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COVID-19: Considerations for U.S. Contributing Employers to Multiemployer Plans

The COVID-19 pandemic has had a significant financial impact on business and individuals around the globe, with global financial markets seeing significant drawbacks in March 2020 alone.  That impact has also been felt by U.S. employers who contribute to multiemployer pension plans, as well as the plans themselves.  Below are a few issues that U.S. contributing employers to multiemployer pension plans should keep in mind in these volatile times:

  1. Consequences of Changes in Funded Status. Even before the COVID-19 pandemic, many multiemployer pension plans were operating in critical or critical and declining funded status, and the market fluctuations as a result of the COVID-19 pandemic will only exacerbate those funding shortfalls.  Contributing employers should anticipate that those shortfalls may result in additional surcharges becoming payable on their monthly contributions (as a result of the Pension Protection Act of 2006) as well as increased estimates of potential withdrawal liability.
  2. Withdrawal Liability. With many contributing employers implementing layoffs or other workforce reductions, there may be questions as to whether such reductions may result in withdrawal liability under the applicable multiemployer pension plan.  Withdrawal liability is due upon a complete or partial withdrawal from a multiemployer pension plan.  A complete withdrawal occurs when a contributing employer permanently ceases all operations covered by the plan or no longer has an obligation to contribute under the plan.  Therefore, layoffs and/or temporary shutdowns should not trigger complete withdrawals unless and until those layoffs and shutdowns become permanent.  Partial withdrawal occurs upon a 70% contribution decline

COVID-19 and Compensation: Considerations for Public and Private U.S. Companies

The COVID-19 pandemic has created significant disruption in the financial performance of businesses across the globe, creating real challenges for compensation programs maintained by both public and private U.S. companies. While the health and safety of company employees does and should remain the primary concern, boards of directors and compensation committees may also want to consider how the economic impact of COVID-19 may affect their short- and long-term incentive compensation programs and the potential effects of related performance declines on employee morale and commitment.

1. Establishing and Adjusting Performance Goals for Incentive Compensation Programs.

The destabilizing forces of the COVID-19 pandemic have significantly impacted business operations around the globe. As a result, company performance may lag for reasons unrelated to employee performance. In that context, boards of directors and compensation committees should evaluate the performance goals that have been (or are scheduled to be) established for their current cash and equity incentive compensation programs and determine whether it would be in the company’s interest to adjust those performance goals . For public and private companies that have not yet established performance goals for 2020 performance periods, to the extent permitted under applicable plan documents it may be best to hold off on establishing performance goals until the impact of COVID-19 on business operations is more fully understood. Fortunately for U.S. public companies, the repeal of Section 162(m)’s performance-based compensation exception in 2017 created significant flexibility as to when during a performance period performance

Employer Shared Responsibility Payments May Have No Statute of Limitations

In Chief Counsel Memorandum 20200801F, released on February 21, 2020, the IRS established its position that no statute of limitations applies to employer shared responsibility payments that may be assessed under Section 4980H of the Internal Revenue Code (the “Code”).  This IRS internal guidance should serve as a warning for applicable large employers that non-compliance with the Affordable Care Act’s employer shared responsibility rules can result in significant penalties that may be assessed at any time in the future.

The IRS bases its position on the fact that the information returns on Forms 1094-C and 1095-C do not provide sufficient information to calculate the tax liability due by an employer under Section 4980H of the Code.  In Beard v. Commissioner, 82 T.C. 766 (1984), aff’d 793 F.2d 139 (6th Cir. 1986), the tax court set forth a four-part test for determining whether a document is sufficient to start a statute of limitations under Section 6501 of the Code, with the first test requiring that the document include sufficient data to calculate the taxpayer’s tax liability.  In the IRS’s view, since neither Form 1094-C nor the Form 1095-C includes information with respect to an employee’s eligibility for a premium tax credit – which is necessary data for determining whether a Section 4980H penalty applies – an employer cannot know whether it has potential liability under Section 4980H at the time those forms are filed.  As a result, the IRS concluded that the statute of limitations

Highlights from Proposed Section 162(m) Regulations

Section 162(m) of the Internal Revenue Code disallows a deduction by any publicly held corporation for applicable employee remuneration paid with respect to any covered employee to the extent that remuneration for the taxable year exceeds $1 million.   As we’ve previously blogged here, here, and here, the bill popularly referred to as the Tax Cuts and Jobs Act of 2017 significantly amended and expanded the scope of Section 162(m) for taxable years beginning after December 31, 2017, including by eliminating its performance-based compensation exception.  Now, Proposed Regulations on the amended Section 162(m) have been released which expand on the entities, individuals and compensation that are now subject to Section 162(m).

This blog highlights some of the common questions that the Proposed Regulations attempt to clarify. The Proposed Regulations supersede (but largely confirm) the guidance in Notice 2018-68 (released in August 2018) and will generally be effective for taxable years beginning after the publication of the final regulations, except with respect to guidance relating to covered employees and grandfathered arrangements, which will be effective as of September 10, 2018.

  1. What does it mean to be a “publicly held corporation”?

A publicly held corporation includes any corporation whose securities (debt or equity) are required to be registered under Section 12 of the Exchange Act or that is required to file reports under Section 15 of the Exchange Act, in each case, as of the

ISS Updates its U.S. Compensation and Equity Compensation Plan Policies for 2020

In December 2019, Institutional Shareholder Services (“ISS”) published updates to its FAQs for its U.S. Compensation Policies and its policies related to U.S. Equity Compensation Plans with respect to annual meetings occurring on or after February 1, 2020.  While ISS did not make major changes for 2020, reporting companies should be aware of the following key updates.

  • The passing scores for all U.S. Equity Plan Scorecard (“EPSC”) models remain the same as in effect for the 2019 proxy season (55 points for S&P 500 reporting companies, 53 for other reporting companies). However, ISS made the following notable changes and clarifications to EPSC’s scoring model:
    • An evergreen feature (i.e., automatic share replenishment without the need for additional stockholder approval) in an equity plan submitted for stockholder approval will be considered a negative overriding factor which may result in a negative vote recommendation. Sunset provisions applicable to such evergreen features will not be considered as a mitigating factor.
    • While the passing scores for EPSC models remain unchanged, certain factor scores within the models have been adjusted (but not disclosed since they are proprietary).
    • Limited partnership interests, including operating partnership units issued by REITs, will be included in common shares outstanding (CSO) for purposes of shareholder value transfer (SVT) and burn rate calculations if such interests are equivalent to common stock on a 1:1 basis and can be exchanged into common stock at any time at no cost to the holder.
  • ISS confirmed

IRS Expands Determination Letter Program for Mergers of Qualified Plans Following Corporate Transactions

The IRS recently reversed course on the availability of the determination letter program for merged qualified retirement plans – thereby providing new alternatives for integrating qualified retirement plan benefits in the context of corporate transactions.

Merged Plan Relief:  Rev. Proc. 2019-20, released on May 1, 2019, expands the IRS’ determination letter program for individually designed qualified retirement plans (e.g., defined benefit plans or defined contribution plans) that result from a merger of two or more qualified retirement plans following a corporate merger, acquisition or other similar business transaction (a “Merged Plan”).  The newly expanded program will be available beginning September 1, 2019 and continuing on an ongoing basis.

Eligibility:  To be eligible for the determination letter program:

  • The Merged Plan must be a combination of two or more qualified retirement plans maintained by previously unrelated entities (i.e., entities that are not members of the same controlled group under Section 414 of the Internal Revenue Code);
  • The plan merger must occur no later than the last day of the first plan year that begins after the effective date of the corporate merger, acquisition or other similar business transaction (the “Corporate Transaction”); and
  • A determination letter application for the Merged Plan must be submitted by the last day of the first plan year that begins after the effective date of the plan merger.

Pre-approved or prototype qualified retirement plans are not explicitly covered by the procedure  — additional IRS guidance will be needed to determine the applicability

There’s No Such Thing as a Free Lunch…But There are Free Snacks

Something to gnaw on during your lunch hour today (sorry, we couldn’t resist):  the IRS recently released TAM 201903017, which ruled that free employee meals provided by an employer were includible in its employees’ taxable income – and therefore subject to employment taxes.

Section 119(a)(1) of the Code excludes the value of meals provided to an employee by an employer if the meals are furnished on the employer’s business premises “for the convenience of the employer.”  The “convenience” test can be met if the employer has a substantial noncompensatory business reason for providing the free meals, such as that the employee must be available for emergency calls or that there are no nearby alternatives to secure a meal within the employee’s meal period.  Under Section 119(b)(4) of the Code, if more than 50% of an employer’s employees on its premises receive meals that satisfy the “convenience” test, then all meals provided by the employer are deemed to be for its convenience and are therefore excluded as a taxable fringe benefit to its employees.  Section 3121(a)(19) of the Code excludes the value of any such meals from employee wages for purposes of employment tax withholding if it is “reasonable to believe” that the meals are excludable under Section 119.

In TAM 201903017, the employer-taxpayer (which, although redacted, appears to be a large technology corporation) did not include the value of employer-provided meals and snacks in its employees’ income, nor did it withhold and pay the related amount of

ISS Updates its U.S. Compensation and Equity Compensation Plan Policies for 2019

In December 2018, Institutional Shareholder Services (“ISS”) published updates to its FAQs for its U.S. Compensation Policies and its policies related to U.S. Equity Compensation Plans with respect to annual meetings occurring on or after February 1, 2019.  While ISS did not make major changes for 2019, reporting companies should be aware of the following key updates.

  • The passing scores for all U.S. Equity Plan Scorecard (“EPSC”) models remain the same as in effect for the 2018 proxy season. However, ISS made the following notable changes and clarifications to EPSC’s scoring model:
    • Full points will be awarded for the change in control (CIC) vesting factor if the plan discloses with specificity the CIC vesting treatment for both time- and performance-based awards. If a plan is silent on CIC vesting treatment or provides for discretionary vesting, then no points will be awarded for this factor.
    • Weighting on the plan duration factor has been increased to encourage plan resubmissions more often than listing exchanges require (and following the repeal of Section 162(m), which required periodic stockholder reapproval). To receive full points for plan duration, the proposed share reserve should last five to six years or less (based on the issuer’s 3-year annual average burn rate).
    • Equity plan amendments that involve removal of general references to Section 162(m) qualification (including references to approved metrics for use in performance plan-based awards) will be viewed as administrative and neutral. However, the removal of individual award limits in

FAQs on the New 162(m) Guidance

FAQs on the New 162(m) Guidance

September 13, 2018

Authored by: Lisa Van Fleet and Adam Braun

We previously blogged about the guidance released by the IRS in Notice 2018-68 (the “Notice”), which addressed some of the changes made to Section 162(m) of the Internal Revenue Code (“Section 162(m)”) in the 2017 tax reform law (the “Act”).  In that post, we focused on the general changes in the definition of covered employee and guidance as to what constitutes a written binding contract eligible for grandfather relief.   In this post, we will address 5 of the most common questions we’ve heard companies ask about the guidance and describe potential next steps.

Q 1:   If a performance based compensation arrangement permits negative discretion to zero, are all payments made pursuant to that arrangement subject to 162(m)’s $1 million deduction limit? 

A:  Most likely, yes.  The Notice clarifies that a compensatory arrangement is not a written binding contract to the extent that any amounts payable under the arrangement may be reduced to $0 upon the company’s exercise of negative discretion.  However, if a portion of that amount is required to be paid under state law, then that portion of the payment would be grandfathered under Section 162(m) and would not be subject to its $1 million deduction limit.  Companies covered by Section 162(m) should review their current compensation arrangements now to identify the contracts and plans that may be impacted by this guidance.

Q 2:   What changes will constitute material modifications of grandfathered arrangements?  

A:   The Notice states that a material modification

A New Method to Incentivize Young Workers?

Companies have considered various ways to retain and incentivize their younger, and increasingly mobile, workforce.  A recent PLR offers another option: using a 401(k) plan to provide additional benefits (in the form of a nonelective contribution) to employees who pay down their student debt during the plan year.

On August 17, 2018, the IRS released a private letter ruling (PLR 201833012) in which it ruled that a proposed student loan repayment program included in a 401(k) plan does not violate the contingent benefit rule in Internal Revenue Code Section 401(k)(4)(A) and Treas. Reg. 1.401(k)-1(e)(6).  The requesting company’s 401(k) plan and proposed student loan repayment program included the following features:

  • An employee may elect to contribute eligible compensation to the 401(k) plan as pre-tax or Roth elective deferrals, or after-tax employee contributions.
  • If an employee makes an elective contribution during a payroll period equal to at least 2% of eligible compensation during the pay period, the company makes a matching contribution equal to 5% of eligible compensation during the pay period.
  • An employee may elect to enroll in the student loan repayment program and may opt out on a prospective basis. An employee who participates in the program would continue to be eligible to make elective contributions to the 401(k) plan but would not be eligible to receive regular matching contributions with respect to those elective contributions while participating in the program. The employee would be eligible to receive nonelective contributions and a true-up matching contribution, as
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