The $2.3 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act1 provides a variety of stimulus and relief programs to employers negatively impacted by COVID-19. Each program has different eligibility requirements and may impose limits on employee compensation that can be paid by companies that participate in the program. This alert discusses those programs and limits. This alert also discusses the limited payroll tax relief provided under the CARES Act.
Exchange Stabilization Fund Loans
- Are limits imposed on employee compensation paid by recipients of loans and loan guarantees from the U.S. Treasury's Exchange Stabilization Fund under Section 4003 of the CARES Act?
Yes. The compensation of highly compensated employees must be limited during a "restricted period" for companies that access loans under Section 4003 of the CARES Act.
These compensation restrictions will apply to companies participating in its newly-announced Main Street Lending Program. For more information on this new program, please see our client alert: Main Street Lending Program Announced.
- Which employees will be limited in their compensation?
The compensation limits are applicable to any employee or officer who received "total compensation" in 2019 greater than $425,000.
"Total compensation" is comprised of salary, bonuses, stock awards and other financial benefits, although additional guidance will be required to determine how equity awards and other financial benefits will be valued.
- What are the limits on compensation for covered employees during the restricted period?
A covered employee may not be paid greater total compensation than the employee received in 2019 within a rolling period of 12 months during the restricted period.
Lower limits apply to covered employees that received more than $3 million in total compensation in 2019. Such highly compensated employees are limited to total compensation no greater than (i) $3 million plus (ii) 50 percent of the amount by which 2019 total compensation exceeded $3 million, again measured during a rolling 12-month period during the restricted period.
Companies considering whether to access this loan program will need to identify covered employees and potentially modify existing compensation arrangements before participating to ensure that the compensation limits are not exceeded. Companies participating in this loan program must implement procedures to track and limit compensation paid to covered employees over a rolling 12-month basis during the restricted period.
- What is the "restricted period"?
The compensation limits apply while the loan is outstanding and for one year thereafter. This period is the restricted period.
Aviation-related companies accessing loans under Section 4116 of the CARES Act have similar compensation restrictions but a restricted period spanning from March 24, 2020, to March 24, 2022.
- What are the restrictions on severance pay to covered employees?
During the restricted period, "severance pay or other benefits upon termination of employment" to any covered employee may not exceed two times the "maximum total compensation" received by the individual in 2019.
- Do these compensation limits apply to companies receiving loans under the Paycheck Protection Program (PPP)?
No. Certain limits placed on PPP loan proceeds are discussed below.
- There are a number of open questions regarding these compensation limits:
- Will the $425,000 threshold be annualized?
- What rules apply to an employee hired after 2019?
- What compensation is included in "severance pay or other benefits"?
- How will equity acceleration be valued in calculating total compensation for compensation limits?
- How will equity acceleration be valued in calculating severance pay, if at all, and will qualified and/or non-qualified retirement programs be included?
- Will these limits allow executives to trigger a "good reason" termination entitling them to severance under their existing employment arrangements?
- Can the company agree to make up payments following the restricted period?
- We hope to receive guidance with respect to these issues in the coming days.
Additional information can be found in the following two client alerts: CARES Act Summary and The CARES Act - A Summary of Loan Programs.
SBA Paycheck Protection Program
- What are SBA Paycheck Protection Program Loans (PPP Loans)?
In general, qualified smaller companies are permitted to borrow up to 2.5 times a qualified borrower's average monthly U.S. payroll costs, with a $10 million loan maximum. PPP loans will have a maximum 1 percent interest rate and may only be used for specified purposes. Certain covered expenses incurred between February 15, 2020, and June 30, 2020 may be forgiven. For a discussion on the program please see our prior client alert: The CARES Act - A Summary of Loan Programs.
- What is included in U.S. payroll costs?
Compensation of U.S.-based employees in the form of salary, wages, commissions, cash tips, vacation and leave pay, separation pay, employee benefits costs including group health care coverage and retirement plans, and payment of employer state and local taxes assessed on employee compensation is included. Annualized salary taken into account is capped at $100,000 per employee.
- What is excluded from U.S. payroll costs?
Excluded costs include non-U.S. employee compensation, annualized salary exceeding $100,000 for an employee, costs related to independent contractors and qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Relief Act (FFCRA).
The CARES Act also specifies that payroll costs exclude Federal employment and income taxes imposed or withheld between February 15, 2020, and June 30, 2020. However, through recent FAQs issued jointly by the Department of the Treasury and the SBA (see Question 16), this exclusion is interpreted to mean that payroll costs are calculated on a gross basis, without subtracting federal taxes that are imposed on the employee or withheld from employee wages. However, employer-side taxes would be subtracted from payroll costs.
The FAQs give this example: "For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute."
- What limits are placed on PPP loan proceeds?
PPP loan proceeds may only be used for limited purposes, including to pay for payroll costs (subject to certain caps), certain group healthcare related costs and insurance premiums, rent, mortgage interest, utilities and interest on debt obligations incurred before February 15, 2020.
Payroll Tax Relief
- What payroll tax relief is available to employers under the CARES Act?
The CARES Act provides the opportunity for employers that have been materially impacted by COVID-19 to receive limited tax credits and for employers to defer payment with respect to the employer's portion of Social Security payroll tax (6.2 percent) for the remainder of 2020. The employer's 1.45 percent portion of Medicare tax is unaffected by this relief as is the employee's share of FICA taxes. The credit is not available if the company has received a PPP loan. Deferral is not available once a company's lender issues a decision to forgive the Company's PPP loan, although the company may continue to defer any Social Security payroll tax properly deferred before that date until the due dates described below. Eligibility for both programs is discussed in greater detail in our prior client alert Tax Relief Under the CARES Act, and the additional IRS guidance released today, April 10, 2020, on this topic can be found here: IRS FAQs re Employment Tax Deferrals. Additional credits available for qualified sick and family leave wages under the FFCRA are discussed in greater detail in our prior client alert: COVID-19 Tax Relief and will also be discussed in an upcoming alert we will release on this topic.
- What is the Employee Retention Credit?
A refundable tax credit of 50 percent of qualifying wages paid to employees after March 12, 2020, and before January 1, 2021, capped at $10,000 in qualifying wages per employee (effectively, a maximum credit of $5,000 per employee). The tax credit is applied against the employer's portion of Social Security payroll tax.
- What payroll tax deferral is permitted?
Qualifying employers may defer the remittance of the 6.2 percent employer's portion of Social Security payroll tax from March 27 through the remainder of 2020. 50 percent of this amount is due December 31, 2021, and the remaining 50 percent is due December 31, 2022.
Wilson Sonsini continues to monitor the global impact of COVID-19 on various industries. Wilson Sonsini's COVID-19 Client Advisory Resource is a collection of alerts, advisories, and programs—all of which are intended to help the management, boards of directors, and in-house counsel of our clients maintain key operational and business functions, despite pressing challenges caused by the COVID-19 pandemic.
 Signed by President Trump on March 27, 2020.