F-A-Phew!: SBA FAQ Finally Clarifies Public Hospital Eligibility for the Paycheck Protection Program
This Featured Article is contributed by AHLA's Tax and Finance Practice Group.
- May 22, 2020
- Zachary J. Buxton , Baird Holm LLP
The Coronavirus Aid, Relief, and Economic Security (CARES) Act’s Paycheck Protection Program (PPP) brought relief for many tax-exempt hospitals under Section 501(c)(3) who rushed to apply for loans amid the economic uncertainty wrought by the spread of SARS-CoV-2, the novel coronavirus that causes COVID-19. Yet as their peers rushed to apply, public hospitals[1] were largely left in PPP purgatory waiting for either Congress or the Small Business Administration (SBA) to step in.
On May 3, 2020, the SBA—in consultation with the Department of the Treasury—clarified in its oft-updated PPP Frequently Asked Questions (FAQs) that public hospitals that are tax-exempt under Section 115 would be considered “nonprofit organizations” for purposes of participating in the PPP. Prior to the SBA’s clarification, the issue—and confusion—for public hospitals was whether they were eligible to receive a loan under existing language creating the PPP in the CARES Act.[2]
Section 1102 of the CARES Act expanded the existing 7(a) loan program administered by the SBA to nonprofit organizations, which the CARES Act defined as an organization described in Section 501(c)(3) of the Internal Revenue Code (IRC) that was tax-exempt under Section 501(a). This description allowed tax-exempt hospitals with 500 or fewer employees or that met SBA’s size standards to apply for a PPP loan.
Unable to qualify as “nonprofit organizations,” county and city-owned public hospitals without separate tax-exempt status under Section 501(c)(3) were forced to search for other ways to qualify but continued to find barriers in existing SBA regulations.
The CARES Act incorporated the definition of a “Small Business Concern” from Section 3 of the Small Business Act but did not otherwise define a “business concern.”[3] Existing SBA regulations defined the term as “a business entity organized for profit” that may be in the legal form of “an individual proprietorship, partnership, limited liability company, corporation, joint venture, association, trust or cooperative, except that where the form is a joint venture there can be no more than 49 percent participation by foreign business entities in the joint venture.”[4] Adding to potential roadblocks for public hospitals, the SBA stated in an Interim Final Rule published in the Federal Register on April 15, 2020 that ineligible businesses under the PPP are identified in its existing regulations at 13 C.F.R. § 120.110, which includes “[g]overnment-owned entities.”[5]
Facing the same confluence of financial pressures and decreasing volumes due to the spread of COVID-19 as their tax-exempt peers, public hospitals were faced with a decision: apply for a PPP loan and risk potential criminal or civil penalties due to uncertain PPP eligibility standards or wait for a legislative fix from Congress or clarification from SBA and risk losing out on funds.
Congress’ first opportunity to address the issue was the Paycheck Protection Program and Health Care Enhancement Act signed into law on April 24, 2020,[6] which poured an additional $321 billion into the PPP. Congress elected to punt the PPP eligibility issue for public hospitals to the SBA, which released supplemental guidance through an Interim Final Rule.
Initially released on Friday, April 24, 2020,[7] it was reported by some industry outlets that the SBA clarification resolved the eligibility issue for public hospitals under the PPP. But there appeared to be a split in the interpretation of SBA’s language—did it apply to all public hospitals or only those with dual tax-exempt status under Section 501(c)(3)? In that Interim Final Rule, SBA provided the following answer to the question of whether a hospital owned by governmental entities is eligible for a PPP loan:
“A hospital that 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) shall not be rendered ineligible for a PPP loan due to ownership by a state or local government if the hospital receives less than 50% of its funding from state or local government sources, exclusive of Medicaid.
The Administrator, in consultation with the Secretary, determined that this exception to the general ineligibility of government-owned entities, 13 CFR 120.110(j), is appropriate to effectuate the purposes of the CARES Act.”
At least some interpreted the SBA’s guidance to mean that a public hospital is not rendered ineligible for a PPP loan due to ownership by a state or local government so long as the hospital receives less than 50% of its funding from the state or local government (as many public hospitals do), excluding Medicaid. But such interpretation disregarded the operative language in SBA’s clarification: “A hospital that is otherwise eligible to receive a PPP loan as a business concern or nonprofit organization”; in other words, if public hospitals could not be eligible as a business concern or nonprofit organization, SBA’s clarification appeared to only apply to those public hospitals with dual tax-exempt status under Sections 115 and 501(c)(3).
After weeks of searching for answers and clarification, the SBA released an updated PPP FAQ on May 3, 2020 offering public hospitals a way out of PPP purgatory.[8] In that FAQ, the SBA stated that it will consider public hospitals that are tax-exempt under Section 115 as meeting the definition of a “nonprofit organization” solely for purposes of eligibility under the PPP.[9]
To be eligible, the public hospital must “reasonably determine” that it is an organization described in Section 501(c)(3) of the IRC and therefore tax-exempt under Section 501(a) and keep a written record of this determination. By incorporating the guidance for government-owned hospitals published in the Federal Register on April 28, 2020, it is apparent that public hospitals must still receive less than 50% of their support (excluding Medicaid) from the state or local government to be eligible under the PPP.
The takeaway from the SBA’s PPP FAQ #42 is clear—public hospitals that do not have separate tax-exempt status under Section 501(c)(3), who reasonably determine that they could meet such standard, and otherwise meet the PPP eligibility criteria are eligible to apply for a loan under the PPP. The SBA’s clarification was welcome relief for public hospital administrators and leadership teams as they continue to balance decreasing patient volumes and revenue while simultaneously preparing for the spread of COVID-19 in their communities.