The plaintiffs’ expectations surely suffered a blow after reading the Supreme Court’s initial observation in their case: “If [the plaintiffs] were to lose this lawsuit, they would still receive the exact same monthly benefits that they are already slated to receive, not a penny less. If [the plaintiffs] were to win this lawsuit, they would still receive the exact same monthly benefits that they are already slated to receive, not a penny more.” Thole v. U. S. Bank N. A., more…
We previously wrote about the Department of Labor’s proposed expansion of its safe harbor for electronic delivery of certain retirement plan disclosures required under ERISA. The wait is finally over, with publication of the final rule (the “New Rule”) helped along by the DOL’s desire to alleviate some of the “disclosure-related problems being reported by a great many retirement plans” during the COVID-19 pandemic.
Plan administrators have long bemoaned the narrow parameters of the DOL’s current safe harbor for electronic delivery (the “2002 Safe Harbor”), which requires that plan participants have work-related computer access or provide affirmative consent to receive their ERISA disclosures electronically. This safe harbor rule became effective well before smartphones and tablets made it much easier for plan participants to access email and company intranets—and the benefit plan document that might be posted there—at any time and from anywhere.
The New Rule establishes another voluntary safe harbor for retirement plan administrators who wish to furnish “Covered Documents” to “Covered Individuals” electronically as the default means of delivery. (Though the New Rule is undoubtedly good news for retirement plan administrators, it is important to point out that the New Rule applies only to retirement plan disclosures, and welfare plan administrators may utilize the 2002 Safe Harbor only until further guidance is issued by the DOL.)
For the New Rule, a “Covered Individual” is a participant, beneficiary, or other individual entitled to Covered Documents who has provided, or has been provided with, an electronic address. This includes an email address or internet-connected mobile-computing-device (e.g. smartphone) number. “Covered Documents” include summary plan descriptions, summary of materials modifications, and pension benefit statements or information that the administrator is required to furnish to participants and beneficiaries.
Under the New Rule, electronic delivery can be the default method for distribution of Covered Documents unless a Covered Individual affirmatively opts out. The New Rule permits these two methods for electronic delivery:
- Website Posting – Plan administrators may post Covered Documents on a website, if certain requirements are met.
- Email Delivery – Plan administrators may send Covered Documents directly to the email addresses of Covered Individuals. The email must include specific language within the subject line of the email and a statement that briefly describes the content of the Covered Document.
The New Rule also protects Covered Individuals who may wish to opt-out of the electronic disclosures. Specifically:
- Covered Individuals can request paper copies of specific Covered Documents or globally opt-out of electronic delivery entirely.
- Covered Individuals must be furnished with an initial notification (on paper) of the administrator’s switch to electronic delivery.
- Covered Individuals must be furnished a timely notice of internet availability each time a new Covered Document is made available for review on the internet website. The notice of internet availability may be sent via email or text message. The notice of internet availability must include, among other things, a hyperlink to the Covered Document and statement of the right to receive a paper version instead.
The New Rule is technically effective on July 27, 2020—60 days after its publication. The DOL, however, will not take enforcement action against plan administrators that rely on the New Rule before the 60-day period has expired. Administrators may also continue to use and rely on the 2002 Safe Harbor.
We are available to help plan administrators understand and implement the New Rule’s requirements. Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.
On May 28, 2020, the Internal Revenue Service (IRS) released an advanced version of Notice 2020-35, which amplifies the relief it had previously provided from deadlines for certain time-sensitive actions. The relief offered by Notice 2020-35 is provided because of the ongoing COVID-19 pandemic and is in addition to the relief provided by Notice 2020-18, Notice 2020-20, and Notice 2020-23.
Specifically, Notice 2020-35 amplifies the definition of “affected taxpayer” to include the performance of “time-sensitive actions” that are due to be performed on or after March 30, 2020, and before July 15, 2020, concerning:
- Certain employment taxes;
- Employee benefit plans (including section 403(b) plans, government section 457(b) plans, SEP plans, or SIMPLE IRA plans);
- Exempt organizations; and
- Forms 5498, 5498-SA, or 5498-ESA.
Notice 2020-35 also amplifies the definition of “time-sensitive actions” to include:
- The correction of employment tax reporting errors using the interest-free adjustment process under the Internal Revenue Code of 1986 (the “Code”);
- Funding waivers for defined benefit plans that are not multiemployer plans under Code Section 412(c);
- Actions for multiemployer defined benefit plans;
- Actions for cooperative and small employer charity pension plans (CSEC plans);
- Filing Form 5330 and the payment of associated excise taxes;
- The initial remedial amendment period and plan amendment rules for 403(b) pans;
- The second remedial amendment period for pre-approved defined benefit plans originally scheduled to end on April 30, 2020;
- The implementation of corrective actions under the IRS Employee Plans Compliance Resolution System (EPCRS) and compliance statements issued under the Voluntary Correction Program (VCP);
- Requests for approval of a substitute mortality table under Code Section 430(h)(3)(C);
- Electronic submissions of exempt organizations’ Form 990-N under Code Section 6033(i) and the time for commencing a suit for declaratory judgment under Code Section 7428; and
- The due date for filing and furnishing the Forms 5498, 5498ESA and 5498-SA, is postponed to August 31, 2020. Penalties regarding such postponed filings will begin to accrue on September 1, 2020.
Notice 2020-35 also provides a temporary waiver of the requirement that all Certified Professional Employer Organizations (CPEOs) file certain employment tax return filings and accompanying schedules, on magnetic media (including electronic filing). This temporary waiver applies to Forms 941 (and its accompanying schedules) filed in the second, third, and fourth quarters in 2020 and Forms 943 (and its accompanying schedules) for the 2020 calendar year.
With time-sensitive actions regarding provisions of the Code for which there are parallel provisions in the Employee Retirement Income Security Act of 1974 (ERISA), the relief provided by Notice 2020-35 also applies to the parallel provisions under ERISA.
Contact any Jackson Lewis attorney with questions about how this notice may affect your company or employee benefits.
Over the last few weeks, we have seen significant changes affecting COBRA compliance. Employers should contact their COBRA administrators to discuss the best practices in light of these developments, which include the Department of Labor’s publication of new model COBRA notices and COVID-19 notice and premium payment extensions. We have a helpful article that discusses agency publications. This is especially important, given the recent flurry of class action cases involving COBRA notices. A recording and a recap of the Jackson Lewis COVID-19 daily briefing episode discussing COBRA class action litigation are also available. Contact any Jackson Lewis attorney to help you navigate the new agency guidance.
The Small Business Administration (SBA) has issued guidance on the forgiveness provisions applicable to loans made under the Paycheck Protection Program (PPP) created by the CARES Act.
The SBA was required to issue guidance on these provisions within 30 days of the enactment of the CARES Act, or no later than April 26, 2020. On May 15, 2020, the SBA issued guidance in the form of the PPP Loan Forgiveness Application and Instructions. On May 22, 2020, the SBA issued additional guidance in the form of an Interim Final Rule. More…
The Small Business Administration (SBA) has issued guidance on the forgiveness provisions applicable to loans made under the Paycheck Protection Program (PPP) created by the CARES Act.
The SBA was required to issue guidance on these provisions within 30 days of the enactment of the CARES Act, or no later than April 26, 2020. On May 15, 2020, the SBA finally issued guidance in the form of the PPP Loan Forgiveness Application and Instructions. More…
Many employers facing economic challenges because of COVID-19 have considered several possibilities for reducing their contributions to their 401(k) plans. Whether freezing safe harbor matching or nonelective contributions or deciding against making discretionary matching and/or profit-sharing contributions, the goal has been the same: reduce their employee benefits costs.
What many employers have not focused on doing, however, is ensuring that employee contributions (elective deferrals and loan repayments) to their 401(k) plans (“Employee Contributions”) continue to be deposited into the plans in a timely manner. The United States Department of Labor (the “DOL”) requires that an employer remit Employee Contributions to a 401(k) plan “on the earliest date on which such amounts can reasonably be segregated from the employer’s general assets, but in no event later than the 15th business day of the month following the month in which the amounts were paid to or withheld by the employer.” In the case of a “small” plan, i.e., a plan with fewer than 100 participants, the DOL has established a safe harbor under which the remittance of Employee Contributions is deemed timely if made within seven business days following the pay date. In the case of a “large” plan, i.e., a plan with at least 100 participants, the DOL generally will look at all deposits made for the plan year and, absent unusual circumstances, generally will take the position that the quickest remittance is what is required for all remittances. The 15-business day outer limit is reserved for circumstances truly beyond the control of the employer.
Recently, and in light of COVID-19, the DOL, in EBSA Disaster Relief Notice 2020-01 (the “Notice”), issued guidance intended to relax the timely remittance requirement for employers unable to satisfy the general rules described above: “The Department [DOL] recognizes that some employers and service providers may not be able to forward participant payments and withholdings to employee pension benefit plans within prescribed timeframes during the period beginning on March 1, 2020, and ending on the 60th day following the announced end of the National Emergency. In such instances, the Department will not – solely on the basis of a failure attributable to the COVID-19 outbreak – take enforcement action regarding a temporary delay in forwarding such payments or contributions to the plan. Employers and service providers must act reasonably, prudently, and in the interest of employees to comply as soon as administratively practicable under the circumstances.” (Emphasis added.)
The Notice requires that failing to remit Employee Contributions to the plan in a timely manner be “solely on the basis of a failure attributable to the COVID-19 outbreak.” Given this language, we recommend that an employer that cannot deposit or have its payroll provider deposit Elective Deferrals into the plan in a timely manner solely due to a COVID-19 issue document the existence thereof and how the Employee Contributions were deposited into the plan as soon as possible after the COVID-19 issue was resolved. Potential examples of COVID-19 failures that, in and of themselves, might cause untimely deposits under the general rules include furloughing the employer’s payroll staff or staffing shortages at the payroll provider.
Any employer sponsoring a 401(k) plan should care deeply about ensuring the timely remittance of Employee Contributions. First, an untimely remittance must be reported on the plan’s annual IRS Form 5500 filing. Depending on the amount reported, a DOL or Internal Revenue Service (“IRS”) audit of the plan could be triggered, as late remittances are higher audit risk items on the Form 5500.
Second, an untimely remittance of Employee Contributions is deemed to be an interest-free loan from plan participants to the employer sponsoring the plan. Such a deemed loan constitutes a prohibited transaction under both the Internal Revenue Code (the “Code”) and the federal pension law, the Employee Retirement Income Security Act of 1974 (“ERISA”). Penalties under the Code amount to 15% of the earnings that the late Employee Contributions would have generated each year, compounded annually; this penalty increases to 100% of the foregone earnings if the IRS discovers the untimely remittance before the employer remits the Employee Contributions and required earnings to the plan. The ERISA penalty would be 20% of the foregone interest.
Third, employees participating in the 401(k) plan tend not to look kindly upon untimely remittances of Employee Contributions (it’s their money!), especially if the employer is a “repeat offender.” Not only does this outlook increase audit risk, it creates employee relations issues that can be difficult to navigate.
Please contact your Jackson Lewis P.C. employee benefits attorney to discuss whether you qualify, and how to document your qualification, for the relief provided in the Notice, and certainly if you have untimely remittances of Employee Contributions.
Recent statements by Small Business Administration (SBA) and Treasury Department officials have confused many Paycheck Protection Program (PPP) borrowers and led many to return PPP funds or consider doing so. Finally, the SBA has issued FAQ 46, which should assuage many borrowers’ concerns.
Previously, the SBA notified borrowers through a number of pronouncements that they must consider “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business” in determining whether their certification was made in good faith. This was a surprise as the certification in the PPP loan application that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” did not appear problematic during the COVID-19 pandemic. This guidance, along with statements by Treasury officials (including Secretary Steven Mnuchin), led many employers to have serious reservations about their use of PPP funds.
The SBA’s FAQ 46 provides clear and welcome relief to PPP borrowers. The SBA has created a safe harbor for PPP borrowers of less than $2 million:
SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA stated the safe harbor was appropriate because:
- Such borrowers are generally less likely to have had access to adequate sources of liquidity;
- It will promote economic certainty as PPP borrowers endeavor to retain and rehire employees; and
- It will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
Larger borrowers also got welcome relief, at least regarding the prospect of administrative enforcement. PPP borrowers of $2 million or more will need to demonstrate they had an “adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance.” However, if a borrower lacked an adequate basis for the required certification about the necessity of the loan request, SBA will seek no relief beyond the repayment of the outstanding PPP loan balance with no loan forgiveness. Significantly, FAQ 46 provides, “[I]f the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning the necessity of the loan request.” This comes as a big relief with many borrowers concerned with civil (and possibly criminal) sanctions under the False Claims Act and other federal laws.
If you have questions about this latest guidance or any other aspect of the PPP, please contact Jackson Lewis.
The Small Business Administration (SBA) violated federal law by imposing conditions for loans under the Paycheck Protection Program (PPP) that were not enacted in the Coronavirus Aid, Relief, and Economic Security Act, H.R. 748, P.L. 115-136 (CARES Act), Judge David Thuma has held. Roman Catholic Church of the Archdiocese of Santa Fe v. United States of America Small Business Administration, No. 20-1026-t (Bankr. D.N.M. May 1, 2020)[D.I. 15].
Does this portend the outcome of future litigation challenging the SBA’s post-statutory rulemaking in connection with PPP?
The executive and equity compensation plans, agreements, policies and arrangements (collectively, the “Plans”) of publicly traded companies receive close scrutiny from various shareholder advocacy groups during the annual proxy season, which is well underway for 2020. These groups advise institutional shareholders whether to vote for, to abstain from voting on, or to vote against, such Plans and/or the boards of directors of the companies seeking to adopt or amend such Plans.
On April 8, 2020, Institutional Shareholder Services (“ISS”), one of the most influential shareholder advocacy groups, published a policy update addressing various issues of concern given the ongoing COVID-19 pandemic. The policy update, entitled “Impacts of the COVID-19 Pandemic,” includes two sections relating to executive and equity compensation.
As discussed below, these two sections may provide public companies with additional flexibility in modifying their Plans, but any such modifications should be done in the context of the potential triggering of adverse federal income tax consequences for the award recipient under Section 409A of the Internal Revenue Code (the “Code”). This Section of the Code, which governs the federal income tax treatment of nonqualified deferred compensation plans, operates as a strict liability statute: Any violation of Section 409A’s requirements, irrespective of materiality, exposes the award recipient to income inclusion at vesting, rather than at payment, a 20% penalty tax (in addition to regular taxes) and, if the federal income tax is not timely paid, premium interest liability for late payments of tax.
For this reason, many deferred compensation plans are designed in a manner intended to ensure exemption from the requirements of Section 409A of the Code. The most common exemption is the “short-term deferral exemption,” which provides that if payment is made within two and one-half months following the year of vesting (i.e., by March 15th of the following year in the case of a calendar year plan), Section 409A does not apply to the payment.
If Section 409A does apply to a payment, the payment must be made in accordance with a compliant payment event (i.e., a specified or fixed date, a separation from service, a change in control, an unforeseeable emergency, disability of the award recipient or death of the award recipient). Each event, other than death, has a specific definition under Section 409A.
Lest anyone think that we’re suggesting that the tax tail should wag the business dog, we’re not: We’re merely suggesting that the adverse tax consequences under Section 409A should be assessed as boards/compensation committees consider making COVID-19-related changes, as the very people likely to be affected the most will be members of the executive management team, particularly, the company’s named executive officers (“NEOs”).
- Change in Metrics/Shift in Goals or Targets
In the section entitled “Change in Metrics/Shift in Goals or Targets,” ISS differentiates between short-term compensation plans (i.e., one-year performance plans) and long-term compensation plans (i.e., multiyear performance plans).
- Short-Term Compensation Plans
ISS acknowledges that many public company boards “are likely to announce plans to materially change the performance metrics, goals or targets used in [such] . . . plans” in response to the economic downturn and possible recession caused by COVID-19. For such plans, ISS – noting that changes to 2020 metrics, goals, and targets generally will be analyzed and addressed by shareholders at the 2021 annual, general meetings – encourages boards to contemporaneously disclose to shareholders of their reasons for making any such changes.
- Long-Term Compensation Plans
Material changes to long-term compensation plans will be reviewed with greater scrutiny. ISS writes that its “benchmark voting policies generally are not supportive of changes to midstream or in-flight awards since they cover multi-year periods. Accordingly, we will look at any such in-flight changes made to long-term awards on a case-by-case basis to determine if directors exercised appropriate discretion . . . and provided adequate explanation to shareholders of the rationale for changes.”
- Code Section 409A Issues (Delayed Payment and the Going Concern Exception)
Without going into detail, suffice it to say that many short-term compensation plans are designed to be exempt from the requirements of Section 409A, typically under the short-term deferral exemption, whereas many long-term compensation plans are designed to be exempt from or compliant with such requirements. Any change in metrics, goals, or targets with the effect of delaying the date of payment of the compensation has the potential to vitiate the short-term deferral exemption and/or trigger an outright violation of Section 409A.
Delaying a payment will not have such an adverse effect if the sole reason is that making the payment would jeopardize the ability of the company to continue as a going concern. In such instance, the company must make the payment as soon as possible after doing so would no longer jeopardize its ability to continue as a going concern.
Any public company seeking to delay payments past the period of exemption (for calendar year plans, generally, March 15th of the immediately following year) or past the prescribed payment date necessary for compliance with Section 409A, as applicable, should document why making the payments would jeopardize its ability to continue as a going concern. Consideration should be given to obtaining an attorney-client privileged memorandum on the going concern issue as an alternative to a full vetting of such issue that finds its way into the board/compensation committee minutes.
- Option Repricing
- ISS Giveth and ISS Taketh Away
In the section entitled “Option Repricing,” ISS acknowledges that, given the economic downturn and possible recession caused by COVID-19, some public companies may seek to “reprice (or replace/exchange/cancel and re-grant)” underwater stock options (i.e., options whose exercise price per share exceeds the current fair market value per share (typically, the current trading price per share). ISS advises boards that undertake option repricing actions to request shareholder approval or ratification of such actions promptly (by the 2020 annual general meetings); otherwise, the directors’ actions will be subject to scrutiny under ISS’ benchmark policy board accountability provisions, which, according to question 40 of its December 6, 2019 publication entitled “Equity Compensation Plans Frequently Asked Questions,” will cause a negative recommendation on the Plan.
If, in contrast, a board seeks shareholder approval/ratification of its option repricing actions at the company’s 2020 annual general meeting, ISS will apply its case-by-case policy approach in determining how to advise institutional shareholders. Under this policy, as applied, for example, to the U.S. market, ISS generally recommends “opposing any repricing that occurs within one year of a precipitous drop in the company’s stock price.” ISS writes that, among other facts, it also will examine “whether (1) the design is shareholder value neutral (a value-for-value exchange), (2) surrendered options are not added back to the Plan reserve, (3) replacement awards do not vest immediately, and (4) NEOs and directors are excluded.”
ISS’ guidance on repricing underwater options, given COVID-19 may not be that helpful to most public companies. Not only will a proposed repricing within one year of a precipitous drop in stock price generally result in a recommended “no” vote on such repricing, but even a repricing within one year of a drop in stock price that is not precipitous frequently will benefit NEOs and directors disproportionately and surrendered shares frequently must be added back to the Plan reserve in order to effectuate a value-for-value exchange (lower option price means more option shares to produce the same value).
- Code Section 409A Issues (NQSOs)
From a Section 409A standpoint, a reduction in the exercise price of a nonqualified stock option (“NQSO”) is treated as the grant of a new option. For the new grant to be exempt from Section 409A, it would need to have an exercise price per share of no less than fair market value of an underlying share as of the grant date.
If the company were to cancel the option and grant compensation that could be payable after the expiration date of the option, the award recipient could face Section 409A exposure. For instance, if an NQSO is replaced with a restricted stock unit (“RSU”) – an unfunded, unsecured promise by the company to deliver a vested share of stock, or the cash equivalent thereof, in a future year – that vests after the option expiration date (e.g., the RSU vests after the remaining term of the option, let’s say five years of a 10-year option term, expires) , the IRS could view the option as having provided for the deferral of compensation from the original grant date, thereby triggering Section 409A exposure for the award recipient.
Similarly, a public company should avoid a series of option repricings. The IRS could claim that the option lacked a fixed exercise price as of the original grant date, resulting in Section 409A exposure for the award recipient.
- ISO Issues
Substituting one incentive stock option (“ISO”) for another ISO creates even greater tax complexity. Although an ISO is not subject to Section 409A, its preferential tax treatment (unlike an NQSO, no tax upon exercise, unless the employee is subject to the alternative minimum tax) requires that the option shares be held for two years from the grant date and one year from the exercise date. The replacement ISO resets the two-year holding period.
In addition, only the first $100,000 in ISO value (grant date value) that becomes exercisable for the first time in any given year is treated as an ISO; the remainder is treated as an NQSO. For purposes of applying the $100,000 limit, any shares under the cancelled ISO that otherwise would have or actually did become exercisable and any shares that become exercisable under the replacement option, in each case during the year of cancellation, are counted. This rule makes the preservation of vesting of the cancelled option more challenging.
- Concluding Thoughts
ISS’ COVD-19 update to its compensation policy provides some flexibility to employers, particularly regarding re-setting short-term compensation plan metrics, goals, and targets. Flexibility on re-setting long-term compensation plan metrics, goals, and targets is minimal, and the one-year rule regarding “no” votes for option repricings following precipitous declines in stock value make such repricings significantly less palatable to boards/compensation committees.
Section 409A of the Code and the ISO rules make the ISS updates even more complicated to navigate. A delay in payment under a short-term compensation plan or a long-term compensation plan frequently will need to satisfy the “inability to continue as a going concern” exception to Section 409A exposure. Replacing an NQSO with an RSU that vests after the original term of the option or engaging in a series of repricings can trigger unwanted Section 409A exposure.
Repricing ISOs can get even more complicated. ISO shares, which are not subject to Section 409A, can be deemed NQSO shares, which may be subject to Section 409A, by virtue of the $100,000 rule, and replacing one ISO with another ISO resets the two-year holding period.
Navigating the interplay of the ISS updated policy and these tax issues requires thoughtful and practical legal and tax analysis. Please feel free to contact your Jackson Lewis employee benefits attorney to discuss any of these issues.