CARES Act Restricts Loans Used to Enhance Senior Executive Compensation

One of the most critical provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is financial relief for U.S. businesses in the form of federal loan programs aimed at keeping Americans employed and companies solvent.  However, there are certain restrictions on how federal loan monies may be deployed, including a prohibition on using these loans or loan guarantees to enhance senior executive compensation.

Under Section 4004 of the CARES Act, federal stimulus loans or loan guarantees have certain compensation limits, including the following:

Total compensation limit on 2019 earnings of $425,000 to $3 million.  Company executives or employees whose total compensation in 2019 was between $425,000 and $3 million may not receive more than their 2019 total compensation for any 12-month period beginning on the date of the loan or loan guarantee (the “restriction period”).  This restriction ends one year after the loan or loan guarantee is paid in full or forgiven.

Total compensation limit on 2019 earnings of over $3 million.  Company executives or employees whose total compensation in 2019 was more than $3 million may not receive total compensation that is more than $3 million plus 50% of the amount their 2019 total compensation exceeded $3 million.

Severance limit on 2019 earnings of over $425,000.  Company executives or employees whose total compensation in 2019 was $425,000 or more cannot receive severance pay or other termination benefits more than two times their 2019 maximum total compensation.

Regulatory Clarification Needed

Under the CARES Act, total compensation is defined as “salary, bonuses, awards of stock, and other financial benefits.” However, the Act does not specify how total compensation is to be measured — when it is granted, vested, taxable, or by some other standard.  Exactly how total compensation is to be calculated is particularly important for equity awards.

In addition, “severance pay or other termination benefits” is similarly undefined. Clarification is needed to assess various scenarios, such as whether accelerated vesting of equity awards would be considered “severance pay,” and if it were, how accelerated vesting value would be measured.

Executives with similar compensation arrangements may realize different outcomes if total compensation is measured when taxable.  When looking back to 2019 compensation for similarly paid executives, different outcomes result if executives deferred any 2019 compensation, received a 2019 payout from prior deferred compensation, exercised a prior year’s grant of a nonqualified stock option, etc.

Additional Considerations

Companies needing to access federal loan or loan guarantee programs may need to renegotiate compensation with executives whose current compensation packages exceed the compensation limits of the CARES Act.  Modifications to executive compensation will need to be reviewed with Section 409A of the Internal Revenue Code in mind.

There will be little incentive for departing executives to agree to modifications to compensation, which would be an obstacle for companies needing to access federal stimulus loan programs.  In this case, it may be necessary for companies to move up the departure date for these executives to meet CARES Act loan program requirements.

The experienced, responsive benefits attorneys at Hall Benefits Law help plan administrators understand what regulations and rulings are relevant to them and how best to apply these rulings in practice. Learn more by calling 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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