The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020, to deliver financial relief to American workers and businesses facing financial hardship from the COVID-19 pandemic. Going forward, there are some important considerations for companies involved in M&A transaction negotiations, especially when it comes to how CARES Act relief provisions affect employee benefits plans.
Deferred Payroll Taxes and Contributions to Pension Plans
Under the CARES Act, eligible employers are allowed to defer their Social Security tax deposits for 2020, but must deposit 50% of the deferred amounts by December 31, 2021 and the remaining 50% by December 31, 2022.
The CARES Act also allows employers to defer the required minimum contributions to defined benefit plans for 2020 until January 1, 2021. Deferred payments are subject to interest accrued for the period between the original due date and the payment date.
If an M&A target has taken advantage of these CARES Act provisions, buyers should consider whether any warranties and representations should mandate that all taxes and requisite contributions to qualified plans have been paid since deferrals can stretch into 2022. If the deal includes all pre-closing costs to employees within the definition of “Indebtedness” or “Transaction Expenses,” buyers should ensure the definition also includes deferred payroll taxes and/or contributions to defined benefit plans related to pre-closing services.
Employee Retention Credit (ERC)
Companies that were shut down or suffered a 50% reduction in revenue due to Coronavirus-related government orders are eligible for a refundable payroll tax credit of up to $5,000 per employee for wages paid between March 13-December 31, 2020. This includes monies spent to maintain group health plan coverage. Companies that receive a Paycheck Protection Program (PPP) loan or Economic Injury Disaster Loan (EIDL) are ineligible for the ERC.
For purposes of an ERC, the CARES Act treats individual businesses and organizations as a single employer if they are an aggregated group under section 52(a), 52(b), 414(m) or 414(o). Aggregated group members must allocate the ERC based on each group member’s proportionate share of the qualified wages included in the credit computation.
If a target company has been using the ERC, buyers should be aware that it might compromise an aggregated group members’ eligibility for a PPP loan. Similar issues may arise if a buyer company has received an ERC and the target company has taken a PPP loan. The federal government has yet to provide guidance on the application of these restrictions on an aggregated group when there is a change of control.
If the target is eligible for the ERC post-transaction, buyers should consider including representations and warranties in the purchase agreement concerning the target’s compliance with ERC program requirements. Sellers may want to consider negotiating a purchase price credit for the ERC amount.
Paycheck Protection Program (PPP) Loan
Companies with fewer than 500 employees are eligible for the CARES Act’s Paycheck Protection Program (PPP), which provides forgivable loans to cover payroll costs (including employee benefits costs), mortgage payments, rent and utilities incurred between February 15-December 31, 2020, as well as interest on other debt obligations incurred prior to February 15, 2020.
Conditions for obtaining a PPP loan apply across an aggregated group, so if a target company has a PPP loan, the requirements that came with that loan may apply to the new buyer.
Executive Compensation Restrictions
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 in excess of two times their 2019 maximum total compensation.
Buyers should be aware that, absent any further guidance from the federal government on aggregated group restrictions, these same requirements would apply to all buyer companies for the duration of the restriction period.
To learn more about the services we offer at Hall Benefits Law, including employee benefits in mergers and acquisitions, call 678-439-6236 today.
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