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Paycheck Protection Program eligibility issues for healthcare providers

published in McAfee & Taft LINC | April 29, 2020

Healthcare providers are encountering a number of issues in determining whether or not they qualify for the SBA Paycheck Protection Program.   Some of the issues include the following:

Public hospitals

In its Interim Final Rule posted April 24, 2020, the SBA clarified that a government-owned hospital is not disqualified from participating in PPP due to its government ownership, as long as it is otherwise eligible to receive a PPP loan as a business concern or nonprofit organization (described in Section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from taxation under Section 501(a) of such Code), and the hospital receives less than 50% of its funding from state or local government sources, exclusive of Medicaid.  The April 24 Interim Final Rule clearly opened the door for public hospitals that have 501(c)(3) status, but raised questions about eligibility for the significant number of public hospitals that are exempt from federal income taxation as “governmental” but do not have dual 501(c)(3) status.

Nonprofit organizations

The CARES Act amended the Small Business Act to include nonprofit organizations as a new category of entities that may participate in PPP (previously, nonprofit organizations were ineligible for SBA business loans) if they employ fewer than 500 employees or, if applicable, the number of employees set forth in the SBA employee-based size standards for their industry.  In subsequent guidance, the SBA confirmed that businesses may also qualify for PPP under the applicable revenue-based standard for their industry (based on annual receipts) or under the SBA’s “alternative size standard” (based on tangible net worth and average net income).  However, the SBA guidance appears to limit the availability of the non-employee-based size standards to “small business concerns” – which, by definition, do not include nonprofit organizations.   The SBA has not yet clarified whether nonprofit organizations may also avail themselves of the non employee-based size standards in order to qualify for PPP loans.   

Affiliates

When counting the number of employees to determine eligibility, potential borrowers must aggregate the employees of all affiliates.  The process for determining who is an affiliate is not always straightforward and requires evaluation of a number of factors and considerations, including not only ownership, but also overlap of board members or officers, management and contractual relationships, blocking rights, stock options and convertible securities, joint ventures, control exercised by third parties,  and familial relationships.   There are narrow exemptions and waivers of the affiliation rules that are not likely to apply to healthcare providers.

Private equity firms

The SBA affiliation rules also potentially restrict participation by healthcare providers who are owned by or have contractual relationships with private equity firms through management services organizations.  Healthcare providers who have these types of relationships should carefully evaluate their arrangements and contract terms to determine whether the affiliation rules restrict their eligibility for PPP and also be mindful of the required PPP certification that the loan request is necessary to support ongoing operations.

If you have questions about the Paycheck Protection Program or your organization’s eligibility to participate in the program, please contact your McAfee & Taft Healthcare attorney.

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