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COVID-19: CARES Act Limits Executive Compensation for U.S. Businesses Participating in CESA Relief

As part of the recently passed Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act), the Treasury Department will provide loans, loan guarantees, and other investments for U.S. businesses, states, and municipalities dealing with losses incurred as a result of COVID-19.  Among other requirements, businesses that enter into these loan agreements are subject to certain limits on executive compensation during the period beginning on the date the loan agreement is entered into and ending one year after the loan or loan guarantee is no longer outstanding (the “Restriction Period”).  Note that these limits are not applicable to businesses that participate in the small business relief that was also provided under the CARES Act.[1]  More information on the small business relief under the CARES Act can be found here. The rules described below apply to certain specialized industries (passenger air carriers, cargo air carriers, and businesses critical to maintaining national security) as well as other mid-sized businesses in any industry with between 500 and 10,000 employees. The restrictions on executive compensation are as follows:

  • No officer or employee of the business whose total compensation exceeded $425,000 in 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020) may receive from the business:
    • Total compensation which exceeds, during any 12 consecutive months of the Restriction Period, the total compensation received by the officer or employee from the business in 2019; or

IRS Takes Step Towards De-Risking Retiree Lump Sum Windows

On March 6, 2019, the IRS announced that it will not amend the minimum required distribution regulations under Code section 401(a)(9) to expressly prohibit lump-sum window elections for retirees who are already receiving annuity payments under a defined benefit pension plan.  This practice has never been clearly permissible under existing RMD regulations. Nevertheless, some plan sponsors seeking to “de-risk” their pension liability received private letter rulings in the past permitting such action.  Then the IRS issued Notice 2015-49 announcing that it would propose amendments to the RMD regulations clarifying that lump sum windows for retirees are not be permitted.  Now the IRS has altered course on this issue again with Notice 2019-18.

Thoroughly confused?  Not surprising given the shifting positions of the IRS on this issue.

Existing Regulations

Existing regulations state that once annuity payments have commenced over a period of time, the period may only be changed in accordance with certain exceptions enumerated in Treas. Reg. 1.401(a)(9)-6, Q&A-13.  One enumerated exception is for annuity payment increases described in Q&A-14.  The regulations under Q&A-14 provide that annuity payments may increase to allow a beneficiary to convert the survivor portion of a joint and survivor annuity into a single-sum distribution upon the employee’s death.  They do not expressly recognize a similar right to convert an annuity into to a lump sum during the employee’s lifetime.  They do, however, permit the payment of “increased benefits that result from a plan amendment.”  Plan sponsors interested

ESOPs: A Path to Bank Independence

Originally posted on BankBryanCave.com.

Employee Stock Ownership Plans offer an opportunity for banks to offer an attractive employee benefit plan, but can also do so much more.  On the latest episode of The Bank Account, Jonathan and I are joined by Bryan Cave Partner, Steve Schaffer, to discuss the advantages to banks considering implementing an ESOP.

To hear the Bank Account Podcast, please visit here.

Button up Your Business Associates Agreements or Pay the Price

480652321Last month, the Office of Civil Rights (OCR) of the U.S. Department of Health and Human Services (HHS) announced a resolution agreement with the Center for Children’s Digestive Health (CCDH) which included a $31,000 penalty.

This isn’t the first time a covered entity has paid a “resolution amount” to settle potential violations under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) Privacy and Security Rules with respect to a business associate agreement (or lack thereof).

  • March 2016: North Memorial Health Care of Minnesota  paid $1.55 million to settle charges that it failed to enter into a business associate agreement with a major contractor performing certain payment and health care operations activities on its behalf and to complete a risk analysis.
  • April 2016: Raleigh Orthopaedic Clinic, P.A. of North Carolina  agreed to pay $750,000 to settle charges that it potentially violated the HIPAA Privacy Rule by handing over the protected health information of approximately 17,300 patients without first executing a business associate agreement.
  • September 2016: Care New England Health System entered into a settlement relating to the failure to timely amend an existing business associate agreement for the HIPAA Omnibus Final Rule and paid $400,000.

However, unlike the other settlements in which the covered entity had reported a breach, OCR was not investigating a breach involving the CCDH’s protected health information.   It appears that the compliance

Fiduciary Rule Under Review – Update

On Friday, President Trump issued an order directing the Department of Labor to review the new regulation to determine whether it is inconsistent with the current administration’s policies and, as it deems appropriate, to take steps to revise or rescind it.

The long awaited Fiduciary Rule expanded protection for retirement investors and included a requirement that brokers offering investment advice in the retirement space put clients’ interests first.  Financial institutions that either implemented, or were rapidly completing, their compliance efforts to comply with the Fiduciary Rule will need to assess the impact of this order on these efforts.  Notwithstanding many earlier reports that the rule would be delayed 180 days, the date on which the rule was to take effect (April 10, 2017) has not been delayed.  However, it is anticipated that a delay will be forthcoming, making the decision whether or not to proceed with further compliance efforts a difficult one.  Many of those institutions may choose to implement only certain aspects of the Fiduciary Rule, while delaying complying with other aspects of that rule, pending the results of the DOL review.

Some have speculated that regardless of whether the Fiduciary Rule is finally made effective, compliance with the Fiduciary Rule could become the new “best practice” model; however, it is unlikely that financial institutions will voluntarily assume most of the obligations and resulting exposure of serving retirees in a fiduciary capacity.

ACA Facelift to Disability Claims Process Could Affect All Plans

claimIt might be tempting to conclude that the recent Department of Labor regulations on disability claims procedures is limited to disability plans.  However, as those familiar with the claims procedures know, it applies to all plans that provide benefits based on a disability determination, which can include vesting or payment under pension, 401(k), and other retirement plans as well. Beyond that, however, the DOL also went a little beyond a discussion of just disability-related claims.

The New Rules

The new rules are effective for claims submitted on or after January 1, 2018. Under the new rules, the disability claims process will look a lot like the group health plan claims process.  In short:

  • Disability claims procedures must be designed to ensure independence and impartiality of reviewers.
  • Claim denials for disability benefits have to include additional information, including a discussion of any disagreements with the views of medical and vocational experts and well as additional internal information relied upon in denying the claim. In particular, the DOL made it clear in the preamble that a plan cannot decline to provide internal rules, guidelines, protocols, etc. by claiming they are proprietary.
  • Notices have to be provided in a “culturally and linguistically appropriate manner.” The upshot of this is that, if the claimant lives in a county where the U.S. Census Bureau

PBGC Proposed Rule May Offer DC Plans New Tool for Finding Missing Participants

where-are-youFor many years, the PBGC has been helping reunite missing participants with their benefits under single-employer defined benefit plans. Now, a new PBGC proposed rule may open up the program to missing participants under other terminated plans.

Under this proposed rule, terminated defined contributions plans may choose to transfer benefits of missing participants to the PBGC or to establish an IRA to receive the transfer and send information to the PBGC about the IRA provider.   The PBGC will attempt to locate the missing participants and add them to a searchable database. The PBGC notes that once the program is established, it may issue guidance making the reporting requirement mandatory for defined contribution plans as authorized under section 4050 of ERISA.

The PBGC will accept the transfer of accounts of any size. If a plan sponsor chooses to transfer accounts to the PBGC, it must transfer the accounts of all missing participants.  There will be no fee for transfers of $250 or less. For transfers above that amount, a one-time flat fee will apply which the PBGC indicates will not exceed its costs associated with the program.  Initially, the fee has been set at $35.

This newly-proposed voluntary program for defined contribution plans has certain limitations. For instance, it would only be available to locate missing participants upon plan termination.  It would not be available to locate missing participants for

Employee Stock Ownership Plans: Another Tool for Family-Owned Banks

Today’s economy presents numerous challenges to community bank profitability—compressed net interest margins, increased regulation, and management teams fatigued by the crisis. In response to these obstacles, many boards of directors are exploring new ways to reduce expenses, retain qualified management teams, and offer opportunities for liquidity to current shareholders short of a sale or merger of the institution.

For many family-owned banks, their deep roots in the community and a desire to see their banks thrive under continued family ownership into future generations can cause these challenges to be felt even more acutely. In particular, recruiting and retaining the “next generation” of management can be difficult. Cash compensation is often not competitive with the compensatory packages offered by publicly-traded institutions, and equity awards for management officials are unattractive given the limited liquidity of the underlying stock. All the while, these institutions should ensure that their owners have reasonable assurances of liquidity as needs arise or as investment preferences change. In combination, these challenges can often overwhelm a family-owned bank’s desire to remain independent.

Depending on the condition of the institution, implementing an employee stock ownership plan, or ESOP, may help a board address many of these challenges. While the ESOP is first a means of extending stock ownership to the institution’s employees, an ESOP can have other applications for family-owned banks.

Recruitment and Retention An obvious benefit of an ESOP is to provide management and employees the ability to participate in an increase in the value of the

The ESOP as a Solution

The ESOP as a Solution

August 2, 2013

Authored by: Steven Schaffer and Chris Rylands

Employee Stock Ownership Plans (“ESOPs”) can be a good choice for the right company because they can generate liquidity for the owners in a tax-advantaged form, allow the owners to retain de facto, if not legal, control, and provide employee ownership and the resultant productivity and retentive benefits to the business.  Common uses of ESOPs include can have other uses as well, such as:

  • Allowing an owner to exit his or her business but provide an incentive to retain existing management (who may be unable to buy)
  • Allowing a shareholder to diversify his or her holdings through a partial (or total) sale to an ESOP;
  • Providing a vehicle to efficiently redeem unwanted shareholders;
  • Structuring management buy-outs;
  • Providing a buyer for an estate holding closely-held stock;
  • Closing out a private equity fund by selling a portfolio company to an ESOP; and
  • Selling a division to employees.

Using an ESOP has certain advantages over more traditional approaches to address these issues, including:

  • Both principal and interest paid on any leveraging required for the ESOP transaction are tax-deductible.
  • In many circumstances, owners can rollover the proceeds resulting from a sale of their stock to an ESOP into other corporate securities free of federal (and most often, state) income taxes.
  • Even in situations which are not eligible for the tax-free rollover, sellers can get capital gain treatment, rather than dividend treatment, on the sale to an ESOP.
  • Unlike private equity, the ESOPs tend to be passive, longer-term investors.
  • Since

Reminder: Hurry! Opportunity for Possible Refund of FICA Taxes Ends Soon!

As noted in our blog entry on October 16, 2012, under the Sixth Circuit’s discussion in U.S. v. Quality Stores, severance payments made because of an employee’s involuntary separation resulting from a reduction-in-force or discontinuance of a plant or operation are not subject to FICA taxes.  This holding is contrary to a prior decision of the Federal Circuit Court of Appeals and published IRS guidance.  The government has until May 3 to appeal the case to the Supreme Court.  Until a final decision in this case has been rendered, taxpayers that have made severance payments in 2009 should file a protective claim for a FICA tax refund no later than April 15, 2013.  This protective claim will preserve the taxpayer’s right to a refund should the IRS not appeal the decision or should the decision be upheld on appeal.

 

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