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U.S. Companies Assess Ripple Impact of COVID-19 on their Business and Incentive Plan Metrics

As we near the end of second quarter 2020, companies are evaluating the ripple effect COVID-19 has had and will likely continue to have on their businesses as a result of worker layoffs, shelter-in-place orders, employee health and safety matters, supply chain and counterparty risk issues and decreased product demand, among other things.

One key area of focus for many companies and compensation committees will be assessing the impact of COVID-19 on incentive plan performance award targets, many of which were set in February before the pandemic hit the United States and may now be unattainable. Most companies will want to keep their executive and management teams striving for potentially new and adjusted goals that the new environment requires. How to go about reflecting and rewarding key employees for performance around these changes becomes challenging when awards for the performance period have already been granted.

Some companies have viewed their performance awards as long-term in nature and have maintained existing performance targets in spite of changed circumstances. Others see a need for changes. The approaches will depend on each company’s particular compensation philosophy and structure, the amounts and types of awards that have been granted, the extent and manner in which the business and existing targets have been affected, and other motivating criteria at issue.

On approach that companies have considered in connection with their annual awards is to adjust the performance targets based on currently available information so as to reflect changing expectations. This approach is relatively straightforward. A

Unraveling U.S. Retirement Savings – How a Global Pandemic Threatens to Undo Decades of Planning

With the economy in a free-fall and the U.S. government scrambling to create a financial safety net for citizens, giving access to tax-qualified retirement savings was a natural piece of Congress’ plan to loosen the grip on needed funds.  And yet, plan sponsors should pause before adopting the new in-service withdrawal and loan options wholesale.  The options made available under the CARES Act are permissive, not required.  Implementing a thoughtful, needs-based, COVID-19 withdrawal/loan policy could protect employees’ financial security for decades to come.

Plan sponsors can adopt an incremental approach to COVID-19 in-service withdrawals or loans, and should consider doing so in the interest of helping participants not decimate hard-won savings in a panic.

What Options do Plan Sponsors Have?

COVID-WithdrawalsThe CARES Act allows a new category of withdrawals, COVID-19 Distributions, which allows participants to take a withdrawal of the lesser of 100% of their vested account balance or $100K, anytime between January 1, 2020 – December 31, 2020, if they satisfy certain requirements. Click here to read our summary of the CARES Act withdrawal rules.

Plan sponsors can design a COVID-19 withdrawal program within the parameters of the CARES Act without allowing the full $100K withdrawal at once – or at all.  The statute does not require that a plan go from 0 to 100!  Further, while the new law allows plan administrators to rely on the representation of participants that they qualify for the in-service withdrawals, plan sponsors can impose any reasonable substantiation

COVID-19: Emergency Leave-Sharing Plans for U.S. Employers

In addition to the paid sick leave and family leave U.S. employers must provide under the Families First Coronavirus Response Act (“FFCRA”), some employers are seeking additional ways to support employees affected by COVID-19. The IRS has published guidance on leave-sharing plans for employees affected by a major disaster or emergency, as declared by the President. President Trump issued such a declaration on March 13 (retroactive to March 1), so this guidance applies to employers who wish to implement an emergency leave-sharing plan at this time.

A major disaster leave-sharing plan as applied to the current COVID-19 emergency is a written plan that meets the following requirements:

  • The plan allows employees to voluntarily deposit accrued leave in an employer-sponsored bank for use by other employees who have been adversely affected by COVID-19. An employee is considered to be adversely affected by a COVID-19 if it has caused severe hardship to the employee or a family member of the employee that requires the employee to be absent from work.
  • The plan does not allow employees to deposit leave for a specific leave recipient.
  • The amount of leave that may be deposited by an employee in any year generally does not exceed the maximum amount of leave that the employee normally accrues in a year. Under this requirement, employees likely cannot donate emergency sick leave provided under the FFCRA.
  • An employee may receive paid leave, at his or her normal rate of compensation, from leave deposited

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

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 Releases 2020 Adjusted Qualified Plan Limitations

The Internal Revenue Service released the cost-of-living adjusted qualified retirement plan limitations effective January 1, 2020.  For ease of reference and comparison to prior years, we have placed the adjusted limitations in the table below.  For more information, refer to the Internal Revenue Service’s news release and Notice 2019-59 and to the Social Security Administration’s October 10, 2019, fact sheet.

Qualified Plan Limits

Type of Limitation 2020 2019 2018 2017 2016 Elective Deferrals (401(k), 403(b), 457(b)(2) and 457(c)(1)) $19,500 $19,000 $18,500 $18,000 $18,000 Section 414(v) Catch-Up Deferrals to 401(k), 403(b), 457(b), or SARSEP Plans (457(b)(3) and 402(g) provide separate catch-up rules to be considered as appropriate) $6,500 $6,000 $6,000 $6,000 $6,000 SIMPLE Salary Deferral $13,500 $13,000 $12,500 $12,500 $12,500 SIMPLE 401(k) or regular SIMPLE plans, Catch-Up Deferrals $3,000 $3,000 $3,000 $3,000 $3,000 415 limit for Defined Benefit Plans $230,000 $225,000 $220,000 $215,000 $210,000 415 limit for Defined Contribution Plans $57,000 $56,000 $55,000 $54,000 $53,000 Annual Compensation Limit $285,000 $280,000 $275,000 $270,000 $265,000 Annual Compensation Limit for Grandfathered Participants in Governmental Plans Which Followed 401(a)(17) Limits (With Indexing) on July 1, 1993  

$425,000  

$415,000  

$405,000  

$400,000  

$395,000 Highly Compensated Employee 414(q)(1)(B) $130,000 $125,000 $120,000 $120,000 $120,000 Key employee in top heavy plan (officer) $185,000 $180,000 $175,000 $175,000 $170,000 Tax Credit ESOP Maximum balance $1,150,000 $1,130,000 $1,105,000 $1,080,000 $1,070,000 Amount for Lengthening of 5-Year ESOP Period $230,000 $225,000 $220,000 $215,000 $210,000 Taxable Wage Base $137,700 $132,900 $128,400 $127,200 $118,500

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

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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