Employers that are tax-exempt or have tax-exempt affiliates (for example, a foundation) should pay close attention to a 21% excise tax under Section 4960 of the Internal Revenue Code on certain executive compensation. Final Regulations under Section 4960 are described here. The discussion includes traps for the unwary. Please
10 Keys to Proposed Regulations Under Section 4960 (Executive Compensation for Tax-Exempt Organizations and their Affiliates)
Employers that are tax-exempt or have tax-exempt affiliates (for example, a foundation) should pay close attention to a 21% excise tax under Section 4960 of the Internal Revenue Code on certain executive compensation. Proposed Regulations under Section 4960 are described here. The discussion includes traps for the unwary. Please
IRS Issues Guidance on COVID-19-Related Tax Credits Available to Employers Under the FFCRA
On April 1, 2020, the Internal Revenue Service (“IRS”) posted on its website a series of frequently asked questions (“FAQs”) that explain the COVID-19-related tax credits available to small and midsize employers who are required to provide paid leave under the Families First Coronavirus Response Act (the “FFCRA”), which was signed into law by President Trump on March 18, 2020. This blog summarizes some of the key items addressed by the FAQs, including which employers are eligible for these credits, and the requirements and documentation necessary for claiming the credits.
The CARES Act and Compensation – What Employers Need to Know
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748).
In this blog post we (1) lay out an initial action plan for employers considering obtaining relief under the CARES Act, (2) summarize the compensation-related provisions of the CARES Act, and (3) identify the key questions that the CARES Act leaves unanswered.
CARES Act – An Employer Action Plan to Comply with Compensation-Related Provisions
Any employer considering obtaining loans, loan guarantees or payroll assistance under the CARES Act should:
- Review the CARES Act compensation-related provisions and workforce maintenance requirements, which are summarized in further detail in the next section.
- Identify affected officers and employees and compensation arrangements (for those employers accepting loans, loan guarantees or other relief).
- Identify all officers and employees with total compensation in excess of $425,000 for calendar year 2019 (an “Applicable Employee”).
- Identify all Applicable Employees with total compensation in excess of $3 million in calendar year 2019.
- Identify last-12-months’ compensation levels for all Applicable Employees as of latest practicable date (the “LTM Compensation”).
- Identify and review all compensation arrangements between the business and each Applicable Employee, focusing on: (1) dollar amounts; (2) guaranteed increases / guaranteed compensation; and (3) amendment and termination provisions.
- For purposes of provisions requiring workforce and compensation/benefits maintenance, identify workforce and compensation and benefits levels as of relevant dates.
- Identify and review collective bargaining agreements (if any).
- Act to comply with the CARES Act compensation provisions (once the loan or loan guarantee has been executed or other relief has been received).
- Mobilize resources to track ongoing compliance (e.g., GC / Deputy GC; CHRO or HR team leaders; stock plan administrators; benefits administrators).
- Establish administrative framework to track compensation on a rolling 12-month basis and to track benefit levels.
- If current LTM Compensation for any Applicable Employee exceeds maximum levels, amend any applicable agreements, plans, programs or policies to implement required reductions and obtain any required consents from any such Applicable Employee.
- For all other plans, programs or policies between the business and an Applicable Employee, amend to include prospective cutback provisions, as needed.
- For all new agreements with Applicable Employees, include savings language that would allow changes to compensation as may be required to comply with federal requirements without triggering any rights for the Applicable Employee (e.g., severance rights upon a “good reason” termination or breach of any such agreement).
- Restore workforce and compensation / benefits levels as necessary to comply with workforce maintenance requirements as described below.
COVID-19 Impact on Executive Compensation – Salary/Wage Reductions
We continue our blog series on COVID-19 implications on executive compensation matters with a post that addresses salary or wage reductions on a company-wide or targeted basis.
Companies impacted by the COVID-19 pandemic, including the concomitant widespread shelter in place orders, may be considering pay cuts for some or all of their workforce, either in addition to or instead of furloughs and layoffs. In implementing salary or wage reductions, companies should be mindful of federal, state and local wage and hour and labor laws, consent and notice requirements under contractual agreements with individual employees or groups of employees, tax implications on subsequent “make-whole” or “make-up” payments, impact on employee benefit plan participation, governance considerations, and disclosure requirements for public companies.
Prior to implementing salary or wage reductions, companies should:
- IDENTIFY affected employees and applicable state or local law:
- Who are the employees affected by potential salary or wage reductions? Are they exempt or non-exempt? Are they part-time or full-time? How many employees are affected at any single location? Will company executives be impacted?
- Is the salary or wage reduction being undertaken in connection with a reduction in hours? If so, is the reduction proportionate?
- What state or local law is applicable to the employee’s employment?
- What are the state and local requirements for the notice, if any, that must be provided to employees prior to or following a wage reduction?
- Would a reduction result in the employee’s wage falling below the threshold level for exempt classification (currently $684 per week under federal law)?
- REVIEW the potential effects of a salary or wage reduction under applicable law, contract, agreements, offer letters, and employee benefit plans:
- Is the employee a party to an employment agreement, offer letter, or other agreement or arrangement that sets base salary? If so, does it expressly provide that base salary cannot be reduced, such that it would need to be amended?
- Is the employee covered by an agreement, offer letter, or plan with a “good reason” or similar definition that would trigger severance, equity award accelerated vesting, or other rights as a result of a salary reduction? Is there an exception for across-the-board salary reductions and, if so, whether a limit or such reduction applies?
- Does the employee participate in employee benefit plans and programs (e.g., group health plans, retirement plans, 401(k) plans, severance benefits, and vacation programs) that may be impacted by a reduction in hours and/or salary or wage reduction? For example, salary reductions may reduce an employee’s severance entitlement, pension accrual or matching contribution.
- Does the company’s employee handbook address salary or wages during a leave of absence or furlough?
- ACT to execute waivers, deliver notices, take action with respect to employee benefit plans and, for publicly traded companies, provide disclosure of the salary reduction where necessary:
- Obtain consents to salary or wage reductions and waivers of “good reason” from employees as needed.
- Provide advance notice in accordance with applicable state and local requirements.
- Take any necessary actions under employee benefit plans and programs to continue or end coverage/participation, as applicable.
- Prepare and file disclosure if/as required for public companies (e.g., Form 8-K, press release).
- Consider creating a working group including representatives from HR, legal, and investor relations to coordinate actions and communications to internal and external interested parties.