DSOs Present Challenges For Dental Practices Seeking COVID-19 Loans Under the CARES Act
Like almost every other business and profession, dental practices have been decimated by the COVID-19 pandemic. Stay-at-home orders, social distancing, and the limitation of economic activity to “essential services” means that dentists are deferring most routine, elective, or non-emergency procedures. With doors closed and chairs empty, practices find themselves in untenable positions in terms of paying their workforce, rent, utility, and other obligations.
While the federal government’s response to the current crisis has been lacking in many respects, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed at the end of March does provide for financial assistance to cash-strapped businesses, including dental practices. Among the many aspects of the CARES act, eligible practice owners can obtain low-interest and potentially forgivable loans for coronavirus losses through the Paycheck Protection Program (PPP).
But for practices that are part of a dental services organization (DSO), qualifying for a PPP loan can be a particularly tricky endeavor. Loans are only available to businesses with less than 500 employees, so can or how does a small practice qualify for a PPP loan if they are part of or affiliated with a large DSO with too many employees to participate in the program?
Paycheck Protection Loan Basics
The PPP sets aside almost $350 billion in funds for emergency Small Business Association (SBA) loans to help qualifying businesses cover payroll for their workforce as well as pay for other operational costs such as rent and utilities.
Dental practice owners can apply for a PPP loan at any lender approved to participate through the existing SBA 7(a) lending program, as well as at any other institution approved by the U.S. Department of the Treasury. Participating lenders began accepting applications on April 3, and businesses can apply for a PPP loan until June 30, 2020.
The maximum amount any small business or practice may borrow is 250 percent of its average monthly payroll expenses incurred during the one-year period before the date on which the loan is made, up to a total of $10 million. This amount is intended to cover eight weeks of payroll expenses and any additional amounts needed to make payments towards debt and certain other identified obligations such as covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks following the loan.
The purpose of the Paycheck Protection Program is to help businesses retain employees at their current base pay. If the borrower keeps all of its employees and uses the loan proceeds for the above-described purposes, the entire loan may be forgiven. There is no requirement that the employer have work for the employees in order to pay them.
The Problem For Practices In DSOs: Too Many Employees to Qualify For a PPP Loan
With some exceptions, PPP loans are only available for small businesses that employ 500 or fewer employees. For dental practices that are part of a dental services organization, this limitation may or may not pose an insurmountable barrier to loan eligibility as the SBA may count the total number of employees of the DSO, not the individual practice, in determining whether a practice qualifies.
On April 3, 2020, the SBA issued guidance regarding how it treats practice management companies like DSOs when evaluating employee headcount. For purposes of determining the number of employees of a PPP loan applicant, the SBA considers the applicant together with its “affiliates.” As such, eligibility hangs on whether or not the SBA finds a practice and its DSO to be “affiliates.” And that determination centers on control.
As the SBA states in its guidance:
“Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists.”
There are four circumstances in which the SBA will find that there is control over the practice such that the practice would be considered an affiliate. The one most applicable to DSO arrangements involves control of management. Specifically:
“Affiliation… arises where a single individual, concern or entity controls the management of the applicant concern through a management agreement.”
Most dental practices that are part of a DSO are also parties to management agreements that give the DSO a substantial say in the management and operation of the practice. As such, practice owners should consult with an experienced dental practice attorney who can review any agreement as well as the overall relationship with the DSO to determine what, if anything, needs to be changed to reduce the chances that the SBA finds the two entities to be affiliates. As noted, the deadline for applications is June 30, so practices should take all necessary steps as soon as possible to position themselves for approval for these vitally needed funds.
