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UPDATED: The Paycheck Protection Program and Healthcare Enhancement Act Has Passed

UPDATED: The Paycheck Protection Program and Healthcare Enhancement Act Has Passed

Gallagher will continue to monitor the evolving guidance.

UPDATE April 27, 2020: The “Paycheck Protection Program and Health Care Enhancement Act” has passed. The $480 billion Act allows for additional Coronavirus relief, becoming an extension of programs initiated by the original CARES Act.

 

Paycheck Protection Program (PPP) Receives Additional Funding

The popular Paycheck Protection Program will receive a $310 billion increase in available funds for small businesses. The enhancement also provides for credit unions and community banks to receive $60 billion of the $310 billion to lend out to community businesses, thus increasing access to the PPP loans. The provisions of PPP remain the same with the additional funding.

PPP loans may apply to the following expenses:

  • - Employee salaries (up to a certain amount).
  •  
  • - Paid sick, medical or family leave.
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  • - Costs related to group healthcare benefits during periods of leave.
  •  
  • - Rent or mortgage payments.
  • Other debt obligations.

PPP loan proceeds may NOT be used for executive compensation greater than $100,000 per year. There is significant confusion in the market as to how loan forgiveness is calculated. The Small Business Administration (SBA) has left administration and servicing to the lenders. Borrowers should inquire about and receive additional clarity from their lenders per their lenders’ interpretation of the plan regulations and guidance.

The SBA resumed accepting PPP loan applications on Monday, April 27, 2020 at 10:30AM EDT from approved lenders on behalf of any eligible borrower.

 

Other Programs and Funding

The Act also provides funding for the following programs:

  • - $60 billion in additional funding for the Economic Injury Disaster Loan (EIDL) program, which provides low-interest loans to small businesses through the SBA, which also exhausted its funds. This total includes $10 billion for $10,000 grants that can be awarded as an advance to loan recipients.
  •  
  • - A new program with $75 billion in funding for hospitals and healthcare providers that will be disbursed through the Department of Health & Human Services’ Public Health Social Services Emergency Fund.
  •  
  • - A new program with $25 billion in funding for COVID-19 testing and tracing capacity.

All restrictions and rules laid out in the CARES Act apply to this enhancement Act.  There is continued talk at the federal level about an additional round of funding that could be up for approval in May. 

 

Originally reported on April 3, 2020

The “CARES Act” (the Act) includes provisions only for those organizations that receive financial support through loan guarantees from the US Treasury's Exchange Stabilization Fund under Title IV of the Act. These restrictions do not apply to organizations that receive funds ($100 billion) specifically designated to aid healthcare organizations impacted directly by COVID-19. Gallagher’s HR & Compensation Consulting practice prepared the following summary, with opinion comments bolded:

 

Executive Compensation Restrictions

For officers and employees who earned greater than $425,000 in total compensation during calendar year 2019, total compensation earned during any 12 consecutive months within the restricted period cannot exceed calendar year 2019 total compensation.

  • - Total compensation is defined as “salary, bonuses, awards of stock, and any other financial benefit.”
  •  
  • - "Other financial benefit" likely includes vesting in or receiving benefits from deferred compensation plans and other items. The definition of “compensation” creates questions and requires further clarification.
  •  
  • - The restricted period is defined as beginning on the date on which the agreement was executed and ending on the date one year after the date on which the loan or loan guarantee no longer is outstanding (represents a compensation freeze for two years if paid back one year after loan agreement execution).
  •  
  • - The Act does not include employees covered under a collective bargaining agreement.

The new Act imposes restriction on severance pay or other retirement benefits upon termination of employment that exceeds twice the total compensation received in calendar year 2019.

  • - The severance timing and guidance on how to negotiate and manage already established agreements is unclear per the Act, and requires further clarification.

No officer or employee whose total compensation exceeded $3,000,000 in calendar year 2019 may receive total compensation during any 12 consecutive months within the applicable period greater than the sum of $3,000,000 + 50% of the excess over $3,000,000 of total compensation received in calendar year 2019.

  • - For example, an employee receiving $4,000,000 in 2019 cannot receive more than $3,500,000 ($3,000,000 plus 50% of $1,000,000) in any 12-month stretch during the restricted period.


The “CARES Act” (the Act) includes provisions only for those organizations that receive financial support through loan guarantees from the US Treasury's Exchange Stabilization Fund under Title IV of the Act. These restrictions do not apply to organizations that receive funds ($100 billion) specifically designated to aid healthcare organizations impacted directly by CPVBID-19.  Gallagher’s HR & Compensation Consulting practice prepared the following summary, with opinion comments bolded:

 

Executive Compensation Restrictions

For officers and employees who earned greater than $425,000 in total compensation during calendar year 2019, total compensation earned during any 12 consecutive months within the restricted period cannot exceed calendar year 2019 total compensation.

  • - Total compensation is defined as “salary, bonuses, awards of stock, and any other financial benefit.” Other financial benefit” likely includes vesting in or receiving benefits from deferred compensation plans and other items. The definition of “compensation” creates questions and requires further clarification.
  •  
  • - The restricted period is defined as beginning on the date on which the agreement was executed and ending on the date one year after the date on which the loan or loan guarantee no longer is outstanding (represents a compensation freeze for two years).
  •  
  • - The Act does not included employees covered under a collective bargaining agreement.

The new Act imposes restriction on severance pay or other retirement benefits upon termination of employment that exceeds twice the total compensation received in calendar year 2019. 

  • - The severance timing and guidance on how to negotiate and manage already established agreements is unclear per the Act, and requires further clarification.

No officer or employee whose total compensation exceeded $3,000,000 in calendar year 2019 may receive total compensation during any 12 consecutive months within the applicable period,  greater than the sum of $3,000,000 + 50% of the excess over $3,000,000 of total compensation received in calendar year 2019.

  • - For example, an employee receiving $4,000,000 in 2019 cannot receive more than $3,500,000 ($3,000,000 plus 50% of $1,000,000) in any 12-month stretch during the restricted period.

 

Organizations Will Need More Clarification

Please note: There are a significant number of questions related to the impact on executive compensation arrangements and administration of these restrictions that require guidance. Gallagher continues to monitor this closely and we expect additional clarification to follow. These are just a few questions we are hearing:

  • - How do the restrictions apply to post-2019 hires and / or mid-2019 hires?
  •  
  • - What is total compensation and how do we calculate it under the provision? Does it include benefit values, life insurance premiums, and social security contributions?
  •  
  • - How will deferred compensation and equity grants be treated? Grant date? Vesting date? Paid date?
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  • - How do the restrictions apply to employees of related organizations?
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  • - How does an organization negotiate with an executive who was promised severance or other benefits if those benefits would violate the Act? Section 409A would place limitations on adjusting deferred compensation set to be paid. Will Section 409A rules be modified?
  •  
  • - Will an employee operating as a contractor, non-employee director, partner or independent contractor be considered a covered employee?
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  • - How will the restrictive compensation provisions will be enforced? - The Administration(?) is forming a “Pandemic Response Accountability Committee” “to promote transparency and support oversight of funds provided in this Act.” The Committee will set up a website that publicly reports data on how the Treasury allocates funds.

 

Consider these Immediate Next Steps:

  • 1. If your organization is considering applying for a loan from the Exchange Stabilization Fund, you should calculate calendar year 2019 compensation paid to executives greater than $425,000 and $3,000,000. (A good place to start would be W2 reported compensation for 2019; however, this may not be the final total compensation calculation considered under the CARES Act) - Understand caps for any consecutive 12 months within the restricted period (two years)
  •  
  • 2. Review severance agreements and identify any that exceed the CARES act limit of twice total  compensation in 2019
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  • 3. Identify any deferred compensation arrangements that could vest and be paid during the restricted period (retirement plans, retention agreements, special bonuses, long-term incentive plans, etc.)
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  • 4. Continue to communicate closely with Gallagher as we monitor developments related to the Act
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  • 5. Connect with your legal counsel and confirm your organization’s interpretation of the Act’s guidance

 

We at Gallagher are happy to discuss any questions to help you support the overall wellbeing of your organization.

 

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©2020 Arthur J. Gallagher & Co.

Consulting and insurance brokerage services to be provided by Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc. is a licensed insurance agency that does business in California as “Gallagher Benefit Services of California Insurance Services” and in Massachusetts as “Gallagher Benefit Insurance Services.” Neither Arthur J. Gallagher & Co., nor its affiliates provide accounting, legal or tax advice.

 

Dan Mayfield

Dan Mayfield is a Managing Director with Gallagher’s Human Resources & Compensation Consulting practice. Mr. Mayfield has nearly 15 years of experience consulting on executive pay issues in partnership with the board of trustees and management of both large and small health care providers. Mr. Mayfield works closely on issues related to compensation strategy, incentive plan design, severance benefits, nonqualified retirement plans and perquisites, director compensation, and corporate governance. Mr. Mayfield leverages his experience partnering ...

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