The legislature, the Senate and House of Representatives have worked feverously over the last couple of weeks, not just in responding to the healthcare crisis around COVID-19, but [00:02:00] also to the blossoming economic crisis. The volatility in the stock market, the lack of economic growth and the ensuing recession that I think we all can feel unfolding beneath us have really given rise to immediate emergency economic stabilization. And so Congress and the president have passed over the last month, three different significant pieces of legislation at increasing levels of support [00:02:30] to the economy.
About a week ago on March 27th, they passed what is the CARES Act, which is a $2 trillion package of economic stabilization to really impact all Americans. From large fortune 100 companies like the cruise lines and airlines to small business owners like physicians, [00:03:00] dentists and every day middle-class Americans through different provisions of the bill. And so it was designed to have broad reaching effects that would touch everyone and we think it's going to do just that.
There's an enormous piece specifically designed for [00:03:30] the 30 million small business owners around the country. Again, many physicians and private practices are going to fall in that subset.
[00:04:30] From the ground floor, the CARES Act included a provision called the recovery rebate. And the recovery rebate is kind of the widely publicized $1,200 checks that will be coming out in the next week or so. That's $1,200 for individuals, $2,400 for married couples, but that's going to affect individuals with $75,000 and less of income or households with $150,000 and less. So typically, [00:05:00] you wouldn't think of that as being the physician demographic, but it does include physicians in training. So perhaps there's folks listening who are in residency or fellowship that would fall into those income limits and you should expect a direct deposit in the next couple of weeks of a $1,000 or $2,400, depending on your marital status.
With that said, kind of working up into the topic you were asking about with small business owners, the second or another part of the CARES Act is this [00:05:30] thinking of economic support for business owners, not just for their own incomes but capital to allow them to keep their employees on the payroll even though in many cases their businesses have been shut down based on some or the state and local ordinances and regulations. Or in the case of medical practices, their volumes have been significantly curtailed. Or for specialists, they're unable to do elective [00:06:00] procedures or surgeries. And so just the revenues are plummeting. And so the CARES Act provides sources of funds through two different loan provisions to give money to those practice owners to basically keep their payroll afloat as well as their mortgage and their utilities and operating costs.
New guidance coming out almost daily over the last couple days on different aspects of the bill, but the current understanding is that employees that have been released say, during the month of March or even early February, can be rehired as part of your head count before April 27th. And if you apply for one of these loans on April 27th, it's the head count then that can contribute [00:07:30] to the loan formula.
This gives a lot of flexibility. To be clear, there's two key loan provisions that I think have surfaced in some of the publications that are causing questions for our clients and your constituents. [00:08:00] The one type of loan is called the paycheck protection program or the PPP. I love how we all come up with acronyms [inaudible 00:08:08] very quickly. And the other, what's it now called an EIDL loan and it's E-I-D-L. Economic Injury Disaster Loan. So there are two different buckets of money that the federal government has set aside for small business owners.
The small business doesn't just mean one person with a couple staff, [00:08:30] small businesses is basically any entity that has less than 500 employees. So we're talking even large, multi-specialty practices are going to qualify for this.
But with this said, the EIDL loan, the E-I-D-L loan is really designed to provide operating capital to the business for their ongoing use and all but a tiny of that is loan capital that will need to be repaid [00:09:00] over a period of time that it looks like is up to 10 years.
So we don't see as many medical practices finding use for the EIDL loan provision. It is in fact more this triple P or the PPP paycheck protection program loan provisions that we think is a better fit for professional service firms like medical practices. And that loan is specifically designed for really about two or three key things. One is payroll, [00:09:30] two is rent or mortgage payments and three is utilities. That's what the PPP is designed for and its real selling point or attractive nature is the fact that that loan is eligible to be forgiven in its entirety if certain conditions are met.
The business had to be in business by February 15th of this year, 2020. They have 500 employees or fewer [00:10:00] employees and they have to have been impacted from the coronavirus.
Shane Tenny: No. Nope, I think there's a defacto assumption that everyone has been impacted and certainly any healthcare practice is going to have no trouble being able to demonstrate they've been impacted. So that's not a concern. [00:10:30]
T he loan amount is 2.5 times your average monthly payroll and benefits costs. And that's the fixed amount. [00:12:00] You use your payroll information from 2019 (you will need this information to complete the application of your loan). Your payroll information you'll be able to get from your payroll provider. You're going to basically include all the wages and salary of your staff. You can also include retirement and health benefits as well.
So for example, if you're a practice with a payroll of $40,000 a month in wages, salary compensation, benefits and retirement benefits, then two and a half times that would be $100,000. That's the most and that is in fact the amount that you will be applying for.
The bill was passed on Friday, March 27th and through all of the following week, up until the following Friday, there was a ton of interaction between banks, large and small and the SBA and the department of the treasury answering questions that just needed to be clarified. So the experience of many folks when they went to their banker on Monday or Tuesday or Wednesday and said, "Hey, I'm interested in this loan," or, "I read about it in the wall street journal," or whatever. And the bankers said, "I don't know what to tell you." That's normal and that was okay.
After Friday, April 3, 2020, [00:14:00] there was a lot of clarity that came out. And so as we moved into April, you and I are recording this on April the 8th, and so the information has been received by many banks. Now depending on the size of the bank and the scale, different banks have been able to react to that and many of the larger banks have online application functionality.
[00:14:30] For the practice owner that wants to pursue a paycheck protection program loan, again, the instruction from the Small Business Administration and the Treasury is go to your local bank. If your local bank says, "We're not exactly sure what to do," or, "We're figuring that out." I think the course of action is you got to just wait in queue and look to them for guidance. We are beginning to hear, even as recently as yesterday, that some large national banks whose names I'll leave out [00:15:00] of our recording here because it may change by the time somebody is listening to this, have already kind of tapped out the amount that's been allotted to them. And so it may be necessary for folks, if you find out your local bank is a dry well, then you may need to ask for a referral or start knocking around looking at other SBA-approved lenders who might be willing to assist you even though you don't have a previously established relationship there.
There definitely is concern that even though there are billions and billions [00:15:30] of dollars available, it's still a finite pool that can quickly be quickly be tapped.
The guidance that we're being given is hopefully beginning the week of April 20th. So there isn't underwriting requirement. I mean it is up to the bank to validate the application and [00:16:30] the documentation that's provided. Again, which is very light. You're pretty much just providing a copy of your 2019 payroll. But somebody needs to look at that and affirm that this meets the SBA guidelines. And once that's done, then they're accessing the capital. So at this point, we're hearing April 20th. I kind of wouldn't be surprised if that even gets pushed back another week, but it should be relatively soon.
The current understanding of the loan program is that the PPP is going to be established at two and a half times your payroll, is a two-year loan at a 1% interest rate and the first payment will be due six months after the loan is originated. When that first payment comes due, then the borrower will have the chance to [00:17:30] apply for forgiveness. And what we're told is that the eligibility for forgiveness is simply proving that the funds were used for eligible expenses.
They are the payroll that you paid for eight weeks following the date of the loan and rent, mortgage and utilities. So if the sum of those things equals or exceeds the amount of the loan, then the loan balance [00:18:00] should be forgiven. If the sum of those things is less than the balance that you borrowed, that portion would be forgiven and you'd simply need to pay back the remaining portion again at 1% over two years.
Not necessarily. The other element of this that folks need to contemplate or talk with your accountant or practice consultant or financial advisor is based on the unique circumstances for your practice. What is the best timing for your loan and how might your state's unemployment benefits factor in? We are seeing some specialty groups, [00:20:00] say for example, plastic surgery or groups that do a significant amount of elective procedures that are effectively out of business or closed down based on their state's requirements. Your doors are closed then ... and may be closed through June 1st or June 15th or an unknown period of time.
It may be advisable to consider furloughing your employees so that they can [00:20:30] file for unemployment benefits. Doing so will entitle them to presumably about $950 a week, which is an annualized salary of about $50,000 and they can collect those unemployment benefits while the doors are closed. And then if you apply for PPP and get that loan, then those funds could be used to cover some payroll once they come back to work. Again, so there's a lot of details in timing in here, so [00:21:00] I'm certainly not intending to give any recommendation or advice, just raising other type of strategy that may apply to some practices out there.
Quite a few therapists and psychiatrists that we work with from marketing that they're just really sole proprietors. But I would assume if they pay themselves a salary from their practice that would quality for the PPP loan, right? Because a lot of them are ... they are actually [00:21:30] working but some of them are taking reduced rates with telehealth appointments. So it's still a loan might be helpful for them. It would apply, right?
The other provision that I think has a big impact for healthcare providers and physicians, in the bill, is relief provided for borrowers of federal [00:24:00] student loans. And so it's important that everything I'm going to say pertains to federal loans, not private loans.
But if you have a federal student loan, two things are true or maybe a couple. One is the interest rate has been set as of last month, I think February the 15th, at 0% interest. There's nothing you need to do. Interest rates regardless of whether you borrowed money back in the mid 2000s at 2 or 3% or whether [00:24:30] you're a recent medical school graduate with loans at 6 or 7%, your rate has been set at 0% by the federal government until September 30th of this year.
The second thing that's true is that they have immediately suspended all automatic payments. And so whether you write a check every month, which I highly doubt, but if you're on automatic bank draft, that has been suspended for you. And so there will be no payment draft is our understanding until September 30th. [00:25:00] You are allowed to make payments if you want to, but there's no interest accruing and there's no interest due and there is no payment due.
The unique aspect of this is not only is it a nice help in terms of your cashflow, but for those borrowers who are pursuing public service loan forgiveness where there's an obligation to make 120 qualifying payments, the bill has deemed these months [00:25:30] of no payments as qualifying payments. So if you need to make 120 payments to qualify for public service loan forgiveness, over the next six months, there is no payment due, but they're still going to give you credit for six months worth of payments towards that loan forgiveness. So that's a really neat benefit of the bill that maybe it doesn't put cash in hand but it leaves cash in hand because you're not having to make a [crosstalk 00:25:57].
The last point about [00:26:00] student loans that is important to know is that there's a provision on the bill that allows employers to provide up to $5,250 in tax free student loan payments to borrowers this year.
So even though they're giving me $10,000, I do owe taxes on it and then pay it out on my student loan. This bill carves out $5,250 [00:27:00] as tax-free to the employee but deductible to the employer. That is a huge trendsetter and the expectation is ... That's something that folks have been asking for for years. We kind of expect that will likely to get extended beyond this year. And so it becomes an interesting dynamic. Personally, I'm curious to see if resident graduates and fellows going into practice are aware of that and begin to try and negotiate [00:27:30] that provision in more of their employment contracts.
Within the CARES ACT 2020 [00:30:00] there are resources available to most practice owners to give them options on how they navigate the next couple months. If you have any questions about how this applies to your practice do not hesitate to reach out to Meredith Kallaher at [email protected] OR find more detailed information on Shane Tenny's blog at