Small Business Administration (Finally) Clarifies Paycheck Protection Program Necessity Certification

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.

Church Successfully Challenges SBA’s Legislation of PPP by Regulation; More to Follow?

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?

More…

ISS COVID-19 Compensation Guidance More Flexibility (Maybe) For Public Companies, But More Tax Risk (Maybe) For NEOS

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”).

  1. 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.

  1. 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.

  1. 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.

IRS Releases FAQ for Coronavirus-Related Retirement Plan Relief

On May 4, 2020, the Internal Revenue Service released much-anticipated guidance related to implementing the retirement plan aspects of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) enacted on March 27, 2020, see our article here.  Although the questions and answers fall short of resolving all open questions, they provide helpful insight into what the additional guidance will look like. A brief overview follows.

Optional Changes

The guidance confirms that the CARES Act changes affecting the distribution and loan provisions of the plan are optional.  Employers do not have to implement these rules.

However, even if a retirement plan does not allow Coronavirus-Related Distributions (CRD), individuals can treat a distribution as a CRD on their individual federal tax returns if they meet the requirements of a qualified individual.  The guidance also notes that many retirement plans that are designed to accept rollover contributions correspondingly would accept repayments of CRD.

Qualified Individuals

The guidance makes clear that a qualified individual is anyone who: 1) is diagnosed with SARS-CoV-2 or COVID-19, 2) has a spouse or dependent who is diagnosed with SARS-CoV-2 or COVID-19, 3) experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced, business closure or inability to find child care due to SARS-CoV-2 or with COVID-19.

However, it falls short of answering a number of questions related to who is suitable as a qualified individual to be eligible to receive a CRD or loan.  For example, questions have been raised of whether a spouse or dependent who experiences adverse financial consequences would enable the participant to be treated as a qualified individual and what it means to be quarantined.  The IRS guidance acknowledges that the Treasury has received several comments relating to this and is considering an expansion of the list of factors considered.

The guidance also affirms a plan administrator may rely on an individual’s certification of his or her qualified status, unless the administrator has actual knowledge to the contrary.  Thus, there is no requirement for an administrator to independently verify an individual’s certification, but should a plan implement independent verification, it will be held responsible for determinations based on the information received.

Taxation Aspects of Distributions

The CARES Act provides taxation relief to qualified individuals receiving CRD, including an option for individuals to elect having their distribution ratably taxed over a 3-year period or taxed in full in the year of the distribution.  The IRS guidance includes the following example:

For example, if you receive a $9,000 COVID-19-related distribution in 2020, you would report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022. However, you have the option of including the entire distribution in your income for the year of the distribution.

Distributions will be subject to reporting on the IRS Form 1099-R.  The IRS expects to issue additional guidance related to this reporting later this year.  Likewise, individuals receiving a CRD will be required to report the distribution on their individual tax returns, treating the distribution as taxable ratably over a 3-year period or all in the year of the distribution.

Repayments of CRD

The IRS guidance answers important questions about the taxation of CRD repayments.  The guidance confirms that individuals desiring to repay CRD will use IRS Form 8915-E, which is expected to be made available later this year, to report the amounts includible in income for a year, and the amount of any repayments.  Any individual who repays a portion or the entire amount of the CRD before the end of the three-year repayment period may file amended tax returns to claim a refund of any taxes already paid.  The IRS included the following example:

If, for example, you receive a COVID-19-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022.

Delayed Loan Repayments

The IRS guidance provides helpful insight into the administration of suspended loan repayments, following principles similar to IRS Notice 2005-92, which implemented tax-favored distributions and plan loans under the Katrina Emergency Tax Relief Act of 2005 (KETRA) that was issued in IRS Notice 2005-92.  The IRS explained that for loans outstanding on or after March 27, 2020, if any repayment is due between March 27, 2020, and December 31, 2020, the due date for that repayment may be delayed for up to one year.  After the suspension period, the loan must be re-amortized to reflect the delay and interest accruing during the delay.

The IRS never fully explained back in 2005 how the KETRA 1-year loan suspension rule should operate, opting instead to announce a “safe harbor” that allowed plans to suspend loan repayments only until the end of the allowable suspension period (maximum 16 months for KETRA loans, but only 9 months for COVID-19 loans).  Immediately after the repayment suspension period ended, the remaining loan balance including accrued unpaid interest would be re-amortized so the loan will be repaid in level installments within 5 years from the original loan date PLUS the actual length of the KETRA loan suspension period applicable to each individual.

IRS Notice 2005-92 described how the safe harbor rules applied to these delayed loan repayment rules for Katrina-related loans using the following example:

Example. On March 31, 2005, a participant with a nonforfeitable account balance of $40,000 borrowed $20,000 to be repaid in level monthly installments of $394 each over 5 years, with the repayments to be made by payroll withholding. The participant makes 8 monthly payments until December 1, 2005. The participant’s home is in the Hurricane Katrina disaster area and the participant sustained an economic loss. The participant’s employer takes action to suspend payroll withholding repayments, for the period from December 1, 2005, through the end of 2006, for loans to qualified individuals that are outstanding on or after August 25, 2005 . . . [N]o further repayments are made on the participant’s loan until January 1, 2007 (when the balance is $19,045). At that time, Repayments on the loan resume, with the amount of each monthly installment increased to $423 in order to repay the loan by April 30, 2011 (which is the date the loan originally would have been fully repaid, plus the 13-month loan suspension period that resulted from Hurricane Katrina).

We anticipate the IRS will issue additional guidance consistent with IRS Notice 2005-92.  Until such additional guidance is issued, we recommend employers exercise caution and prudence in implementing these provisions.

SBA, Treasury Clarify Treatment Of Foreign Affiliates Under PPP Eligibility Criteria

In our post of April 4, we advised there was an ambiguity between the CARES Act and subsequent guidance issued by the Small Business Administration (SBA) on whether employees of foreign affiliates of applicants are considered when determining eligibility for Paycheck Protection Program (PPP) loans.

Applicants in the SBA’s Business Loan Programs (which includes the PPP) are generally subject to the affiliation rule under 13 CFR Section 121.301, subject to certain statutory waivers.  These rules provide that in determining a concern’s size (and therefore its loan eligibility), the SBA counts the employees of both the concern whose size is at issue and all of its domestic and foreign affiliates.

However, in an Interim Final Rule, the SBA has indicated that an entity generally is eligible for the PPP if it, combined with its affiliates, has 500 or fewer employees whose principal place of residence is in the United States.

In the latest update of its PPP Frequently Asked Questions (FAQ’s), issued May 5, 2020, the SBA clarified this ambiguity by unequivocally stating that “for purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S and foreign affiliates, absent a waiver of or an exception to the affiliation rules” and that “[b]usiness concerns seeking to qualify as a “small business concern” under section 3 of the Small Business Act (15 U.S.C. 632) on the basis of the employee-based size standard must do the same.”

Any business concern that obtained a PPP loan by excluding the employees of its foreign affiliates may now want to revisit their applications (and the eligibility certifications they made) in light of the anticipated (and well-publicized) scrutiny of PPP loans.

Please contact the authors or any Jackson Lewis attorney with questions.

New Model COBRA Notices and Emergency Extensions to COBRA Deadlines Require Employers to Take Action

The Department of Labor (DOL) and other federal regulators released updates and clarifications related to employee benefits, including updates to model COBRA notices and an extension of certain statutory deadlines intended to minimize the possibility of participants and beneficiaries losing benefits during the COVID-19 pandemic. This article highlights the DOL’s recent changes and updates relating to Consolidated Omnibus Budget Reconciliation Act (COBRA).

Updated COBRA Notices

On May 1, 2020, the DOL released the first updates to its model COBRA Notices since 2014. The models are for the (i) general or initial notice (provided to employees and covered spouses within the first 90 days of coverage under the group health plan), and (ii) the election notice (provided to qualified beneficiaries within 44 days of the qualifying event resulting in a loss of coverage). The notices inform plan participants and other qualified beneficiaries of their rights to health continuation coverage upon a qualifying event. The release of these updated model COBRA notices is an important reminder for employers to ensure that plan participants receive timely and adequate information about their COBRA rights.

More Information about Medicare:  The primary update to the DOL model notice is a new Q&A section, “Can I enroll in Medicare instead of COBRA continuation coverage after my group health plan coverage ends?”, with similar content in a companion FAQ about COBRA and Medicare options.

Risk of Noncompliance

Employers do not have to use the model notices, however the DOL considers using the model notices, appropriately completed, to be good-faith compliance with COBRA’s notice content requirements. Our firm recently discussed the rapid expansion of class action litigation against employers that issued COBRA election notices that failed to follow the DOL model notice in detail. We strongly recommend that employers use the updated DOL COBRA notice forms (or some enhanced version of such notices).

If the updated model notices are not used, the employer should ensure that their COBRA notices include the most current information from the DOL. Because of the significant exposure for COBRA noncompliance, and because employers retain liability for COBRA compliance even if a third-party vendor is hired for COBRA administration, employers should have their COBRA notices regularly reviewed.

COBRA Deadline Extensions

On April 29, 2020, the DOL and Internal Revenue Service (IRS) issued a Joint Notice extending certain time frames affecting a participant’s right to continuation of group health plan coverage under COBRA after employment ends. Normally, a qualified beneficiary has 60 days from the date of receipt of the COBRA notice to elect COBRA, another 45 days after the date of the COBRA election to make the initial required COBRA premium payments, and COBRA coverage may be terminated for failure to pay premiums timely. A premium is considered timely if paid within a 30-day grace period.

The Joint Notice extends the above deadlines (and many other participant-related deadlines such as HIPAA special enrollments, claim appeals and external review filings) by requiring plans to disregard the period from March 1, 2020, until 60 days after the announced end of the National Emergency (known as the “Outbreak Period”).

Election Period Extension:  once a participant receives his or her timely COBRA election notification, the applicable COBRA deadlines are now extended until after the Outbreak Period ends. For COBRA election purposes, this means if a qualifying beneficiary receives the election notice on or after March 1, 2020, the 60-day initial COBRA election period does not begin until the end of the Outbreak Period. The participant then has another 45 days after that to make the required COBRA premium payments (that still apply back to the date on which previous employer coverage ended). The more time provided to qualified beneficiaries to elect and pay for coverage retroactive to the date coverage is lost, the greater the opportunity to game the system.

As an example, if the National Emergency period is proclaimed to end on May 31, 2020, the “Outbreak Period” will be deemed to end on July 30, 2020.  If an employee was provided a COBRA election notice on April 1, 2020, that person’s initial COBRA election deadline will be extended from the original deadline of May 31, 2020 (the 60th day from date of receipt of COBRA election notice) to a new COBRA election deadline of September 28, 2020 (i.e., 60 days from the end of the Outbreak Period).  That individual then has 45 more days to make the first COBRA premium payment for all coverage back to the original date of coverage loss.

Premium Payment Extension:  Likewise, for individuals already on COBRA, the deadlines to make required monthly premium contributions are extended until 30 days after the end of the Outbreak Period, and the guidance makes clear that an employer or health insurance carrier cannot terminate coverage or reject any claims for nonpayment of premium during this period. Such coverage termination can only occur if the individual fails to make all the required monthly premium contributions at the end of the Outbreak Period.

For example, an individual previously elected COBRA and has been paying monthly COBRA premiums since March 1, 2020. That individual does not pay applicable monthly COBRA premiums for April, May, June, or July. Under the extension guidance, the Plan must allow the individual until 30 days after the end of the Outbreak Period (or, August 29, using the dates from the prior example) to fully pay all prior months of COBRA premiums to maintain the COBRA coverage.  Health plans and insurance carriers are burdened with holding all claims submitted during the extension period to know whether coverage will or won’t be paid as required.

Employer COBRA Notice Period Extension:  The Joint Notice potentially also allows plans, plan administrators, and employers to have extra time to provide the COBRA election notice but the guidance is unclear about how that extension period applies. Until further guidance is issued to add clarity, we recommend that employers, other plan sponsors and administrators continue to send the COBRA election notices based on existing law and rely on the extension only if necessary.

Complications will likely result under this new guidance, and thus we strongly recommend working with COBRA administrators to ensure proper compliance is maintained throughout the Outbreak Period and beyond.

Participant Options for Coverage

Lastly, the DOL updated its ongoing FAQ guidance for participants to know and understand their health insurance and other benefit rights and coverage options before, during, and after the National Emergency period ends. While this guidance is directed to participants and beneficiaries, employers may also find it instructive to ensure they are providing proper coverage alternatives.

More Information

Employers can find a consolidation of almost all the DOL’s recent COVID-19 related guidance about benefits on its website. Jackson Lewis is ready to assist all employers in making sure they understand these and other ongoing changes and updates.

Too Good to Be True? Treasury, SBA Limit Benefits of PPP Loans

Guidance issued by the Treasury Department and the Small Business Administration (SBA), the federal agency that administers the Paycheck Protection Program (PPP), demonstrates that the PPP loans, as originally thought, were too good to be true.

PPP was established by section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020). As enacted, the PPP provided for readily available low-interest loans potentially forgivable to the extent used for a broad range of expenditures, all of which were otherwise deductible. Further, the statute expressly provided that the amounts forgiven were not taxable as income to the borrower.  When the CARES Act was enacted, many thought that PPP was “too good to be true,” a belief validated by recent guidance issued by Treasury and SBA.

First, the SBA declared in an Interim Final Rule that no more than 25 percent of the amount forgiven can be attributable to non-payroll costs. See Q&A 2.o. in Part III of the interim final rule, Business Loan Program Temporary Changes; Paycheck Protection Program, Docket No. SBA-2020-0015, 85 Fed. Reg. 20811, 20813-20814 (April 15, 2020). This requirement is not in the statute and significantly limits the utility of the loan to employers in high-rent locations forced to lay off most of their staff due to government closure orders. The SBA’s subsequent Interim Final Rule stated that a borrower may not take multiple draws from a PPP loan to delay the start of the eight-week covered period. Together, these limitations have forced employers to decide to return the PPP loan proceeds, rather than make the expenditures and later fail to meet the forgiveness requirements.

Next, the SBA objected to the many large or publicly traded companies that applied for and received PPP loans during the initial round of funding. Despite the statute expressly making such entities eligible for PPP loans through a waiver of certain SBA affiliation rules that would otherwise disqualify them, the SBA issued two “frequently asked questions” (FAQS) reiterating that PPP loan applicants must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The FAQS went on to state that in so certifying, borrowers 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.” The SBA takes the position that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” The SBA then provided a safe harbor for such borrowers (which were expressly eligible for PPP loans under the CARES Act) by allowing any “borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020” to be “deemed by SBA to have made the required certification in good faith.” Finally, the SBA published a FAQ stating that “[t]o further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.” These FAQs and related comments by public officials have had a chilling effect on PPP borrowers; several have reportedly returned the loan proceeds and countless others are no doubt considering doing so.

On April 30, 2020, the IRS released Notice 2020-32, which “clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the [CARES Act] and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.” This conclusion is based on section 265(a)(1) of the Code, which disallows otherwise allowable deductions (such as the payroll, rent, and utility payments for which loan forgiveness is available under the CARES Act) because such payment is allocable to tax-exempt income and therefore “prevents a double tax benefit” that would otherwise occur. While not beloved by PPP borrowers, Notice 2020-32 provides certainty on at least one open issue regarding forgiveness.

The CARES Act was enacted during an unprecedented crisis and understandably did not address every contingency. Even as the law has developed post-enactment, the PPP loans still offer significant and potentially existential benefits to borrowers. Hopefully, the SBA will issue much-needed guidance on the myriad of issues remaining open and allow borrowers to maximize their intended impact.

Please contact a Jackson Lewis attorney if you have questions.

PPP Loan Forgiveness: Some Answers, Many Questions

Much has happened in the three-plus weeks since the Coronavirus Aid, Relief, and Economic Securities (CARES) Act was enacted on March 27, 2020.  The $349 billion dollars appropriated to the newly created Paycheck Protection Program (PPP) has been exhausted.  The Small Business Administration (SBA), the Federal agency administering the PPP, reports they have made over 1.6 million loans through nearly five thousand lenders with “net approved dollars” (net of fees paid to the originating lenders) of $342.3 billion dollars.  As of this writing, the Senate has approved legislation providing another $320 billion for the PPP and the House is expected to approve.  The President has indicated he supports the additional funding.

Many of these lenders have now disbursed funds to borrowers, triggering the eight week “Covered Period” for loan forgiveness purposes.  The cornerstone of the PPP, the loan-forgiveness provisions of the PPP provide that amounts expended for payroll costs, rent, mortgage interest, and utilities (“Eligible Expenses”) during this Covered Period are potentially forgiven.  Unfortunately, many questions remain unanswered at a time when employers need to make important decisions about their workforce and the use of the PPP funds to ensure forgiveness.

The CARES Act mandates the SBA to issue guidance on the loan-forgiveness provisions of the PPP within thirty days after enactment, or April 26, 2020.  Hopefully, this guidance will address some or all the following questions perplexing employers and their advisors:

  1. What are “costs incurred and payments made” during the Covered Period? 

Section 1106 of the CARES Act provides that a borrower is eligible for forgiveness of indebtedness on a PPP loan in an amount equal to the sum of permissible “costs incurred and payments made” during the covered period.  The phrase “costs incurred and payments made” is susceptible to at least two plausible interpretations: (a) that a cost must be both incurred and made during the covered period to be eligible for forgiveness; or (b) that a cost must either be incurred or made during the covered period to be eligible for forgiveness.  Employers need clarity on this basic provision. 

  1. What does “full-time equivalent employee” mean? 

The forgiveness provisions are not absolute; even after you decipher which “costs incurred and payments made” are eligible for forgiveness, the sum of the Eligible Expenses incurred and made during the covered period (the “Base Forgiveness Amount)” is subject to reduction or elimination based on the employer’s headcount during the covered period measured against one of two prior periods.  Specifically:

The Base Loan Forgiveness Amount is reduced by multiplying it by the following fraction:

  • The numerator of which is the average number of full-time equivalent employees per month employed by the borrower during the covered period (neither the CARES Act nor any subsequent guidance to date defines “full-time equivalent employees”)
  • The denominator of which is, at the election of the eligible recipient, either
    • the average number of full-time equivalent employees per month employed by the borrower during the period beginning February 15, 2019, through June 30, 2019, or
  • the average number of full-time equivalent employees per month employed by the borrower in January and February 2020.

For example, if an employer had 50 full-time equivalent employees during the covered period and employed 100 employees during both the period between January 1, 2020, and February 29, 2020, and during the period beginning on February 15, 2019, and ending on June 30, 2019, the Base Loan Forgiveness Amount would be multiplied by 50/100 or one-half and therefore reduced by 50%.

Unfortunately, there is no definition of full-time equivalent employees in the statute or in the other guidance issued to date.  While the typical calculation of full-time equivalent (FTE) is an employee’s scheduled paid hours divided by the employer’s hours for a full-time workweek, the rules of the Small Business Administration typically treat all employees (full time, part-time, temporary or employed on any other basis) equally.  And guidance is needed regarding the treatment of the following employees in this fraction:

  • furloughed employees
  • employees on workshare programs
  • employees on reduced schedules
  • former employees receiving severance
  • employees who voluntarily terminated
  • employees who were terminated for cause
  • employees on paid leave

Seemingly, to the extent employees or former employees are being paid amounts that qualify as payroll costs, such employees should be counted in the numerator of the reduction fraction; however, absent affirmative guidance we cannot say for sure.

Further, the provisions allowing an employer to “cure” any reductions to the Base Loan Forgiveness Amount for reductions in employees or wages between February 15, 2020, and April 26, 2020, (meaning the entire Base Loan Forgiveness Amount is forgiven) by restoring staffing levels to prior levels no later than June 30, 2020, are similarly tied to full-time equivalent employees.  As employers are facing these decisions now, prompt and clear guidance is needed. 

  1. How do employers persuade employees making more money on unemployment to return to “work” and make less money? 

As we can see from the prior question, employers need to bring staffing up to prior levels to achieve maximum loan forgiveness.  Many employers, however, had furloughed or laid off employees at the beginning of the COVID-19 pandemic.  When they receive the PPP loan proceeds and the Covered Period begins, however, many businesses remain shuttered.  Such employers will, therefore, have to pay their employees not to work.  Because of the enhanced unemployment provisions in the CARES Act, many of these employees are currently making more money not to work than they were making pre-pandemic.  Many employers are having difficulty convincing these employees to give up their lucrative unemployment benefits and are looking for ways to incentivize them to do so.

  1. Do bonuses or increases in compensation count as payroll costs? 

Both the amount of a PPP loan and the loan forgiveness provisions are based in principal part upon the employer’s “payroll costs.”  As defined in the CARES Act, payroll costs include “the sum of payments of any compensation with respect to employees that is salary, wage, commission, or similar compensation.”

Many employers are considering paying furloughed employees a bonus or increasing salary levels to incentivize them to forego their lucrative unemployment benefits and return to employment during the period between the start of the Covered Period and the time the employer’s business becomes operational again.  It is unclear, however, whether such payments will be considered payroll costs eligible for forgiveness.  While bonus payments are arguably “similar compensation,” different interpretations are similarly plausible as the absence of the term “bonus” in the payroll costs definition appears to be an intentional omission (Section 4116 of the CARES Act specifically references bonuses).  We also note that the employee retention tax credit provisions in the CARES Act (which provide a credit against employment taxes for qualified wages paid to employees) limits wages for purposes of the credit to the amount such employee would have been paid for working an equivalent duration during the immediately preceding 30 days.  SBA might take a similar approach and limit wage payroll costs to the average wages paid to the employee in a past measurement period.

  1. What about partnerships and LLCs? 

The availability of PPP loans to partnerships and LLCs and applying the loan forgiveness provisions to such entities has generated confusion from the outset.  Many believed that partners and members of an LLC could take out loans as self-employed individuals.  Subsequent guidance issued by SBA confirms that loans by partners are not permissible, and a partnership and its partners (and an LLC filing taxes as a partnership) are limited to one PPP loan.

Many questions remain, however.  For example, the SBA guidance states that “the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.”  Does this mean that a partnership with several active general partners, each of which has more than $100,000 in self-employment income, is limited to $100,000 in the aggregate?  Similar questions remain regarding loan forgiveness.

  1. Can an employer deduct payments that are eligible for forgiveness? 

When the CARES Act was enacted, the PPP loans seemed too good to be true.  The PPP provides forgiveness of the loan to the extent spent on Eligible Expenses and provides that forgiveness amounts are not taxable to the borrower for federal income tax purposes (but not necessarily for state and local income tax purposes).  The statute is not clear as to whether the borrower may also deduct these payments for Federal income tax purposes.  Generally, Section 265 of the Internal Revenue Code would preclude a deduction of the expenses due to the tax-exempt nature of the income, but clarity in future guidance would be welcome.

Response to the PPP has been overwhelmingly popular; the initial appropriation was exhausted promptly, and future appropriations are also expected to be disbursed quickly.  These loans offer a lifeline to many employers.  To achieve this intended purpose, however, employers need definitive guidance on the questions discussed above, among others.  Hopefully, the anticipated SBA guidance will provide some badly needed clarity.

Will New Stimulus Bill Include Multiemployer Pension Reform?

What could be in the next stimulus bill in response to the COVID-19 pandemic? Congress reportedly is working on a bill (dubbed “Stimulus 3.5”) that includes additional funding for the Paycheck Protection Program created by the CARES Act.  Will the new stimulus bill address long-awaited reforms to the multiemployer pension plan system?

The imminent collapse of the multiemployer pension system is well-documented. A recent report found that 114 multiemployer defined benefit plans (out of approximately 1,400 nationally), covering 1.3 million workers, are underfunded by $36.4 billion. Absent a legislative solution, most of these plans are projected to be bankrupt within the next five to 20 years. Moreover, the federal agency that backstops pension benefits — the Pension Benefit Guaranty Corporation (PBGC) — is projected to become insolvent in five years.

There have been numerous reform bills introduced in the past few years. Most recently, Senate Republicans introduced the Multiemployer Pensions Recapitalization and Reform Plan on November 20, 2019. The Democratic solution is called the Rehabilitation for Multiemployer Pensions Act of 2020, which was originally included in the House version of the CARES Act but was excised before the CARES Act was enacted on March 27, 2020.

The Republican Multiemployer Pensions Recapitalization and Reform Plan focuses on increasing the amount of the PBGC’s benefit guarantee (the maximum guaranteed benefit would increase by nearly 80 percent). Funding would come from a combination of increased PBGC premiums for multiemployer plans, and contributions from stakeholders (unions, participating employers, and retirees.) The Democratic Rehabilitation for Multiemployer Pensions Act, on the other hand, would create and fund a Pension Rehabilitation Administration within the Department of the Treasury. The agency would make loans to certain underfunded plans for 29 years on an interest-only basis. PBGC also would receive additional appropriations as needed to provide additional financial assistance to troubled plans, which would be available in addition to the above-mentioned loans.

The bills sharply diverge on withdrawal liability. Under the Republican approach, more employers would ultimately end up paying withdrawal liability; the bill would provide for five years of withdrawal liability payments for plans that are up to 139-percent funded. The mass withdrawal rules would be repealed, and the maximum withdrawal liability payment period (for terminated plans and plans in critical and declining status) would be 25 years.

Under the Democrat proposal, all employers who withdraw from a plan within 30 years of the date the plan received a loan would be treated as having withdrawn in a mass withdrawal; such employer would be subject to potentially infinite withdrawal liability payments.

This is a fluid and evolving situation. We will continue to monitor and report developments. If you have questions, please contact a Jackson Lewis attorney.

IRS Extends the Form 5500 Due Dates for Some Employee Benefit Plans

The Internal Revenue Service has broadened the filing and payment relief provided under prior guidance. IRS Notice 2020-23 postpones, among other relief, the due date for employee benefit plans required to make the Form 5500 series filings due on or after April 1, 2020, and before July 15, 2020.  Plans with original due dates or extended due dates falling within this period now have until July 15, 2020, to file their information reports.

Plan Administrators with original (un-extended) filing due dates falling within this announced 2 ½ month period who need additional time to file may request extensions by filing Form 5558 by July 15, 2020.  However, the extended due date will not be later than what it would have been absent this relief.

The chart below highlights the plans with a plan year-end which may benefit from Notice 2020-23 and have until July 15, 2020, to complete the required filing.

Notice 2020-23 invokes the Rev. Proc. 2018-58 section about Postponements for Federally Declared Disasters, which also states, “whatever postponement of the Form 5500 series filing due date is permitted by the IRS under section 7508A will also be permitted by the Department of Labor and PBGC for similarly situated plan administrators and direct filing entities.”

The PBGC acknowledged this IRS notice in its own Disaster Relief Announcement but reminded filers there are certain actions listed on the PBGC’s Exception List that do not automatically qualify for the relief.  The Exception List comprises actions that the PBGC views as creating a high risk of harm to plan participants.  For those actions, the PBGC will consider relief on a case-by-case basis.  For example, the PBGC filing relief may help those defined benefit plan sponsors recently engaging in significant layoffs who now need to file a PBGC Reportable Event due to a single cause active participant reduction.

IRS Notice 2020-23 also applies to the Form 990 series of filings that apply to tax-exempt trusts described in Internal Revenue Code Section 501(c)(9), referred to as VEBA (voluntary employees’ beneficiary association) trusts, among others, due on or after April 1, 2020, and before July 15, 2020.   The due date for these information reports is extended as well to July 15, 2020.

Jackson Lewis is staying on top of all of the COVID-19 related legislation and guidance affecting employers.  Contact a Jackson Lewis attorney with your questions.

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