Opportunities and Restrictions of CARES Act Loans for Mid-Sized Businesses

There’s been much discussion lately about the Paycheck Protection Program (PPP) loans for small businesses. Unfortunately, many health care organizations aren’t able to benefit from these loans because they employ more than 500 people and are unable to meet the alternative size tests. Here, we discuss two alternative lending programs that health care organizations can pursue during the challenging climate brought on by COVID-19.

PPP Alternative: Mid-Sized Businesses Loan Assistance

While it received less attention, the Coronavirus Aid, Relief, and Economic Security (CARES) Act included funding to provide lending options for mid-sized businesses. There are some favorable terms to these mid-sized business loans, but there are strings attached that health care organizations should be aware of.


The CARES Act directs $500 billion to the Federal Reserve to fund lending assistance to mid-sized businesses. To qualify, a business must certify that it requires financing due to business interruption caused by COVID-19. It must also comply with equity and compensation restrictions, which will apply for the duration of the loan plus 12 months.

Eligible businesses are those with 500 to 10,000 employees. An eligible business must be a U.S. business and not be in bankruptcy.

Equity Restrictions

Borrowers must comply with restrictions on certain disbursements and purchases of equity. The business must agree to:

  • Not pay dividends or make other capital distributions with respect to common stock
  • Not repurchase its own equity securities or any of a parent company if it’s a business with public stock

An exception to the second restriction applies to the extent the purchase is required under a pre-existing contractual obligation.

Compensation Restrictions

The compensation restrictions include limits on employees with higher income. Employees who received more than $425,000 in compensation during the 2019 calendar year are subject to the following restrictions:

  • Compensation for any 12 consecutive months may not exceed the employee’s 2019 compensation.
  • Any severance or other benefits paid to the employee upon termination may not exceed two times the employee’s 2019 compensation.
  • Employees who were paid more than $3 million in compensation in 2019 may not receive more than the sum of $3 million and 50% of the employee’s 2019 compensation in excess over $3 million.

Compensation for these purposes includes salary, bonuses, awards of stock, and other financial benefits.

No industries are excluded from the compensation restrictions. The compensation restrictions built into these loan terms could be problematic for employers of physicians where current market salaries are often above the $425,000 annual threshold.  

Employee Retention

An important condition of the mid-sized business loans is the requirement to keep at least 90% of a business’ workforce retained at full compensation until September 30, 2020.

The business must also restore at least 90% of its February 1, 2020, workforce no later than four months after the termination date of the COVID-19 public health emergency. Jobs can’t be outsourced or offshored during the loan period and for two years after the loan is paid off. Also, a business cannot abrogate existing collective bargaining agreements during that same time period. A business must remain neutral in any union organizing effort for the term of the loan.

Health care organizations may find it challenging to keep 90% of the workforce in place if portions of their services have been deemed non-essential, such as dental services and elective procedures. Organizations will also need to take into consideration employees under collective bargaining agreements.

Main Street Lending Program

The CARES Act also authorized the Federal Reserve to facilitate additional lending under the Main Street Lending Program. On April 9, 2020, the Federal Reserve announced its commitment to facilitate lending of up to $600 billion to small and mid-sized businesses through the Main Street Lending Program. A larger pool of businesses will be eligible for loans under this program because there is no minimum number of employees required. Eligible borrowers are businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. Organizations that have applied for loans under the Paycheck Protection Program with the Small Business Administration may also apply for loans through the Main Street Lending Program.

The Main Street Lending Program has the same equity and compensation restrictions as the assistance to mid-sized businesses provided in the CARES Act. The workforce in place requirement, however, is less stringent in that an organization must simply certify that it’ll make reasonable efforts to maintain its payroll and employees during the term of the loan.

Both the CARES Act Assistance to Mid-Sized Businesses and Main Street Lending Program loan terms may be problematic for many health care organizations due to the restrictions on employee compensation for providers and officers who were compensated more than $425,000 during the 2019 calendar year. 

We’re Here to Help

To learn more about how your organization can benefit from these programs, please contact your Moss Adams professional.

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