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Ordinary Employee Benefits Issues That Can Cause Extraordinary Problems in M&A Deals

Employee benefits rarely drive corporate transactions, but if the benefits of a target company are not reviewed carefully, they can sometimes derail the transaction.  Even some of the most routine facets of benefit plan administration can result in significant potential financial exposure (e.g., additional employer contributions, taxes, penalties, and fees as well as fees associated with the preparation and filing of IRS and DOL correction program applications) that could negatively affect the overall value of the target company. By identifying issues early in the transaction, the seller can prevent costly purchase price reductions and identify issues that need correction, while the buyer can avoid overpaying for a target and ensure that representation and warranty insurance will be available to cover potential claims. Some of those routine compliance issues include, but are not limited to, the following: Failing to timely file an annual Form 5500.  The DOL can assess a penalty… Continue Reading

December 31st Deadline to Amend Deferred Compensation Plans

The 2017 Tax Cuts and Jobs Act (the “TCJA”) significantly amended Section 162(m) of the Internal Revenue Code (“Code”) by expanding the definition of a “covered employee” to also include an employee who was formerly a “covered employee” of the publicly traded corporation (i.e., the “once a covered employee, always a covered employee” rule). Under this expanded rule, anyone who was a covered employee of the publicly traded corporation (or any predecessor) for any taxable year beginning on or after January 1, 2017, will continue to be a covered employee for taxable years beginning in 2018 and later, even after the employee’s separation from service. This change potentially impacts the availability of benefit payments under certain nonqualified deferred compensation plans which provide that payments may be delayed if the company’s deduction would not be permitted under Code Section 162(m). The application of this “once-in, always-in rule” could thus result in a… Continue Reading

Proceed with Caution When Modifying Equity-Based Performance Awards

Most equity-based performance awards for employees that will vest at the end of 2020 were granted well before the COVID-19 pandemic began (in fact, many were granted two years or more before the pandemic), and none of the performance metrics for these awards likely anticipated the havoc the pandemic has caused to the companies’ financial and stock performance. In many cases, the pandemic has rendered these equity-based performance awards worthless to employees because the performance metrics are not even remotely achievable. Yet, employees have been working harder than ever to meet the challenges of the pandemic. Some employers looking for ways to continue to reward and retain employees are eyeing modifications of existing equity-based performance awards to either lower the target and stretch performance goals or to eliminate the performance requirement completely, at least for awards vesting in 2020 (making the awards solely time-based). Before proceeding with any such modifications,… Continue Reading

IRS Expands Definition of Qualified Individual for Loans and Coronavirus-Related Distributions under the CARES Act

Notice 2020-50 provides additional guidance to taxpayers and sponsors of qualified retirement plans regarding coronavirus-related distributions and loan extensions under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Among the guidance included in Notice 2020-50 are the following three items of special importance to plan sponsors: Notice 2020-50 expands the definition of “Qualified Individual” for purposes of eligibility to receive a coronavirus-related distribution or special loan treatment to also include three new categories of individuals: an individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19; an individual whose spouse or a member of the individual’s household (as defined below) is quarantined, furloughed or laid off, or has work hours reduced due to COVID-19, is unable to work due to lack of childcare due to COVID-19, has a reduction… Continue Reading

Evaluating Performance Goals and Incentive Compensation in Light of COVID-19

Boards and compensation committees will be reevaluating their incentive compensation arrangements in light of the COVID-19 pandemic and the resulting market uncertainty. Both long-term and short-term incentive plans can lose motivational and retention value if the performance goals are unachievable or if they do not align with market reality. Companies that have not yet established performance goals for their 2020 equity and bonus awards should carefully consider market conditions and shareholder perception before establishing goals, focusing on motivating their executives with pay for performance that aligns with shareholders’ interests, while giving the company flexibility to navigate through uncharted territory. To the extent possible, companies should also consider delaying the issuance of incentive compensation awards until there is more stability in the business and in the financial markets. Companies that have already established goals for their 2020 awards (or that are evaluating the continued effectiveness of performance goals for prior year… Continue Reading

Retirement Benefit Expenses Covered under the CARES Act’s Paycheck Protection Program

The Paycheck Protection Program (the “PPP”) under the CARES Act aims to assist small businesses affected by COVID-19 by covering certain operating expenses as an incentive to retain employees during the crisis. Expenses, such as “payroll costs,” are used in the calculation of the amount of the available loan and in the amount that may be forgiven under the program. Notably, the PPP does not consider an individual’s compensation in excess of $100,000 annualized, prorated for the covered period, to be covered as a payroll cost. The “payment of any retirement benefit[s]” are among the payroll costs that are included. However, at this time, it not entirely clear what is intended to be included in the “payment of any retirement benefit.” No formal guidance has been issued by the IRS or Treasury, and initial guidance issued by the U.S. Small Business Administration does not shed much light on this question.… Continue Reading

COVID-19 EMPLOYEE BENEFIT AND EXECUTIVE COMPENSATION QUESTIONS AND ANSWERS

In light of the recent economic developments stemming from the COVID-19 pandemic, many employers are evaluating their employee benefit plans and how employee and employer costs will be impacted. The following summary provides a list of questions we have been receiving from clients over the past week, along with action items to help employers address these issues. Health and Welfare Plans and Fringe Benefits Should benefits coverage continue while an employee is on an unpaid furlough? If so, how would the employee pay the employee’s portion of the premium? Could the employee elect to drop coverage due to the reduction in hours of active service? Could the employer pay for coverage for some or all of its furloughed employees? Continued eligibility for benefits will depend on whether the employer treats the furlough as a termination of employment or as an unpaid leave of absence. The terms of the plan, including… Continue Reading

IRS Issues Proposed Section 409A Regulations

The IRS recently issued proposed regulations that would amend the final regulations issued under Section 409A of the Internal Revenue Code. These regulations provide a number of clarifications and changes in response to practitioner comments. For instance, the regulations clarify that the separation pay plan exception may apply to a service provider who had no compensation in the year preceding the year of the separation from service. In such situations, annualized compensation from the year of separation is used. In addition, the term “eligible issuer of service recipient stock” now includes an entity for which a person is reasonably expected to begin, and actually begins, providing services within 12 months after the grant date of a stock right (i.e., an inducement option). The regulations also clarify that (i) a service provider’s right to reimbursement of reasonable attorneys’ fees and other expenses incurred to pursue a bona fide legal claim against… Continue Reading

Federal Court Grants Country Club’s Motion for Summary Judgment Denying Additional Top-Hat Plan Benefits for Ex-General Manager

The general manager of a country club resigned from employment and then sued the country club for mishandling and commingling benefits under a “deferred compensation plan” and an “employment agreement plan.”  The court determined that both plans were top-hat plans under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), because they were unfunded and provided deferred compensation for “a select group of management or highly compensated employees.”  The court then reviewed the benefit determinations under a de novo standard because the Firestone deferential standard of review does not apply to top-hat plans.  The court summarily disposed of the ERISA fiduciary claims because top-hat plans are exempt from ERISA’s fiduciary standards.  The claims that the country club interfered with the employee’s ERISA rights were denied because there was no evidence of constructive discharge.  The recovery of benefits claims were upheld but limited under a factual analysis.  Finally, the… Continue Reading

Deferred Compensation Arrangements in Employment Agreements Not an ERISA Plan

The Fifth Circuit Court of Appeals overturned a district court decision finding that deferred compensation arrangements in employment agreements constituted an ERISA Plan.  Although there was a cap on certain payments, the court held that such provision did not involve enough employer discretion to constitute an administrative scheme, thus ERISA did not apply.  The court also noted that the cap would likely never be triggered, no administrative scheme was needed to monitor the company’s former employees to ensure compliance with non-compete provisions, and even though the triggering events, including termination without cause and retirement, would occur more than once and at a different time for each employee, they could easily be ascertained without employer discretion. Cantrell v. Briggs & Veselka Co., No. 12-20294 (5th Cir. Aug. 27, 2013).

June 2021
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