Fraser Blog | Fraser Trebilcock Blog

Using Forbearance Agreements to Protect Commercial Real Estate Lender Interests During COVID-19

While much attention has been paid to the struggles of businesses, such as restaurants and retail establishments, to survive the economic downturn wrought by the COVID-19 pandemic, those who lend to such businesses for the purchase of real estate are also dealing with the fallout.

Every real estate loan payment missed by a borrower puts lenders in a more precarious financial position. Even borrowers who remain current on their loan payment obligations may find themselves in default, as lower property valuations result in borrowers failing to meet debt yield, loan-to-value or similar financial covenants.

While the economy in Michigan and across the country is reopening in fits and starts, it’s by no means “business as usual.” Economic woes are likely to continue, which means that lenders will be forced to deal with more financially distressed borrowers. In some instances, this means the possibility of foreclosure. In others, this means dealing with debtors in bankruptcy, as evidenced by a recent surge in bankruptcy filings. According to data from Epiq Systems, commercial Chapter 11 filings were up 48% in May as compared to May 2019.

However, more often, loan defaults by borrowers, and the possibility of future defaults due to financial distress, are dealt with outside of foreclosure or bankruptcy. In many cases, a lender is better off working out a deal that keeps a debtor in the property and running its business, so that it can work through the distress and remain solvent. The potential for recovery via foreclosure or bankruptcy is often limited—not to mention the costs associated with such processes are often steep, and with widespread court closures, any judicial action may be curtailed.

One of the primary tools lenders can use to accommodate distressed borrowers, while preserving their own rights and remedies, is a forbearance agreement.

In a typical forbearance agreement, the borrower acknowledges that it has defaulted on its obligations, and the lender agrees that it will refrain from exercising its remedies for such defaults as long as the borrower performs or observes the new conditions set out in the forbearance agreement, and, by a certain date, cures the defaults. A lender who forbears from enforcing remedies does not waive defaults, but rather grants a borrower time to work through its issues.

A forbearance agreement is best suited for situations where the lender has assessed that the borrower’s struggles are short term and will improve. Given that conditions for many borrowers will improve as the economy reopens, forbearance agreements will likely be widely used by lenders in the coming months.

While every forbearance agreement is customized to address a specific scenario, most contain common provisions, including:

Forbearance Period: The forbearance period is the period within which the lender will agree to forbear from exercising its default remedies under the loan agreement. The forbearance period typically lasts for a specified period of time (e.g., 120 days), subject to early termination by the lender if the borrower defaults in its obligations under the forbearance agreement.
Borrower Acknowledgements, Reaffirmations, and Waivers: Borrowers are commonly required to acknowledge and affirm key terms, representations and warranties from the existing loan agreement in the forbearance agreement. These may include waiving defenses, acknowledging amounts due under the loan, and affirming the validity of the lender’s lien, among other things. Lenders also typically condition their agreement to forbear on the borrower waiving claims against the lender based on the loan documents and dealings between the parties taking place prior to the execution of the forbearance agreement in order to avoid lender liability claims.
Agreements as to the Financial Terms of the Forbearance: A forbearance agreement will address financial terms, such as the interest rate the borrower will pay during the forbearance period, which may be different from the original interest rate under the loan documents. Additional terms may include the amount of any forbearance fee payable by the borrower, a reduction to the lender’s commitment to extend additional credit, reduction of overadvance or overformula balances, and any deferral or modification to the debt service payment schedule.
Additional Reporting: During the forbearance period, a lender may request reporting information in addition to what is required by the existing loan agreement. Such information may include the borrower’s cash flow status and expenses, weekly business updates from the borrower, and access to the property for inspection.

A forbearance agreement can benefit both a borrower and lender. A borrower is given time to work out its business issues or attempt to sell or refinance the property, and a lender can shore up its position by addressing deficiencies in the original loan documents and negotiating more favorable terms as described above, and hopefully avoid having to exercise foreclosure or other default remedies under the loan agreement. For some borrowers, foreclosure and/or bankruptcy may be inevitable. But commercial real estate lenders are often well-served by pursuing a forbearance agreement in order to better align the interests of lender and borrower during the borrower’s recovery period.

If you have any questions about forbearance agreements, or real estate workout issues in general, please contact Douglas J. Austin at 517.377.0838 or at daustin@fraserlawfirm.com.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Fraser Trebilcock attorney Douglas J. Austin has been at the center of real estate law for over 45 years. In addition to being a shareholder at Fraser Trebilcock, Doug is also the chair of our Real Estate Law department. He can be contacted at 517.377.0838 or at daustin@fraserlawfirm.com.

As Chapter 11 Bankruptcy Filings Surge, Here’s What Creditors Need to Know to Protect and Enforce Their Rights

The National Bureau of Economic Research recently announced that the U.S. economy officially entered a recession in February, 2020, one month before COVID-19 shut down much of the economy. It should come as no surprise, therefore, that the economic downturn has led to a surge in corporate bankruptcy filings. According to data from Epiq Global, 722 companies sought bankruptcy protection around the U.S. last month, a 48-percent increase from the year-ago period. From Hertz to J.C. Penny, more businesses are seeking refuge to restructure their debts.

As chapter 11 bankruptcies continue to increase (many analysts are forecasting the “wave” of filings to grow), more businesses and individuals will be impacted by the fallout. Creditors of a bankrupt company must be aware of the various deadlines and procedures that govern the chapter 11 process in order to protect and enforce their rights. For creditors to maximize their recoveries, they must stay informed and take action during a bankruptcy proceeding.

Whenever a business or individual receives a notice from a United States Bankruptcy Court indicating that a business they have had dealings with has filed a chapter 11 bankruptcy petition, the clock starts ticking, and they should be aware of the following timeline, and key events and milestones that may affect their rights.

The Petition Date

The petition date is the date on which a debtor files a chapter 11 bankruptcy proceeding. The debtor is required to serve all known creditors with notice of the commencement of the chapter 11 case. An “automatic stay” is imposed as of the petition date, which prevents creditors from taking any further action, such as pursuing collection activity, related to a pre-petition debt.

To remain informed throughout a bankruptcy proceeding, a creditor may request to receive notice of all pleadings filed in a case pursuant to Federal Rule of Bankruptcy Procedure 2002. In addition, creditors have an opportunity to obtain information about a case and the debtor’s finances by attending the “Section 341” meeting of creditors that takes place shortly after a case is filed.

“First Day” Motions

In most chapter 11 cases, the debtor files a series of “first day” motions with the bankruptcy court seeking relief that it may not otherwise be automatically entitled to receive under the Bankruptcy Code. Such relief may include a request to pay some unsecured creditors (such as employees or “critical vendors”) ahead of others. Because debtors require sufficient cash to operate their businesses and pay for the administrative expenses of the chapter 11 process, many seek interim court approval for financing (called “debor-in-possession” or “DIP” financing) and/or the use cash collateral that is subject to a secured creditor’s lien. In some cases, the debtor’s pre-petition lender becomes the DIP lender, and in other cases a new lender, or syndicate of lenders, steps in and tries to “prime,” or supersede, an existing lender’s lien to the extent of DIP financing extended to the debtor.

It is important for creditors and their advisors to carefully review “first day” motions in order to know how their rights may be affected, and take action as appropriate. For example, while the Bankruptcy Code allows for a DIP loan to prime the lien of an existing secured creditor, the secured creditor must receive “adequate protection” that its position will not be diminished as a result of the use of cash collateral or new financing. A creditor may need to file an objection to requested first-day relief to protect its rights.

Proof-of-Claim Bar Date

In order to participate in the distribution of the debtor’s assets to satisfy pre-petition claims, a creditor must have a valid claim. After filing for bankruptcy, a debtor is required to file a schedule of assets and liabilities, which is supposed to include all claims against the debtor. If a creditor agrees with the debtor as to the amount listed for its claim in the debtor’s schedules, and the claim is not listed as contingent, unliquidated or disputed, then the creditor does not need to file a proof of claim. However, if a creditor disagrees with how its claim is scheduled, then it must file a proof of claim in order to preserve its rights.

The bankruptcy court will enter a bar date setting a deadline by which claims must be filed, and the debtor will mail notice of the bar date, as well as other details of the claims filing process, to creditors. To the extent a creditor fails to file its claim by the bar date, it may be objected to and disallowed as untimely. Your attorney can help you through the process of understanding the deadlines associated with filing your claim, as well as supporting your claim with sufficient evidence to prove what you are owed.

Debtor’s Post-Petition Obligations

In chapter 11, a business keeps running with the goal of reorganizing, which means that expenses continue to accrue after it files for bankruptcy. A debtor is required to pay all post-petition expenses in the normal course of business. Unlike pre-petition debts, post-petition debts are not subject to the automatic stay—the debtor is required to pay such debts and creditors can and should take action with the bankruptcy court to ensure they get paid.

Post-petition debts are given priority as “administrative claims,” which are actual, necessary costs and expenses of preserving the estate. Accordingly, a creditor that is, for example, supplying goods (post-bankruptcy) to a debtor under a supply agreement is entitled to be paid for those goods as an administrative claim, and can petition the bankruptcy court to order payment to the extent it is being wrongfully withheld. Those who deliver goods to the debtor within 20 days of the petition date are also entitled to an administrative expense claim. While neither the Bankruptcy Code nor Bankruptcy Rules establish a specific date by which a party must file a motion for allowance of an administrative expense claim, such deadlines are typically set by local rule and/or in a scheduling order entered by the bankruptcy court.

Conversely, a creditor must also perform its post-petition obligations to a debtor. A creditor who refuses to perform its obligations under a valid contract due to a debtor’s failure to pay for goods or services pre-petition can be compelled to perform post-petition.

Executory Contracts

Debtors are authorized to assume or reject executory contracts in chapter 11. An executory contract, while not defined under the Bankruptcy Code, generally is one in which both parties have performance obligations remaining under the contract. Unlike in chapter 7 bankruptcy, there is no specific deadline for chapter 11 debtor to assume or reject an executory contract. If a debtor decides to reject a contract, the contract is treated as breached and a creditor has an unsecured claim for damages. If a contract is assumed, meaning the debtor wants to keep the contract in place, any defaults under the contract, including pre-petition defaults, must be cured. A debtor must obtain bankruptcy court approval to assume or reject an executory contract, either by motion or through the plan confirmation process.

Unexpired Leases

While non-residential real property leases are executory contracts, they are treated a bit differently than other contracts. A debtor must take action to assume or reject a lease within 120 days of the petition, with an option to seek one 90-day extension for cause. In addition, to the extent a lease is rejected, damages, which constitute an unsecured claim, are capped at the greater of (1) one year’s rent or (2) the rent for 15 percent, not to exceed three years, of the remaining term of the lease.

Plan Confirmation Issues

Most unsecured creditors won’t have their pre-petition claims paid until after a debtor’s plan of reorganization is submitted to and approved by the bankruptcy court. A debtor has a 120-day period during which it has an exclusive right to file a plan. The exclusivity period may be extended or reduced by the court, but in no case can the exclusivity period be longer than 18 months. After the exclusivity period has expired, a creditor may file a competing plan.

A plan must be proposed alongside a disclosure statement, which is meant to flesh out all of the important details that interested parties should know to make an informed decision regarding the plan. Unsecured creditors whose rights are “impaired” are entitled to vote on a plan, as well as object to it. Deadlines for (i) requesting the debtor include certain information in a disclosure statement, (ii) filing a combined plan of reorganization and disclosure statement, (iii) returning voting ballots on the plan, (iv) filing objections to the approval of the disclosure statement, and (v) objections to confirmation of the plan of reorganization are set by the bankruptcy court in accordance with the Bankruptcy Code, Bankruptcy Rules, and local rules.

Know Your Obligations, Rights, and Remedies

Chapter 11 bankruptcy is a complex process. Unfortunately, due to the economic downturn, more creditors are going to be mired in the complexity of monitoring cases moving forward. In most cases, especially those when significant sums of money are at stake, it’s important to consult with legal counsel in order to understand your obligations, rights, and remedies with respect to a chapter 11 debtor. Keep in mind that there are steps creditors can take to protect themselves in advance in the event of a customer’s bankruptcy.

If you have questions about the process, or require the assistance of legal counsel to help protect your rights, please contact an attorney at Fraser Trebilcock.

Jonathan T. Walton, Jr.’s legal practice focuses on cases arising from commercial transactions, the Uniform Commercial Code, the federal and state securities laws, banking laws and bankruptcy litigation. In the areas of banking, commercial, construction and real estate litigation, he represents lenders, contractors and owners on construction-related claims, and lenders and borrowers in commercial and residential foreclosure matters, large loan defaults and collections, lien priority disputes, and title insurance company liability. He can be reached at (313) 965-9038 or jwalton@fraserlawfirm.com.

Fraser Trebilcock Attorney Amanda S. Marinkovski specializes her practice in business and tax law, bankruptcy, family law, estate planning, litigation, and real estate law. You can reach her at (517) 377-0897, or at amarinkovski@fraserlawfirm.com.

Client Alert: PCORI Fees Are Back! Payment Due July 31st

PCORI PAYMENTS ARE BACK!

Plan Sponsors of Applicable Self-Funded Health Plans Must Make PCORI Fee Payment By July 31, 2020

The Internal Revenue Service recently released Notice 2020-44 which sets forth the PCORI amount imposed on insured and self-funded health plans for policy and plan years that end on or after October 1, 2019 and before October 1, 2020. The Notice also provides transition relief for calculating the applicable fee for this same period.

See IRS Notice 2020-44

Background

The Patient-Centered Outcomes Research Institute (PCORI) fee is used to partially fund the Patient-Centered Outcomes Research Institute which was implemented as part of the Patient Protection and Affordable Care Act.

The PCORI fees were originally set to expire for plan years ending before October 1, 2019. However, on December 20, 2019, the Further Consolidated Appropriations Act was enacted and extended the fee to plan years ending before October 1, 2029.

The fee is calculated by using the average number of lives covered under a plan and the applicable dollar amount for that plan year. Code section 4375 imposes the fee on issuers of specified health insurance policies. Code section 4376 imposed the fee on plan sponsors of applicable self-insured health plans. This Client Alert focuses on the latter.

Transition Relief for Counting Covered Lives

For self-funded plans, the average number of covered lives is calculated by one of three methods: (1) the actual count method; (2) the snapshot method; or (3) the Form 5500 method.

However, due to the anticipated end to the PCORI fee, plan sponsors did not anticipate the need to calculate the number of covered lives. Therefore, transition relief is allowed for plan years ending on or after October 1, 2019 and before October 1, 2020, and a plan sponsor may use any reasonable method for calculating the average number of lives, as long as it is applied consistently for the plan year. Specifically, Notice 2020-44 provides as follows:

Plan sponsors may continue to use one of the following three methods specified in the regulations under § 4376 to calculate the average number of covered lives for purposes of the fee imposed by § 4376: the actual count method, the snapshot method, and the Form 5500 method. See Treas. Reg. § 46.43761(c)(2)(i). In addition, for plan years ending on or after October 1, 2019, and before October 1, 2020, plan sponsors may use any reasonable method for calculating the average number of covered lives. If a plan sponsor uses a reasonable method to calculate the average number of covered lives for plan years ending on or after October 1, 2019, and before October 1, 2020, then that reasonable method must be applied consistently for the duration of the plan year.

Adjusted Applicable Dollar Amount

Moreover, Notice 2020-44 sets the adjusted applicable dollar amount used to calculate the fee at $2.54. Specifically, this fee is imposed per average number of covered lives for plan years that end on or after October 1, 2019 and before October 1, 2020.

Deadline and How to Report

The PCORI fee is due by July 31, 2020 and must be reported on Form 720.

Instructions are found here (see Part II, pages 8-9): http://www.irs.gov/pub/irs-pdf/i720.pdf

The Form 720 itself is found here (see Part II, page 2): http://www.irs.gov/pub/irs-pdf/f720.pdf

Form 720, as well as the attached Form 720-V to submit payment, must be used to report and pay the requisite PCORI fee to the IRS. While Form 720 is used for other purposes to report excise taxes on a quarterly basis, for purposes of this PCORI fee, it is only used annually and is due by July 31st of each relevant year.

As previously advised, plan sponsors of applicable self-funded health plans are liable for this fee imposed by Code section 4376. Insurers of specified health insurance policies are also responsible for this fee.

For plan years ending on or after October 1, 2017 and before October 1, 2018, the fee is $2.39 per covered life.
For plan years ending on or after October 1, 2018 and before October 1, 2019, the fee is $2.45 per covered life.
For plan years ending on or after October 1, 2019 and before October 1, 2020, the fee is $2.54 per covered life.

Again, the fee is due no later than July 31 of the year following the last day of the plan year.

There are specific calculation methods used to configure the number of covered lives and special rules may apply depending on the type of plan being reported. While generally all covered lives are counted, that is not the case for all plans. For example, HRAs and health FSAs that are not excepted from reporting only must count the covered participants and not the spouses and dependents. The Form 720 instructions do not outline all of these rules.

More information about calculating and reporting the fees can be found here: https://www.irs.gov/newsroom/patient-centered-outcomes-research-institute-fee

Questions and answers about the PCORI fee and the extension may be found here; however, please note that this site does not include the most recent fee of $2.54 for plan years ending on or after October 1, 2019 and before October 1, 2020: https://www.irs.gov/affordable-care-act/patient-centered-outcomes-research-trust-fund-fee-questions-and-answers

As you are well aware, the law and guidance are continually evolving. Please check with your Fraser Trebilcock attorney for the most recent updates.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.

Michigan COVID-19 Guidelines for Safely Running a Day Camp in the Summer of 2020

According to the American Camp Association, more than 14 million children attend summer camps across the country every year. Michigan has a long summer-camp tradition, with kids flocking to camp destinations throughout the state to swim, hike, and roast marshmallows around the campfire. Until recently, summer camp in Michigan was in doubt, another potential casualty of the COVID-19 crisis. However, with the case curve continuing to flatten, and more businesses across the state reopening, Governor Whitmer announced that summer day camps in Michigan would be allowed to open — subject to a number of health and safety guidelines.

Executive Order 2020-110, issued on June, 1, 2020, provides that day camps for children are allowed to operate as of June 8, 2020, subject to guidance issued by the Department of Licensing and Regulatory Affairs (“LARA”). On June 2, 2020, LARA issued its “Guidelines for Safe Day Camp Operations During COVID-19 (“LARA Guidance”),” which offers considerations and actions that camp operators must take before opening for the season. The various recommendations and requirements of the LARA Guidance are extensive and should be closely reviewed with legal counsel. What is clear is that it will not be carefree “camp-as-usual” in Michigan, but at least camps now have the guidance they need to get up and running for summer.

COVID-19 Preparedness and Response Plan

Like other businesses conducting in-person work in Michigan, camps must establish a COVID-19 preparedness and response plan. According to the LARA Guidance, a response plan must be available at your camp or camp headquarters, be made available to families and staff, and be part of a camp’s health service policy and meet applicable camp licensing rules.

A plan should include:

How a camp will monitor for symptoms of COVID-19
How a camp’s programs practice social distancing, as developmentally appropriate
How a camp will ensure hygiene (including regular cleaning and disinfecting)
How a camp will obtain and use safety equipment
Communication and training for staff, parents, and campers related to new
expectations
Isolation procedures in the event of symptoms or confirmed cases onsite
How a camp will maintain required staff-to-camper ratios in the event of staff illness

While preparedness and response plans may be subject to review by a LARA licensing consultant, they do not need to be submitted to LARA for approval. LARA strongly recommends that camps (i) discuss plans with staff from the local health department so that all roles and responsibilities are clarified and updated contact information is included, and (ii) that the local health department be provided with a final version of a response plan.

Communication and Training

The LARA Guidance urges camps to engage in proactive communication and training of employees, including discussing any concerns staff members have about returning to work, and sharing steps being taken, including those outlined in a preparedness and response plan, to make camp as safe as possible.

Camps should establish a staffing plan based on a camp’s projected enrollment, the need (based on “strongly recommended” guidance”) to maintain groups of fewer than 10 campers, and the importance of maintaining physical distancing. Staff members should also be trained on the various protocols and procedures of a camp’s preparedness and response plan.

The LARA Guidance also acknowledges that campers and staff, alike, may be impacted emotionally by the return to a social, structured environment like camp, and that plans should be put in place to support their emotional needs. Camps should also proactively communicate with families in order to address concerns, explain health and safety procedures, and help prepare kids for what, for some, may be a difficult transition to the camp environment after months of isolation.

Health Screening for COVID-19

One of the most important and challenging aspects of running a camp this summer will be adhering to health screening protocols. Pursuant to the LARA Guidance, camps are required to check for COVID-19 symptoms when campers and staff arrive daily. While there is no mandated health screening process, the LARA Guidance suggests that camps adopt screening practices including:

Daily temperature checks for campers
Visual checks for signs of illness
Asking campers and parents about contact with COVID-19-positive individuals and general health questions
Continuing to monitor campers for symptoms throughout the day and monitor
temperatures when campers appear ill or “not themselves”
Conducting similar daily health screening for staff members

For additional guidance, the CDC offers tips on how to practically conduct health screening checks.

Response to Possible or Confirmed Cases of COVID-19

Beyond screening for illness, camps must respond in accordance with LARA Guidance to the extent a COVID-19 case is suspected or confirmed, including:

Identifying a point of contact adult onsite during the camp operation to manage health-related concerns, and ensure that camp staff and families know who this person is and how to contact them
Monitoring the health of staff and campers throughout the day
Immediately sending home someone who becomes ill
To the extent someone becomes sick with COVID-19 symptoms, calling the local health department to report exposure and determine whether those who have been in close contact need to leave camp
Reporting exposure that occurs outside of camp to the local health department
Determining whether to close the camp based on guidance from the local health department

Camps Must be Vigilant this Summer

Running a day camp in Michigan is never easy, and this summer it will be even harder. This article has addressed a few of the key provisions in the LARA Guidance, but camp operators should carefully review the full extent of the guidance, as well as Governor Whitmer’s various executive orders that impact camp operations. From additional legal and regulatory to compliance requirements, to mandated health screening and safety protocols, there is a great deal of complexity that camps need to review and understand in order to run their operations safely and compliantly. To the extent that you have any questions or concerns, or require assistance in the creation of a preparedness and response plan, please contact Mark Kellogg.

Fraser Trebilcock attorney Mark E. Kellogg is a certified public accountant, and has devoted over 30 years of practice to the needs of family and closely-held businesses and enterprises, business succession, commercial lending, and estate planning. You can reach him at 517.377.0890 or mkellogg@fraserlawfirm.com.

Flexibility Act Loosens Restrictions in PPP Loan Program

On Friday morning the President signed into law the Flexibility Act (the “Act”) making significant changes to the forgiveness portion of the Paycheck Protection Program (PPP). These changes will triple the time allotted for small businesses and other PPP loan recipients to spend the funds and still qualify for forgiveness of the loans.

Flexibility Act

Key changes to the PPP program brought by the Flexibility Act include:

Covered Period: PPP borrowers can choose to extend the eight-week period to 24 weeks, or they can keep the original eight-week period. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
Payroll Cost Percentage: The payroll expenditure requirement drops to 60% from 75% but is now a cliff, meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven (although there is talk of a possible technical correction to this).
Employee Rehiring Date: Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by Dec. 31, a change from the previous deadline of June 30.
Exemptions Based on Employee Availability: The Act includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they do not fully restore their workforce. The Flexibility Act allows borrowers to adjust their calculations because (1) they could not find qualified employees or (2) were unable to restore business operations to Feb. 15, 2020, levels due to COVID-19 related operating restrictions.
Loan Maturity Period: Borrowers now have five years to repay the loan instead of two. The interest rate remains at 1%.
Extended Deferral Period: Payment of principal, interest and fees are deferred until forgiveness is remitted to the lender, only if the borrower applies for forgiveness within 10 months after the last day of the covered period.
Payroll Tax Deferral: The Act allows businesses that took a PPP loan to also delay payment of their payroll taxes, which was prohibited under the CARES Act.

Loan Forgiveness Guidance

Earlier, the SBA released new guidance addressing loan forgiveness under the PPP, as well as the SBA’s loan review procedures. Some of this earlier issued guidance has now been overtaken by the passage of the Act.

Noteworthy aspects of the loan forgiveness guidance that remain intact include the following:

Payroll Costs

Reaffirms that, in general, payroll costs paid or incurred during the 8 weeks following disbursement of the loan (i.e., the “covered period”) are eligible for forgiveness, but that borrowers may also use an “alternative payroll covered period” as set forth in the instructions to the Loan Forgiveness Application, in which the borrower may opt to use a covered period beginning on the first day of the borrower’s first payroll cycle;
Confirms that payroll costs are generally incurred on the day the employee’s pay is earned (i.e., the day the employee worked) and clarifies that where employees are not performing work and are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day the employee would have performed work);
Confirms that employee bonuses and hazard pay are eligible for payroll costs, as long as the employee’s total compensation does not exceed the $100,000 annualized cap;
Wages paid to furloughed employees during the covered period are eligible for forgiveness;
Clarifies that owner-employees and self-employed individuals are limited to “payroll compensation” no greater than the lesser of 8/52 of 2019 compensation or $15,385 per individual, and owner-employees are further capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf. Schedule C filers are capped by the amount of their owner compensation requirement, calculated based on 2019 net profit. And general partners are capped by the amount of their 2019 net earnings from self-employment, subject to certain reductions.

Nonpayroll Costs

Reaffirms that nonpayroll costs must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period, but clarifies that if a borrower’s nonpayroll expenses straddle the covered and noncovered period and are paid after the covered period (e.g., a borrower’s “covered period” ends on July 26 and its electricity expenses for July are not paid until August 10), the borrower may seek partial forgiveness of the expenses incurred during the covered period but paid on the next regular billing date (e.g., electricity expenses for July 1-26 are forgivable);
Advance payments of interest on mortgage obligations are not eligible for loan forgiveness.

Forgiveness Reductions

Confirms that EIDL advances will be deducted from loan forgiveness amounts.

Head Count Reduction – Computations

Borrowers will not be penalized for voluntary resignations and schedule reductions or for-cause terminations;
Aa “full-time employee” is an employee who works 40 hours or more, on average, each week, and is given a full-time equivalent (FTE) weighted of 1.0;
In calculating the FTE of part-time employees, borrowers may either add the hours of all part-time employees and divide by 40, or elect, “for administrative convenience . . . to use a full-time equivalency of 0.5 for each part-time employee,” as long as the borrower applies the chosen method consistently.

Salary/Wage Reductions

Confirming that the 25% salary/wage reduction calculation (for employees who were not paid more than the annualized equivalent of $100,000 during any 2019 pay period) is performed on a per-employee basis and not in the aggregate.
Clarifying that borrowers will not be doubly penalized for reductions, such that the salary/wage reduction applies only to the decline in employee salary and wages not attributable to the FTE reduction.

Lenders

The SBA guidance also confirms that lenders have 60 days from receipt of a complete forgiveness application to issue a decision to the SBA, and that the lender must request payment from the SBA at the time it issues its decision to the SBA. Further the SBA is required to remit the appropriate forgiveness amount to the lender, plus any interest that accrued during that period, subject to “any SBA review of the loan or loan application.”

Loan Review Guidance – Rules for Borrowers

The SBA provided guidance clarifying various components of its loan review process including:

Clarifying that the SBA may review “any PPP loans,” at any time in its discretion, and that the SBA may consider in that review whether a borrower correctly calculated the loan amount, properly used the loan proceeds, and/or is entitled to the loan forgiveness amount sought (this presumably includes loans smaller than $2 million, notwithstanding the SBA’s previous suggestion in FAQ 46 that audits will be focused on loans of $2 million or more).
Requiring Borrowers to retain PPP documentation for at least 6 years after the date the loan is forgiven or paid in full, and the SBA must be granted these files upon request.
If the SBA believes a borrower may be ineligible for the loan or for some forgiveness amount, it will require that the lender make a written request for additional information from the borrower, and it may also request information directly from the borrower. All information provided by the borrower in response (either directly to the SBA or through the lender) will be considered in the SBA’s review.
Failure to respond to the SBA’s request for information may result in a determination that the borrower is ineligible for forgiveness or for the loan itself.
Emphasizing that the shareholders, members, or partners of a borrower that is deemed ineligible to have received a PPP loan will not be protected by “the CARES Act’s nonrecourse provision … which limits SBA’s recourse against individual shareholders, members, or partners of a PPP borrower for nonpayment of a PPP loan ‘only’ if the borrower is an eligible recipient of the loan” (emphasis added).
Borrowers have the opportunity to seek reconsideration and appeal of review decisions. Procedural rules covering this process are expected from the SBA.

This alert serves as a general summary, and does not constitute legal guidance. All statements made in this article should be verified by counsel retained specifically for that purpose. Please contact us with any specific questions.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Reopening Offices Under Michigan COVID-19 Executive Orders

Governor Whitmer’s various Executive Orders (“EOs”) have transitioned from shut-down to phased reopening. Those multiple EOs make the reopening process confusing. This article summarizes the requirements to permissible recall office workers for work outside of their own homes. However, the actual requirements are lengthy and all must be met by the employer. We have collected those requirements in a document that may be obtained HERE.

Office Workers – Phased Reopening

Executive Order 2020-77, since superseded, began the “reopening” process for businesses within the State of Michigan. Only employers in Regions 6 and 8 – the Traverse City quadrant and the Upper Peninsula – were conditionally permitted to recall office workers to return to work. However, it is likely that the conditions will be similar for the remainder of the state when office workers in other parts of the state are allowed to return on a Region-by-Region basis. There are two sets of rules for operating office businesses – one applicable to all employers using “in-person” services, and a second set applicable to office work specifically.

Requirements for Employers Allowing In-Person “Office” Work

Identification of Workers Who May Permissibly be Recalled

Only office workers specifically permitted to be recalled may work at the employer’s premises. Each employer that seeks to recall office workers is responsible to ensure that workers are recalled “only to the extent that such work is not capable of being performed remotely.” EO 96 Section 11.m.

Each employer “must determine which of their workers are critical infrastructure workers or workers who perform resumed activities and inform such workers of that designation … in writing, whether by electronic message, public website, or other appropriate means.” EO 96 Section 6.a.

Most importantly, “[b]usinesses and operations maintaining in-person activities must adopt social distancing practices and other mitigation measures to protect workers and patrons, as described in Executive Order 2020-97 and any orders that may follow from it.” EO 96 Section 6.c.

Workers may also be recalled to prepare the workplace to be in compliance with the various Executive Orders. Workers necessary to prepare a workplace to follow the workplace standards described in Executive Order 2020-97 and to otherwise ready the workplace for reopening. EO 97 Sec 11.o.

Executive Order 2020-97 – Mandatory Requirements

The rules set out in Executive Order 2020-97, as referenced, are extensive, mandatory, complex, and overly long for inclusion here. Rules governing office work are selected and available HERE.

Employers must note that the penalties for non-compliance may be significant. A “willful violation” of the Governor’s Executive orders “is a misdemeanor. See, EO 2020-96 section 22. Likely more concerning, EO 96 also states:

“Any business or operation that violates the rules in sections 1 through 10 has failed to provide a place of employment that is free from recognized hazards that are causing, or are likely to cause, death or serious physical harm to an employee, within the meaning of the Michigan Occupational Safety and Health Act, MCL 408.1011.”

Office facilities to be reopened must comply with the threshold policy adoption, social distancing and safe-work requirements of section 11 of EO 2020-97, which are applicable to all businesses requiring “in-person work.” Those rules, which have been in effect in various forms since the initial stay-at-home order, include among other things:

Develop an OSHA-compliant COVID-19 preparedness and response plan
Make that plan available to workers and others by June 1, 2020, or within two weeks of resuming in-person activities,
Designate one or more worksite supervisors or employees, who must be on-site while workers are present, to implement, monitor, and report on implementation of that Plan
Provide COVID-19 training to employees that covers, at a minimum:

(1) Workplace infection-control practices.

(2) The proper use of personal protective equipment.

(3) Steps the employee must take to notify the business of any COVID-19 symptoms or of a suspected or confirmed diagnosis of COVID-19.

(4) How to report unsafe working conditions.

Conduct a daily entry self-screening protocol for all employees entering the workplace, including, at a minimum, a questionnaire covering symptoms and suspected or confirmed exposure to people with possible COVID19.
Keep everyone on the worksite premises at least six feet from one another to the maximum extent possible,
Provide non-medical grade face coverings to employees,
Require face coverings to be worn when employees cannot consistently maintain six feet of separation,
Increase facility cleaning and disinfection to limit exposure to COVID-19 and adopt protocols to clean and disinfect the facility in the event of a positive COVID-19 case in the workplace.
Make cleaning supplies and access to hand washing or sanitizer available to employees upon entry and at the worksite(k) When an employee is identified with a confirmed case of COVID-19, within 24
Establish a response plan for dealing with a confirmed infection in the workplace, including protocols for sending employees home and for temporary closures to allow for deep cleaning.
Promote remote work to the fullest extent possible.
Adopt any additional infection-control measures that are reasonable in light of the work performed at the worksite and the rate of infection in the surrounding community.

EO 2020-97 Section 1.

Again, there are additional, mandatory work safety requirements set forth in Executive Order 97.

Fraser Trebilcock Shareholder Dave Houston has over 40 years of experience representing employers in planning, counseling, and litigating virtually all employment claims and disputes including labor relations (NLRB and MERC), wage and overtime, and employment discrimination, and negotiation of union contracts. He has authored numerous publications regarding employment issues. You can reach him at 517.377.0855 or dhouston@fraserlawfirm.com.

The CARES Act Will Lead to More Small Business Bankruptcies—Here’s How to Protect Your Business from Getting Burned

JCPenney, Neiman Marcus, and other household names have recently filed headline-grabbing Chapter 11 bankruptcy cases. From energy to hospitality to retail, the COVID-19 crisis has had a devastating economic impact on a wide range of companies across industries. And, of course, small businesses are no exception. According to a survey conducted by the National Federation of Independent Businesses, “92% of small employers are negatively impacted by the outbreak of the novel coronavirus.”

While Chapter 11 bankruptcy has historically not been an option for most struggling small businesses due to the expense and complexity of the process, that may be changing as a result of recent legislation. What does that mean for all of the solvent businesses out there? They may be forced to deal with more of their business debtors inside of bankruptcy court, rather than through traditional debt collection means. In this article, we address recent changes ushered in by the Coronavirus Aid Relief and Economic Security Act (CARES Act), and provide businesses with advice on what to be prepared for and how they can protect themselves in this time of economic uncertainty, including:

Signs of customer distress
Protect yourself and help ensure payment going forward
What to do upon receipt of a notice of bankruptcy filing

Implications of the Small Business Reorganization Act

A case filed under Chapter 11 of the U.S. Bankruptcy Code is often referred to as a “reorganization bankruptcy.” On August 23, 2019, the Small Business Reorganization Act (SBRA), which added Subchapter V to Chapter 11 of the Bankruptcy Code, was signed into law and became effective on February 19, 2020.

SBRA streamlined the Chapter 11 bankruptcy procedure—allowing it to proceed more quickly and less expensively—for small business debtors with debts totaling up to $2,725,625. The CARES Act, which went into effect on March 27, 2020, temporarily (for one year) raised the debt threshold for SBRA filing eligibility to $7,500,000.

The SBRA makes the process for reorganizing under Chapter 11 more streamlined by shortening deadlines for various case filings, appointing a standing trustee in every case to facilitate the debtor’s dealings with creditors and keep the proceeding on track, not appointing a creditors’ committee in most cases, and not requiring debtors to pay quarterly U.S Trustee’s fees. In addition:

The debtor is the only party permitted to file a plan of reorganization.
The debtor is not required to file a disclosure statement unless ordered to.
A plan of reorganization can be approved even if all impaired classes of creditors object.
Individual debtors who have used home mortgages to finance their businesses have a right to modify those mortgage loans through a plan of reorganization.
Debtors may retain ownership of their business, even if the plan of reorganization does not fully repay unsecured creditors. In other words, the “absolute priority” rule does not apply under Subchapter V.

By raising the debt limit, and making other debtor-friendly changes through the SBRA, Congress made the streamlined Chapter 11 bankruptcy process available to significantly more small business debtors. Debtors have a new tool available to them to restructure their debts, which means their creditors, many of whom are facing their own financial challenges, need to be even more vigilant.

Spotting Signs of Customer Distress

As a supplier of goods or services, there are certain telltale signs you should be on the lookout for to determine whether your customers are experiencing financial distress. Missed payments, requests to modify contract terms, lack of communication, and an increase in collection activity (such as the filing of lawsuits) against a business are all indicators that a business may be struggling to pay its bills.

To help guard against risks, develop and implement internal procedures that will alert you when payments are being made outside of normal trade terms—or not being made at all. While many businesses are making accommodations to their customers right now, going deeper in the hole with a customer often doesn’t make sense if it’s putting your own cash flow at risk. Before taking any steps to accommodate a customer, consult with legal counsel to make sure that you are, first and foremost, protecting yourself.

Protect Yourself and Help Ensure Payment Going Forward

Once you’ve identified signs of potential distress, take steps to minimize the risks moving forward. It’s important to move quickly, and in consultation with legal counsel, because once a customer files for bankruptcy protection, there is little you can do to improve your likelihood of being paid relative to other creditors.

Require Cash in Advance

One of the simplest and most straightforward ways to ensure payment from a customer is to require cash in advance before supplying goods or services. In some cases, this may require the renegotiation of an existing contract. To the extent your customer is not currently paying in accordance with the terms of an existing contract, you may have the right to suspend your own performance, which can give way to discussions regarding new payment terms. An added benefit of requiring cash in advance of performance is that it can mitigate risks associated with preference lawsuits should your customer ultimately file for bankruptcy.

Requests for Adequate Assurance

If you suspect that a customer may be, or may become, unable to perform under a contract for the sale of goods, but is not yet in breach, you may want to consider demanding adequate assurance. Under Section 2-609 of the Uniform Commercial Code, a party to a contract has the right to demand adequate assurance of performance from a distressed contract counterparty. If the counterparty fails to provide adequate assurance, you may be able to repudiate the contract.

Request Other Forms of Financial Assurance

Explore with your legal counsel whether it’s advisable to seek various forms of financial assurance from a customer, such as obtaining a security deposit, letter of credit, or collateral to secure a debt. Depending on the product or service you supply to a customer, you may also be able to exercise a statutory lien, such as a construction lien, or a special tooling lien, in certain circumstances.

What to Do Upon Receipt of a Notice of Bankruptcy Filing

Regardless of how diligent you may be, today’s severe economic downturn makes it likely that you will be forced to deal with certain debtors in bankruptcy court. The new Small Business Reorganization Act only increases that likelihood.

Once you become aware of a customer’s bankruptcy, call your lawyer for advice. The “automatic stay” imposed once a debtor files for bankruptcy means that normal collection activity against a debtor must stop, and you can put yourself at risk of penalty by engaging in such activity. That doesn’t mean, however, that you must sit idly by during a customer’s bankruptcy. There are additional protections that may be available once the bankruptcy has commenced.

The creditors’ rights attorneys at Fraser Trebilcock are up to date on the latest developments in the bankruptcy laws, and we are seasoned Bankruptcy Court litigators. Experience has shown us that favorable results for creditors are possible within the constraints of the bankruptcy laws. For instance, a small business debtor’s reorganization in bankruptcy may allow repayment to creditors in situations where the debtor would otherwise have just shuttered its business and paid nothing. For assistance in dealing with a financially distressed customer, inside or outside of bankruptcy, please contact a Fraser Trebilcock attorney.

Fraser Trebilcock attorney Amanda S. Marinkovski specializes her practice in business and tax law, bankruptcy, family law, estate planning, litigation, and real estate law. You can reach her at (517) 377-0897, or at amarinkovski@fraserlawfirm.com.

Client Alert: IRS Relaxes Section 125 Mid-Year Change Rules & Increases Health FSA Carryovers

In two recently released Notices, the Internal Revenue Service (IRS) relaxes the irrevocability rule under Internal Revenue Code section 125 relating to cafeteria plans, increases carryover allowances for health flexible spending accounts (health FSAs), extends the period of time to “spend down” unused health FSA and dependent care FSA amounts, and expands previous guidance to provide that certain covered services will not affect high deductible health plan (HDHP) status… retroactive to January 1, 2020.

See:

IRS Notice 2020-33

IRS Notice 2020-29

Section 125 Plan participants have found themselves in difficult situations as they had elected certain health and dependent care FSA amounts to use during 2020 only to find that certain medical procedures were delayed or canceled and that day care facilities were closed due to COVID-19. Moreover, group health plans are changing based on certain new coverage requirements, incomes are dropping, and layoffs are occurring. Employees are finding themselves in a position where they can no longer afford such coverage; however, IRS procedures in many of these situations would not support mid-year election changes. These are just a few examples of election issues currently occurring.

The IRS, therefore, is relaxing the typical rigid Section 125 rules. However, in order to take advantage of this leniency, employers must amend their Section 125 cafeteria plans.

Section 125 Irrevocability Rules Relaxed

Once an election is made under a Section 125 cafeteria plan, that election is irrevocable for the entire plan year, unless (1) one of the mid-year qualifying change in election events occurs as set forth in Treas. Reg. 1.125-4; and (2) the employer’s cafeteria plan incorporates the mid-year change rule.

However, IRS Notice 2020-29 relaxes these rules during calendar year 2020 relating to employer-sponsored health coverage, health FSAs, and dependent care FSAs, and the relief may be applied retroactively to periods on or after January 1, 2020. These changes apply regardless of whether the basis for the election change meets the Treas. Reg. 1.125-4 requirements. A plan amendment is required.

Specifically, Notice 2020-29 provides as follows:

For mid-year elections made during calendar year 2020, a section 125 cafeteria plan may permit employees who are eligible to make salary reduction contributions under the plan to:
- with respect to employer-sponsored health coverage,
  - make a new election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage;
  - revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis, including changing from self-only to family coverage; and
  - revoke an existing election on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer; sample attestation language is provided in the Notice;
- revoke an election, make a new election, or decrease or increase an existing election applicable to a health FSA on a prospective basis; and
- revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care FSA on a prospective basis.

An employer does not need to adopt these more lenient rules and can continue with its current plan procedures. However, given that they could help a number of employees, it is something to consider.

Increase in Carryovers to Health FSAs

If an employer’s cafeteria plan has a health FSA with a carryover provision, another allowable change is permitted. IRS Notice 2020-33 allows, upon plan amendment, for the 2020 plan year carryover to be increased to $550. Previously, only a $500 carryover was allowed. And if the plan is amended correctly, the $550 will likely increase in future years. Please note that this is not for any plan years which started in 2019 and ended in 2020… that carryover remains $500.

Specifically, IRS Notice 2020-33 increases the maximum carryover amount for plan years starting in 2020 to an amount equal to 20% of the maximum Section 125(i) salary reduction contribution for that plan year. Therefore, the maximum amount allowed to be carried over from a plan year starting in 2020 to the immediately following plan year beginning in 2021 is $550 (20% of $2,750). A plan amendment must be made on or before the last day of the plan year that adopts the carryover increase; however, a special amendment timing rule exists for the 2020 plan year under Notice 2020-29.

Moreover, for the remainder of 2020, employees are permitted to change their elections mid-year in order to increase their health FSA (including an initial election to fund a health FSA) due to the increased carryover under Notice 2020-29. However, these changes must be applied prospectively only.

Significantly, Notice 2020-33 provides as follows:

Although only future salary may be reduced under the revised election, amounts contributed to the health FSA after the revised election may be used for any medical care expense incurred during the first plan year that begins on or after January 1, 2020.

An amendment must be made on or before December 31, 2021 and may be effective retroactively to January 1, 2020 (or the first day of the plan year in 2020 if later), provided that the employer informs all eligible individuals of the changes to the plan.

Extended Period to Spend Down FSAs

Many employees had elected amounts in dependent care and health FSAs and were (or are) unable to use them due to reasons such as closed day care facilities or canceled medical procedures. Under the strict Code section 125, unused amounts in these accounts are forfeited at the end of the Plan Year, subject to any carryover provisions (applicable to health FSAs only) or grace periods.

Here, Notice 2020-29 provides flexibility and allows employees to “spend down” their accounts through December 31, 2020. As calendar year plans already allow expenses to be incurred through December 31, 2020, this Notice does not provide relief. It instead applies to plans with grace periods that end in 2020 or whose plan year ends in 2020. Upon amendment, participants in those plans may continue to incur eligible expenses through December 31, 2020 and submit requests for reimbursement consistent with plan terms.

Specifically, the Notice provides:

For unused amounts remaining in a health FSA or a dependent care assistance program under the section 125 cafeteria plan as of the end of a grace period or plan year ending in 2020, a section 125 cafeteria plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses, respectively, incurred through December 31, 2020.

Please see below for one of the examples listed in the Notice:

Example 1. Employer provides a health FSA under a § 125 cafeteria plan that allows a $500 carryover for the 2019 plan year (July 1, 2019 to June 30, 2020). Pursuant to this notice and Notice 2020-33, Employer amends the plan to adopt a $550 (indexed) carryover beginning with the 2020 plan year, and also amends the plan to adopt the temporary extended period for incurring claims with respect to the 2019 plan year, allowing for claims incurred prior to January 1, 2021, to be paid with respect to amounts from the 2019 plan year.

Employee A has a remaining balance in his health FSA for the 2019 plan year of $2,000 on June 30, 2020, because a scheduled non-emergency procedure was postponed. For the 2020 plan year beginning July 1, 2020, Employee A elects to contribute $2,000 to his health FSA. Employee A is able to reschedule the procedure before December 31, 2020 and, between July 1, 2020 and December 31, 2020, incurs $1,900 in medical care expenses. The health FSA may reimburse Employee A $1,900 from the $2,000 remaining in his health FSA at the end of the 2019 plan year, leaving $100 unused from the 2019 plan year. Under the plan terms that provide for a carryover, Employee A is allowed to use the remaining $100 in his health FSA until June 30, 2021, to reimburse claims incurred during the 2020 plan year. Employee A may be reimbursed for up to $2,100 ($2,000 contributed to the health FSA for the 2020 plan year plus $100 carryover from the 2019 plan year) for medical care expenses incurred between January 1, 2021 and June 30, 2021. In addition, Employee A may carry over to the 2021 plan year beginning July 1, 2021 up to $550 of any remaining portion of that $2,100 after claims are processed for the 2020 plan year that began July 1, 2020. A grace period is not available for the plan year ending June 30, 2021.

Again, plan amendments will be required to accomplish the above and must be adopted on or before December 31, 2021. The amendment may be effective retroactively to January 1, 2020 as long as the above Notices are followed and the employees are informed.

Status of HDHPs

Last, the IRS extends certain previous relief for HDHPs retroactively, back to January 1, 2020. Specifically, Notice 2020-29 separately expands Notice 2020-15 to provide that reimbursement of expenses for testing and treatment of COVID-19 incurred on or after January 1, 2020 will not result in an HDHP to fail to be an HDHP under Code section 223. Additionally, testing and treatment for COVID-19 includes “the panel of diagnostic testing for influenza A & B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV) and any items or services required to be covered with zero cost sharing under … the CARES Act.”

Moreover, telehealth and other remote care services provided on or after January 1, 2020 (applying only for plan years beginning on or before December 31, 2021) will not affect HDHP status. The CARES Act previously applied only for services incurred on or after March 27, 2020.

Conclusion

As always, consultation is important to determine if these changes will be of benefit to employers and their employees. Many factors should be considered, such as nondiscrimination rules, adverse selection with allowing mid-year changes, whether extending health FSA reimbursement provisions will negatively affect health savings accounts, and additional required employee communications.

As you are well aware, the law and guidance are rapidly evolving in this area. Please check with your Fraser Trebilcock attorney for the most recent updates.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

SBA Opens Safe Harbor Certification for PPP Loans of Less than $2 Million

The SBA recently issued guidance extending an automatic safe harbor to borrowers receiving Paycheck Protection Program (PPP) loans with an original principal amount of less than $2 million. These borrowers will be assumed to have performed the required certification concerning the necessity of their loan requests in good faith, according to guidance posted by the U.S. Small Business Administration (SBA) on Wednesday, May 13, 2020.

Congress established the PPP to provide relief to small businesses during the coronavirus pandemic. PPP funds are available to small businesses that were in operation on February 15th with 500 or fewer employees. In addition, not-for-profits, veterans’ organizations, Tribal concerns, self-employed individuals, sole proprietorships, and independent contractors were eligible to apply for PPP loans. Businesses with more than 500 employees in certain industries could also apply for loans.

Perhaps the key feature of PPP loans is that they are forgivable in certain circumstances. Loan forgiveness was designed to help employers keep their employees paid and keep their businesses from succumbing to the economic hardships created by the coronavirus pandemic.

After a few well publicized examples, on April 23, 2020 the SBA cautioned that that businesses with substantial access to liquidity may not qualify for PPP loans and announced that the SBA would review all PPP loans in excess of $2 million to make sure borrowers’ self-certification for the loans was appropriate. If the SBA determines during its review that a borrower lacked an adequate basis for certifying the necessity of its loan, the SBA will seek repayment of the outstanding PPP loan balance and inform the lender that the borrower is not eligible for loan forgiveness.

According to the SBA, borrowers with loans below the $2 million threshold are less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers who obtained larger loans.

The guidance, provided as Question 46 in Treasury’s Q&As related to PPP Loans, states that borrowers with loans of more than $2 million may still have an adequate basis for making the required good-faith certification, based on their individual circumstances and the language of the certification and SBA guidance.

The SBA said the safe harbor will promote economic certainty for PPP borrowers with limited resources as they work to retain and rehire employees. The $2 million threshold also will help the SBA conserve its resources and focus its reviews on larger loans.

Client Alert: COVID-19 Group Health Plan Service & Notification Requirements

On April 11, 2020, the Departments of Labor, Health and Human Services, and Treasury (Departments) jointly released frequently asked questions (FAQs) regarding health care coverage issues surrounding the implementation of the FFCRA and the CARES Act. See Joint FAQs.

Notably, the Departments maintain that the FAQs are a statement of policy and are effective immediately.

The Families First Coronavirus Response Act (FFCRA) was enacted on March 18, 2020 and requires health plans and insurers to provide certain items and services related to diagnostic testing for detection of SARS-CoV-2 or the diagnosis of COVID-19 without cost sharing or prior authorization from March 18, 2020 and during the applicable emergency period. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted on March 27, 2020 and broadened the range of diagnostic items and services that plans and issuers must cover. These FAQs represent the Departments’ approach to assist employers, issuers, providers and other stakeholders to come into compliance as well as to help families understand the new laws.

Applicable Plans

The FFCRA and CARES Act apply to group health plans and health insurance issuers offering group or individual health insurance coverage. The term “group health plan” includes both insured and self-insured group health plans, whether they are ERISA plans, non-federal governmental plans or church plans. The term “individual health insurance coverage” includes individual market coverage through or outside of an Exchange. It also includes student health insurance coverage.

However, short-term, limited-duration insurance is not subject… neither are excepted benefits or plans covering less than two employees (such as retiree-only plans).

Duration of Compliance

The FFCRA provisions are effective March 18, 2020 and continue during the public health emergency.

Required Items & Services

Q3-Q5 address the type of items and services that are required under the FFCRA and CARES Act, including:

in vitro diagnostic test (meeting certain requirements) for the detection of SARS-CoV-2 or the diagnosis of COVID-19, and the administration of such tests; this includes serological tests for COVID-19, which are used to detect antibodies against the SARS-CoV-2 virus; and
items and services furnished to an individual during health care provider office visits (including in-person and telehealth visits), urgent care center visits, and emergency room visits that result in an order for or administration of an in vitro diagnostic product, but only to the extent the items and services relate to the furnishing or administration of the product or to the evaluation of the individual for purposes of determining the need of the individual for such product.

The required benefits must be furnished during office visits. The Departments construe the term “visit” broadly and include non-traditional care settings, such as drive-through screenings. See Q8.

Additionally, a recent IRS Notice issued just days ago states that testing and treatment for COVID-19 includes “the panel of diagnostic testing for influenza A & B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV) and any items or services required to be covered with zero cost sharing under … the CARES Act.” See IRS Notice 2020-29.

Notice 2020-29 also separately expands Notice 2020-15 to provide that reimbursement of expenses for testing and treatment of COVID-19 incurred on or after January 1, 2020 will not result in a high deductible health plan (HDHP) to fail to be an HDHP under Code section 223.

Cost-Sharing Requirements

Cost-sharing requirements (including deductibles, copayments and coinsurance), prior authorization requirements, and medical management requirements cannot be imposed for benefits that must be provided under section 6001(a) of the FFCRA, as amended by section 3201 of the CARES Act.

With regard to out-of-network providers, Q7 of the Joint FAQs provides that plans and issuers are required to provide coverage for such items and services even if providers have not agreed to accept a negotiated rate as payment in full. In such case, a cash price equal to the service as listed b the provider on a public internet website must be provided (or another amount may be negotiated for less than such cash price).

Summary of Benefits and Coverage (SBC) Requirements & Mid-Year Changes

While material modifications to the SBC normally require that the plan provide 60 days advance notice, the Departments state that they will not take enforcement action regarding greater coverage of COVID-19 diagnosis and/or treatment, as long as plans and issuers provide notice of the changes as soon as reasonably practicable. This non-enforcement policy applies only while the COVID-19 public health emergency and/or COVID-19 national emergency declaration is in affect. Coverage changes beyond this emergency period must fully comply.

State Standards

States may impose additional standards or requirements on health insurance issuers regarding COVID-19 diagnosis or treatment, as long as they do not prevent application of a federal requirement.

Excepted Benefits

The FAQs describe types of excepted benefits, including employee assistance programs (EAPs), and provide that COVID-19 diagnosis and testing offered under an EAP will not jeopardize that EAP’s excepted benefit status while the COVID-19 public health or national emergency declaration is in effect. Additionally on-site medical clinics offering COVID-19 diagnosis and testing will remain excepted benefits.

Telehealth & Remote Care Services

The Departments maintain that widespread use of telehealth and other remote care services are essential to fight the ongoing COVID-19 pandemic, and they strongly encourage all plans and issuers to promote and notify individuals about these services.

The CARES Act has already offered flexibility with regard to high deductible health plans (HDHPs) and health savings accounts (HSAs)… stating that use of telehealth and other remote care services prior to the deductible being met will not jeopardize HDHP status, even if their use is not for COVID-19 related reasons. Moreover, individuals using telehealth or other such services outside of the HDHP may also still contribute to HSAs. The CARES Act amended Internal Revenue Code section 223(c) in this respect and will remain in effect from March 27, 2020 and for plan years beginning on or before December 31, 2021.

However, subsequently released IRS Notice 2020-29, mentioned above, provides that telehealth and other remote care services provided on or after January 1, 2020 (and applying for plan years beginning on or before December 31, 2021) will not affect HDHP status, expanding on the CARES Act which previously applied this rule effective as of March 27, 2020.

Similar to guidance previously stated in these FAQs, plans and issuers who add benefits (or reduce or eliminate cost sharing) for telehealth and other remote care services will temporarily be deemed not to violate notice of material modifications requirements or mid-year change restrictions. The Departments will apply the same non-enforcement policy as described above but only during the emergency declaration and only as long as notice is provided as soon as reasonably practicable.

Participant Communication and Lawsuits

Please keep in mind this is a Department non-enforcement policy and does not protect employers and plans from participant lawsuits.

As you are well aware, the law and guidance are rapidly evolving in this area. Please check with your Fraser Trebilcock attorney for the most recent updates.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.