The Coronavirus Economic Stabilization Act (CESA)i was established to provide loans and loan guarantees for businesses to improve business liquidity resultant from the COVID-19 pandemic. Unlike the widely publicized Payment Protection Program (PPP), CESA Act loans do not include loan forgiveness. They do include substantial penalties, however, if terms of the loan agreement are breeched.
By accepting CESA Act loans and loan guarantees, companies are committing to comply with the terms and conditions of the loan, which include requirements specific to executive compensation. These guidelines, as we addressed in the Fulcrum Partners whitepaper published April 14, 2020, “Executive Compensation Restrictions and the CARES Act,” apply to any officer or employee who received total compensation greater than $425,000 in the calendar year 2019.
Revisiting Terms of CESA Act Loans
Throughout the period of a company’s loan or loan guarantee, and for one year afterward, (and longer for employers in certain industries) specific restrictions apply. Restrictions include limiting executives who receive between $425,000 and $3 million to receive no more in total compensation than they did in 2019.
Comparably, executives who received over $3 million in total comp in 2019, may receive no more than $3 million plus fifty percent of the amount above $3 million. For example: an executive earning $6 million in 2019, would be eligible to receive $3 million plus an additional $1.5 million, resulting in $4.5 million versus their previous year’s $6 million in total compensation. Companies also need to assess whether the terms of the loan and its required reductions in pay will result in a breech of the terms of individual employment contracts.
CESA Act Loan and Loan Guarantee Restrictions, Additional Details
Other restrictions that apply to companies receiving CESA Act Loans and loan guarantees include, but may not be limited to:
- Executives may not receive severance or other termination benefits in excess of twice the total compensation the executive received in calendar year 2019.
- Companies of 500 to 10,000 employees must commit to maintaining compensation and headcount at the same or greater level than it was when the loan is received.
- Loan recipients must also commit to not sending jobs offshore and to remain neutral in matters of unionization.
Nonqualified Deferred Compensation to Reward Executives
Based on current guidelines, employers potentially could offset reduced pay to an executive through a nonqualified deferred compensation arrangement (NQDC). The NQDC plan would be subject to Internal Revenue Code Section 409A regulations, which include penalties for noncompliance.
Among other pertinent considerations for ensuring compliance with 409A regulations are the timing of future payments and the continued employment of the executive. Section 409A violations can result in deferred amounts becoming immediately recognized as taxable income, plus a twenty percent penalty tax, and other substantial penalties.
The current environment brings into consideration numerous complex compliance issues. Understandably, companies and executives are taking pragmatic steps to review their individual situations with knowledgeable and experienced executive benefit advisory professionals.
Any strategies under consideration by a compensation committee warrant careful review by executive benefits professionals for scrutiny of all aspects of 409A compliance, including documentary compliance, inadvertent new deferral arrangements caused by temporary salary reductions and repayments, and alterations to existing plans. Companies must be fully aware of any ways by which their CESA Act loan could put them in violation of new or existing 409A agreements.
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i Subtitle A of Title IV of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.
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