Protecting Your Practice During the Coronavirus Shutdown
Protecting Your Practice During the Coronavirus Shutdown
It is extraordinary how much our lives are changing so quickly. Practices are shutting down for weeks with no assurance that they can reopen any time soon, certain states are on total lockdown and economic activity has ground to a halt. This is a Newsletter we never imagined writing. But, as we hunker down and navigate our way through this unprecedented time, here are a number of ideas that will limit the fallout. The federal and state governments are passing laws and changing the rules at warp speed. We will be providing further guidance as this happens:
If you are closing your office, then you should direct your employees to your state’s unemployment benefits office. The states (with help from the federal government) are relaxing their requirements for claiming unemployment. Normally, employees have to be laid off and wait a certain period of time before benefits commence. These criteria are being waived, so that employees who have not been terminated, but whose companies have been temporarily closed, can collect ASAP.
You can help your team by researching your state's updated requirements. It shouldn't be hard to find the website. Google "[Your State] Unemployment Covid." The employees will have to provide some basic information about themselves and their employment situation and apply individually, and the unemployment payments should start quickly. Alternatively, your state may allow you to apply for your employees as a group which could start the payments sooner.
The unemployment benefits may not replace all of their lost compensation, but it will ease the strain on practice cash flow. You are asking your employees to sacrifice temporarily, but some of that lost income will be recaptured by the new $1 trillion bailout package being worked out in Congress. These checks may be as much as $1,200 per person, though they will be scaled back for higher earners.
Presumably, your unemployment insurance premiums will go up in future years with your employees now claiming benefits. Therefore, we recommend using up any employee accrued vacation before your team goes on unemployment.
Also, if you are required to pay an employee sick leave or family and medical leave (see the next item), then your state will likely require you to do that first before it pays unemployment benefits to that employee.
Will the practice owner be covered by unemployment? This will vary state to state. It doesn’t hurt to apply. You may qualify for a benefit, albeit at a reduced rate, and your practice may not have to completely close. Also, staff members whose hours have been cut back are likely eligible for unemployment.
Family and Medical Leave and Sick Leave:
The recently passed Families First Coronavirus Response Act (the “Act”) eases the strain on employees and employers by providing employees with (1) paid family and medical leave, and (2) paid sick leave and tax credits to employers to pay for it. If you have an employee who can’t work because he or she is sick or taking care of a sick relative, these will apply to you. Employers with fewer than 50 employees are exempted only if the Dept. of Labor finds that these requirements would compromise the viability of the business.
The ADA has requested the Labor Secretary to issue an exemption for dentists, but he has yet to do so. Here are the relevant details:
Family and Medical Leave. The Act requires employers with fewer than 500 employees to provide both paid and unpaid leave to employees through December 31, 2020. The emergency leave is available when an employee who has been employed for at least 30 days is unable to work or telework because school or daycare for a child under 18 has shut down due to COVID-19.
The first 10 days of leave may be unpaid. (The employee may elect, or the employer can require, that accrued paid vacation or personal leave be substituted for the unpaid leave.) After that, paid leave is required, equal to two-thirds of the employee's regular pay and the number of hours the employee would otherwise be normally scheduled to work, not to exceed $200 per day and $10,000 total.
Sick Time. The Act separately requires private employers with fewer than 500 employees to provide 80 hours of paid sick time to full-time employees who are unable to work (or telework) for specified virus-related reasons. Part-time employees are entitled to sick time based on their average hours worked over a 2-week period. This amount is immediately available regardless of the employee's length of employment.
The maximum amounts payable vary based on the reason for absence. Employees who are (1) subject to a quarantine or isolation order, (2) advised by a health provider to self-quarantine, or (3) experiencing symptoms and seeking diagnosis, must be compensated at their regular rate, up to a maximum of $511 per day ($5,110 total). Employees caring for an individual described in category (1), (2), or (3), caring for a son or daughter whose school or daycare is closed must receive two-thirds of their regular rate, up to a maximum of $200 per day ($2,000 total). Employers cannot require employees to find a replacement worker or use other sick leave or accrued vacation before this sick time.
Employer Tax Credits. The federal government will repay employers for the family leave and sick pay through payroll tax credits. The credit for Family and Medical Leave will be the amount actually paid to the employee up to a maximum of $200/day and a maximum of $10,000. The credit for Sick Leave will be the lesser of paid leave or either the $511 or $200 described above.
Practice owners (at least C corporation owners and Schedule C sole proprietors) will be eligible for the credits too if they would otherwise meet the requirements for sick leave or family medical leave.
Credits will also cover the cost of keeping the employee enrolled in the practice’s group health insurance plan. In addition, there will be no FICA withholding for Family and Medical Leave and Sick Leave compensation, other than the employer’s 1.45% Medicare cost. The employer tax credit will reimburse you for this as well. If you end up having to pay either Family and Medical Leave or Sick Leave, discuss the mechanics of claiming the credit with your CPA.
Short-Term Loans to Keep the Practice Afloat – Personal Loans, Bank Lines of Credit and SBA:
If you have sufficient cash sitting in your personal bank account, then you can make a loan to your practice to help cover ongoing operating expenses. This should be documented with a promissory note with a reasonable repayment term (perhaps two to five years) and a reasonable interest rate. This will distinguish it from a capital contribution. The loan can be paid back tax-free and with interest that is deductible to the practice but taxable to you. A capital contribution would add complexity, especially in a group practice, and the "repayment" could end up being taxable.
If you don’t have enough personal cash, and your savings are in stocks that have gotten pummeled, then don’t sell the stocks to free up the cash -- if you have a bank line of credit or you can obtain one. If you have a line of credit, then draw down significantly on that now - even if you are on the fence about whether you will truly need it. In times of financial panic, there’s a big difference between having access to a line of credit and actually having the money. Banks may be stressed with clients drawing on their credit lines. If you wait too long, the funds may not be available, though the Fed may step in and prop up the banks as needed. Don’t begrudge having to pay a little bit of extra interest if you find, in hindsight, that you drew more than was necessary.
If traditional bank lending dries up altogether, the federal emergency bailout is infusing a massive amount into the Small Business Administration (SBA) to loan to small businesses during the emergency. Your governor will first have to declare your county a disaster area, but the repayment terms will be quite favorable. The areas currently eligible for disaster assistance loans can be found here: sba.gov
Other Overhead – Rent, Office Supplies, Debt Service, Etc.
If you are leasing your office from a third party landlord, reach out to them and ask for a temporary rent abatement (free rent) or at least a deferral, with such deferred rent to be repaid over the remainder of the term. Supply orders should be kept to a minimum, sufficient only to cover your reduced work schedule. If you’ve made equipment or practice purchases with borrowed funds, contact your lenders and ask to have the loan restructured to extend the term or to convert the loan to interest only until you are back up and running.
Insurance Coverage for “Business Interruption”:
We are somewhat pessimistic that coverage will be available. Policy language differs from policy to policy so it is best to review this with your agent. Commercial policies (property/casualty) usually covers lost business income (up to a certain time period and dollar limit) when you can’t work due to a property loss. This typically means a fire or flood that causes actual property damage. Lawsuits are already being filed demanding that insurers pay business interruption coverage for coronavirus related losses on the theory that the virus has damaged the property. The insurers will argue that the property is fine and that the business is closing by government edict – something the policies usually don’t cover.
Todd Erkis, an insurance expert and friend of this Newsletter agrees. His take is, “It really depends on the policy language. Unfortunately, all insurance policies have general exclusions eliminating all coverage if there is a war or a widespread government shutdown. The theory is that insurance is for specific damage to your place of business from one of the events that they cover. A government shutdown is not something they can estimate, and do not charge for, so therefore do not cover. You may have some limited coverage in a specific business continuation rider to your policy and the specific language in your policy is something you should read carefully. It would make sense to call the insurance company or your broker to discuss what coverage you have.”
The insurance trade associations may be petitioning the federal government to create a business interruption fund, along the lines of the 9/11 Victims Compensation Fund, which would cover small businesses for business interruption and remove the onus from the insurers. We shall see.
Office overhead disability insurance policies likely won’t help. These require the doctor (not another employee) to actually be disabled or sick and unable to work — upon a physician’s certification. A doctor who is worried about the virus and self-quarantining will not be covered. A doctor who’s been diagnosed with coronavirus and must self-quarantine should be. But, then the typical 30 or 90 day elimination (waiting) period applies. If the doctor gets better and returns to practice during that time, there is no coverage.
Some Good News! Tax Day is Postponed From April 15 to July 15:
This includes the postponement of both filing the 2019 individual tax return and paying the tax. It also includes the April 15, 2020, quarterly estimate, which now moves to July 15. The IRS won’t charge interest or penalties. This will provide some very needed relief. How will this affect the normal six-month filing extension? We don’t know that yet. It may be three months to October 15 or six months to January 15, 2021. We’ll update this in a future Newsletter.
Contributions to 401(k)-Profit Sharing Plans, SEPs and SIMPLE IRAs:
These should be cut back or eliminated altogether this year. Protecting the practice takes precedence over funding the plan.
Retirement Plan Hardship and Loan Rules Will be Loosened to Free Up Funds For Those Affected:
This is part of the Coronavirus, Aid, Relief, and Economic Security (CARES) Act being negotiated now in Congress, the same bill that will authorize the cash payments directly to U.S. citizens. “Hardship distributions” from a plan or IRA will be exempted from the 10% penalty tax, and the income tax hit on the distribution can be spread over three years. The distribution can also be returned to the plan to avoid the tax altogether. Retirement plan loans will double from $50,000 to $100,000, and loan repayments can be delayed temporarily. We’ll see what’s in the final version, but once it passes, these new features will be available immediately, and the plan document can be amended later.
Cash Balance Plans - Freezing Accruals and/or Using Prefunding Balances:
Cash balance contributions are unpredictable. If the markets do well, then the plan becomes over-funded which means future contributions are reduced. But, when markets fall, plans become under-funded and additional contributions are required. This will be a very difficult year. CB plans have suffered large losses and practices will be less profitable. If the CB plan loss is not recovered by year-end, then you may be in store for larger required contributions for the 2020 plan year. These are some ways to deal with the situation:
Freeze Accruals: If the plan is frozen before the participants accrue another year of service, then you are not required to make a normal annual contribution. This will buy you time to recover market losses. But, this will mean freezing accruals soon. Most plans have a 1,000 hour of service requirement that most participants would not meet if the plan is frozen by about mid-May. This will require an amendment to the plan, so contact your plan provider. If Collier & Associates prepares your CB plan, call us to discuss. If plan assets recover, we can amend the plan to remove the freeze before year-end. Freezing does not mean there will be no required contribution for 2020. It means there will be no accruals after the freeze date.
Prefunding Balances: Plans can create a prefunding balance (PFB). A PFB is a way to use some of the excess contribution for 2019 (the actual contribution over what was actually required) to offset the minimum required contribution for 2020. 2019 was a great year for plan asset growth. Your required 2019 contribution, for example, may have been $0. But, that didn’t mean that you stopped contributing. If your actual contribution was, say, $80,000, then this is a PFB, some of which can be used to offset required 2020 contributions. The PFB is created by an employer election at the time the IRS 5500 tax return is prepared. We (through our affiliated actuary) will be preparing the elections for most of our clients’ plans automatically this year.
General Concept of Plan Funding Requirements: Many plans were well funded for 2019 and are not for 2020. If such a plan freezes before new benefits accrue, the minimum required contribution will be approximately one-sixth of the difference between Cash Balance Account Balances (what’s needed for the plan to be “on track”) and what the actual plan assets are. If the plan is not frozen, the cost of the new contribution credits accrued for 2020 will be added to this amount.
Finally, on a personal note, we are wishing the best for you, your families and your practices. While this is a time of great anxiety, we are finding when speaking with clients, that many have an optimistic take that this is only a brief interruption in what has been a prolonged run of economic growth. Hopefully, we will emerge from these challenging time in the near future and get back to a sense of normalcy. In the meantime, it helps to recall the ancient words attributed to King Solomon, applicable in the best and worst of times . . . “And this too shall pass!”
The information contained in this Newsletter must not be construed as advice or consultation. Consult with your attorney, accountant or financial advisor.
To comply with certain U.S. Treasury regulations, we inform you that any federal tax advice contained in this Newsletter is not a covered opinion as described in Treasury Department Circular 230 and therefore cannot be relied upon to avoid any tax penalties or to support the promotion or marketing of any federal tax transactions.