, 2022.
Finally, if your practice received an advance or grant from the Economic Injury Disaster Loan (EIDL) program under CARES, your PPP forgiveness will also be reduced by the amount of the advance.
Everything else: Taking stock of repayment
To obtain maximum forgiveness at the end of the 8-week period, businesses need to collect documentation to show lenders that they used their funds appropriately. As of now, the required documents include:
- Your roster of full-time employees, payroll, and related expenses (taxes and unemployment filings)
- Receipt of qualifying forgivable rent, mortgage, or utility payments
- Any other documents specified by the U.S. Small Business Administration (SBA)
If you contract with a payroll provider, using official documentation from this party is sufficient.
The SBA has yet to provide guidance on when to apply for forgiveness and what the stipulations might be. Forgiveness may vary between lenders, so for any questions, contact your lender or bank for more information. You should be able to initiate the forgiveness process following the 8-week period and find out if forgiveness was approved no more than 60 days after applying.
For any portions of your loan that aren’t forgiven, expect a 1% interest rate, and a two-year repayment term. While 100% forgiveness is ideal, the interest rate is so low that repayment terms are generally low-stakes. Think of it as an investment in your business’s longevity—preparing your practice to grow once the storm passes (which it will).
If your practice was unable to obtain a Paycheck Protection Program loan, know there are other options for financial relief. We want to hear from you: how can we continue to help you navigate this crisis? Reach out to email@example.com to let us know.
Matt Haberman, CEO