President Trump has signed into law the Paycheck Protection Program Flexibility Act of 2020 (Flex Act). In the wake of criticism from many business owners, the Flex Act seeks to address a number of shortcomings of the Paycheck Protection Program (PPP). Most notably, the new legislation is targeted at two requirements of the PPP—the 8-week Covered Period and 75% payroll requirement—which have resulted in businesses being forced to use loan proceeds to cover payroll despite reduced or entirely shuttered operations.
Accordingly, the Flex Act extends the 8-week Covered Period—the original measurement period in which funds were required to be expended in order to be forgiven—to 24 weeks or until the end of the year, whichever comes first. Borrowers are still permitted to utilize the original 8-week Covered Period at their discretion. Additionally, the threshold requirement that 75% of PPP loan proceeds be expended on eligible payroll costs has been lowered to 60%. Consequently, the recipients of PPP loans will now have more flexibility to use a greater proportion of proceeds to cover non-payroll eligible expenditures—such as utilities, rent, and mortgage interest payments.
While the above changes are assuredly welcome reprieves from the rigidity of the PPP, the Flex Act is not without its own unique challenges. In the absence of further regulations or guidance, the Flex Act appears to create a “cliff effect” as it relates to the 60% payroll cost mandate. As written, the Flex Act will only permit forgiveness for borrowers who utilize “at least 60%” on payroll costs which represents a departure from the CARES Act. Thus, if a borrower comes up short of the 60% mark, the entirety of the loan is ineligible for forgiveness rather than simply resulting in a proportional reduction of eligible forgiveness. Moreover, it must be acknowledged that the passage of the Flex Act at this point will greatly disadvantage those early recipients of PPP loans as those who received funding in early April have already expended a majority of the proceeds while operating on the 8-week Covered Period timeline.
The Flex Act additionally provides for the following:
Creates a minimum maturity date of five years for PPP loans originated on or after the passage of the Flex Act—borrowers who have already received PPP loans may want to discuss with lenders whether maturity dates could be amended in light of this change.
Extends the workforce restoration period from June 30th to December 31st. In conjunction with the extended Covered Period, employers will now have until 12/31/2020 to restore total employee headcount to pre-pandemic levels.
Extends the deferral period for making payments on the loan for those who do not have the proceeds forgiven. Rather than a 6-month deferral, the Flex Act would not require repayment until 10 months after the last day of the Covered Period.
Permits PPP loan recipients to delay payment of the employer portion of social security taxes for all payroll paid from March 27, 2020, through the end of 2020. Borrowers will now be able to defer the payment until 2021 when 50% will be due with the other 50% becoming due in 2022.
Borrowers who have already received PPP loans may want to discuss with their lenders whether their existing loan documentation could be amended in light of the above changes.
On June 1, 2020, the Centers for Medicare and Medicaid Services (CMS) revised its Medicare Fee-for-Service (FFS) billing instructions related to the response to the COVID-19 Public Health Emergency (PHE). The revised instructions clarify when physicians, providers, and suppliers who bill for services provided to Medicare beneficiaries during the PHE must use modifier CR (catastrophe/disaster related) and/or condition code DR (disaster related) when submitting claims to Medicare. The revised instructions also include a chart of blanket waivers and flexibilities that require the modifier or condition code. The guidance is provided in CMS MLN Matters Special Edition Article SE20011.
On Wednesday, June 3, 2020, during his daily update, Governor Andy Beshear provided an overview of Kentucky’s efforts to combat the novel coronavirus 2019 (COVID-19) public health emergency (PHE). He noted that Kentucky was one of the first states to declare a state of emergency on March 6, 2020. Then, on March 26, 2002, the Governor launched Healthy at Home, with information, advice and restrictions aimed at ensuring social distancing and protecting the state’s health care operations. Governor Beshear reported that studies by the CDC, the University of Louisville and the University of Kentucky all show that these early actions saved thousands of Kentuckians’ lives.
On April 27, 2020, the Governor began reopening parts of the healthcare sector with Healthy at Work for Healthcare Facilities, a four-phase, gradual reopening of healthcare services (not applicable to long-term care settings). Phases I, II, III and IV are all now underway, with Phase IV having begun on May 27, 2020. Under Phase IV, non-urgent/non-emergent inpatient procedures can proceed at volumes determined by each healthcare facility. Visitation restrictions, however, remain in force: a single (one) visitor/support person per patient based on the best judgment and discretion of the facility. For additional information, see the Governor’s Healthy at Work for Healthcare Facilities website and Order.
Then, on May 11, 2020, Governor Beshear began reopening the non-healthcare sectors of Kentucky’s economy that had been closed due to the COVID-19. In his June 3rd update, the Governor reported that Kentucky is nationally recognized as among few states that are meeting the White House and CDC guidance for reopening the economy. The reopening, called Healthy at Work, has been a phased approach that is intended to guide businesses and healthcare providers through a “smart, safe and gradual” reopening during the continuing COVID-19 PHE. It is based on criteria set by public health experts and advice from industry experts. Each phase of Healthy at Work will be rolled out in steps to ensure the Commonwealth’s citizens can safely return to work while still protecting the most vulnerable Kentuckians.
Minimum Requirements Applicable to All Reopenings. Healthy at Work has continued with a phased reopening of specific business and organizational sectors. However, pursuant to the Governor’s Executive Order of May 11, 2020, all entities in the Commonwealth shall comply with certain “Minimum Requirements” attached to that Executive Order, in addition to business or activity-specific requirements. While all entities and activity organizations should carefully review the Minimum Requirements (English – Española) , the Healthy at Work webpage highlights the following requirements:
As emphasized by the Governor, compliance with the above Minimum Requirements is essential to protect employees in all businesses, organizations and activities – both healthcare and non-healthcare – as well as to protect the individuals with whom employees may come into contact both inside and outside of their work and other activities. The Minimum Requirements are applicable to all businesses, both those that have reopened and those that had continued to operate throughout the COVID-19 PHE.
As set forth in the Minimum Requirements, if any entity fails to comply with the Minimum Requirements, they can be reported to KYSAFER at 833-KYSAFER or kysafer.ky.gov.
Industry Specific Guidance and Timeline for Reopening. Industry specific guidance will be in place for each business sector under Healthy at Work. The Governor has stated in his daily updates that the business community submitted over 1,000 industry specific proposals on best practices to safely operate within each industry’s capabilities, while keeping employees and customers safe. The timeline for reopening each business sector and the industry-specific requirements for each sector that will apply to all businesses even if they never ceased operations during the state of emergency is as follows (Specific requirements that are new with this update are flagged below as “New!”):
Horse racing (no fans)(only authorized employees, Kentucky Horse Racing Commission license holders who have a horse stabled at a racetrack, and those providing support for a horse stabled at a racetrack at the racetrack, e.g., racetrack employees, trainers, assistant trainers, exercise riders, grooms, hot walkers, jockeys, veterinarians, farriers, and feed vendors) – Specific requirements
The Specific Requirements are also available in Spanish on the Healthy at Work webpage.
Information on specific requirements that have not yet been posted will be announced during the Governor’s daily updates as they are approved. Although not required to reopen, the Governor encourages industry groups, trade associations, and individual businesses to submit reopen proposals that discuss strategies and challenges they face in safely reopening. All proposals are to be evaluated according to White House guidelines and other public health criteria to ensure that Kentucky businesses and other activities are able to comply with public health protocols and CDC guidelines.
Healthy at Work Signage & Other Resources. Kentucky’s Healthy at Work webpage contains links to several resources businesses can use to help implement the Minimum Requirements. These include signage for employees and customers in English, Spanish and French, including signs for Healthy at Work compliance, Do Not Enter if Sick signs and Grocery Store Signage. There is a link for businesses who need hand sanitizers and masks as well as a video on how to make a simple mask out of a bandana. The Governor’s Office has developed a Frequently Asked Questions (FAQs) webpage to answer questions on how the Commonwealth is reopening the state’s economy under the Healthy at Work plan.
The Governor frequently reminds the public during his updates that any of the planned reopenings could be paused as needed to protect public health, especially if the Commonwealth’s progress in the fight against COVID-19 is threatened if Kentuckians let their guard down as a result of the reopenings.
While skilled nursing facilities and nursing homes have received heavy scrutiny during the COVID-19 pandemic, the Centers for Disease Control and Prevention (CDC) has recommended prompt reporting of COVID-19 cases at assisted living facilities as well. These facilities, which provide personal care to residents (as opposed to medical care provided in nursing homes), are not required to report cases to the National Healthcare Safety Network whereas nursing homes are, but the CDC strongly recommends that assisted living facilities immediately notify the appropriate health department of suspected or confirmed COVID-19 cases and follow other strict guidelines for the protection of staff and residents.
As previously reported, all nursing homes are required to inform residents, families, and representatives of COVID-19 cases in their facilities and to report COVID-19 cases and deaths directly to the Centers for Disease Control and Prevention (CDC). The Centers for Medicare & Medicaid Services (CMS) has also issued a memorandum to state survey agencies instructing them on the performance of on-site surveys of nursing homes with past or reported COVID-19 cases for the purpose of identifying and correcting violations of longstanding infection control practices. CMS will impose civil monetary penalties and other enforcement actions to ensure that deficiencies are addressed. More information can be found here.
Health care providers may face whistleblower suits and increased scrutiny by the Department of Justice (DOJ) related to the receipt of funds under the CARES Act. When providers accept funds, they must sign an attestation agreeing to the terms and conditions, which specify that the money can only be used to prevent, prepare for, and respond to COVID-19 or reimburse for expenses and lost revenues attributable to the virus. While HHS has said it doesn’t currently have any enforcement actions against providers regarding the use of these funds, potential whistleblowers are contacting attorneys to explore filing qui tam suits under the False Claims Act to alert the DOJ to potential misuse. More information is available here.
On June 2, 2020, the Department of Health and Human Services (HHS) announced that it is distributing an additional $250 million to hospitals and health care providers pursuant to the CARES Act. The funds will support health care entities in training workforces, expanding telemedicine and virtual care, procuring supplies and equipment, and coordinating responses to the COVID-19 pandemic. HHS distributed $100 million to health care providers in April, bringing the total distributions to $350 million. The breakdown of how funds have been distributed can be found here, including a total of roughly $4.5 million to Kentucky providers.
In its Pandemic Preparedness in the Workplace and the Americans with Disabilities Act, the Equal Employment Opportunity Commission (“EEOC”) confirmed that, during a pandemic, an employer may require employees to wear personal protective equipment that is designed to reduce the transmission of infection, including face masks or gloves. As businesses reopen, many employers are requiring employees to wear masks. And some state and local governments are requiring or recommending that masks be worn in public. So what can an employer do if an employee refuses to wear a mask? Click here to read more.
The deep economic shocks emanating from the shelter-in-place orders caused by the Covid-19 pandemic are still reverberating through the nation’s economy. While discussions of further stimulus have begun in Washington, it is unlikely any further legislation passed will contain programs as substantial for businesses as the Paycheck Protection Program (PPP) and other programs implemented by the CARES Act. At the time of this writing, the PPP has provided over 4.4 million loans to small businesses across the United States totaling more than $510 billion; however, many argue that does not go far enough to aid businesses. Due to restrictions placed on the use of PPP loan proceeds for forgiveness, recipients must expend at least 75% of PPP loan proceeds on eligible payroll costs. While such restriction is intended to ensure that Americans are employed, the 75% mandate does not leave a significant sum for business owners trying to meet rent/mortgage, utilities, and other obligations. Furthermore, unless the forgiveness period for using the PPP loan proceeds is extended beyond the initial eight-week period to a much longer period, restaurants and other recipients that cannot fully staff operations due to safety concerns and governmental restrictions will not fully benefit from the intended forgiveness provisions. Borrowers that do not receive forgiveness will then find the loan term of two years very challenging.
Accordingly, in addition to the PPP, many business owners have applied for Economic Injury Disaster Loans (EIDL) administered by the Small Business Administration (SBA). The intent of the EIDL was to provide capital at a reasonable interest rate to businesses to help them through limited operations due to the pandemic. Terms include:
Historically, the maximum loan amount was $2 million dollars. With the pandemic and increased demand, loans are now capped at $150,000. This lower amount makes the EIDL less appealing to many businesses, especially when coupled with the other terms described below.
EIDLs may be used for ‘working capital’ such as costs due to supply chain interruption, to pay obligations that cannot be met due to revenue loss and for other uses, but only to alleviate economic injury caused by disaster occurring in the month of January 31, 2020 and continuing thereafter. In addition to other remedies, any misapplication of loan proceeds could result in civil liability to SBA for one and one-half times the proceeds disbursed.
No personal guarantee is required because the loan is less than $200,000.
Fixed interest rates of 3.75% for small businesses and 2.75% for nonprofit entities.
Typically payments commence after 1 year and the maturity date is in 30 years, although the borrower may prepay the loan in part or in full at any time, without penalty.
While EIDLs offer additional flexibility for business owners in need of funds, there are important restrictions that applicants must be aware of, some of which may interfere with a business’ operations in the normal course.
One important consideration is that for EIDLs in excess of $25,000, the SBA will take a security interest in all ‘Collateral’ defined as:
“all tangible and intangible personal property, including, but not limited to: (a) inventory, (b) equipment, (c) instruments, including promissory notes (d) chattel paper, including tangible chattel paper and electronic chattel paper, (e) documents, (f) letter of credit rights, (g) accounts, including health-care insurance receivables and credit card receivables, (h) deposit accounts, (i) commercial tort claims, (j) general intangibles, including payment intangibles and software and (k) as-extracted collateral as such terms may from time to time be defined in the Uniform Commercial Code.”
Borrowers must determine whether obtaining the EIDL and providing a security interest in the Collateral is a violation of any existing loans, thereby requiring the prior consent of existing lenders. Borrowers will be charged for Uniform Commercial Code (UCC) lien filing fees after including the indebtedness tax and a third-party UCC handling charge of $100, all of which will be deducted from the EIDL proceeds.
Borrowers need to be aware that the SBA EIDL documents restrict the sale or transfer of any collateral (except for normal inventory turnover in the ordinary course of business) without prior written consent of the SBA. If borrowers keep the loan for the entire term, disposing of obsolete Collateral will be a cumbersome process.
More importantly, many borrowers have existing lines of credit secured by some or all of the Collateral. Because any such preexisting line of credit will have a superior lien compared to the SBA’s security interest, and after receipt of an EIDL, the business will need the consent of the SBA to utilize the line of credit for any purpose, including inventory purchases or other regular business operations, there will be delays in normal business operations. Borrowers must therefore be aware that until they repay the EIDL in full, they are likely to be prohibited from seeking or accepting any future advances under existing lines of credit, and that other lenders may be hesitant to extend new lines of credit when they will not have a first priority position in the Collateral. This has the, perhaps unanticipated, effect of either making lines of credit unavailable to borrowers, or causing unaware or desperate borrowers to breach the terms of their EIDL and possibly their existing lines of credit.
While these restrictions, and numerous others included in the EIDL documents, may not ultimately cause a business owner to decline an EIDL, it is important to understand the implications and restrictions prior to accepting the loan. Any default could result in the entirety of the loan balance becoming immediately due and payable, and any false statement or misrepresentation may result in criminal, civil or administrative sanctions.