Certain CARES Act Loans Contingent on Limits to Executive Pay

Under Section 4003 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Secretary of the Treasury is authorized to provide up to $500 billion in loans, loan guarantees, and other investments to support eligible businesses, states, and municipalities affected by the COVID-19 pandemic. Section 4004 of the CARES Act imposes limits on executive compensation as a condition of receiving this relief.

Executive Compensation Limits

Section 4004 executive compensation limits begin on the execution date of a loan or loan guarantee, and they end one year after the loan or loan guarantee has been satisfied (the “restriction period”).

During the restriction period:

No officer or employee whose total compensation was more than $425,000 in 2019 (other than those employees whose compensation is determined by an existing collective bargaining agreement entered into before March 1, 2020) may receive:

  • Total compensation during any consecutive 12-month period that exceeds their total compensation received during calendar year 2019; or
  • Severance pay or other benefits upon termination of employment that exceeds twice (2x) their maximum total compensation received during calendar year 2019.

No officer or employee whose total compensation was more than $3 million in 2019 may receive:

  • In excess of $3 million; and
  • 50 percent of the amount that their total compensation for calendar year 2019 exceeded $3 million. (For example, if total compensation is $4 million, the officer or employee may not receive more than $3.5 million — $3 million plus $500,000.)

“Total compensation” is defined in Section 4004(b) as “salary, bonuses, awards of stock, and other financial benefits provided by an eligible business to an officer or employee of the eligible business.”

Open for Interpretation

The CARES Act does not discuss treatment of stock options and other non-cash benefits and how they are to be valued (when granted, vested, or taxed) when calculating executive compensation. Nor does the Act specify whether executive compensation limits apply to employees hired after 2019.

The Act is also silent on the treatment of existing contractual obligations to executives and how Section 4004 requirements may trigger a breach of contract claim. In addition, actions to protect executive pay like deferring compensation beyond the end of the restriction period may run afoul of Section 409A of the Internal Revenue Code, exposing the executive to tax penalties.

Furthermore, “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.

We help organizations set up the benefits plans that are right for their members, put processes in place to ensure regulatory compliance, and keep those benefit plans updated based on changes in laws and regulations. To learn more about the services we offer, call 678-439-6236 today.

The following two tabs change content below.

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.

Latest posts by Hall Benefits Law, LLC (see all)