Congress Formulates Retirement-Related and Executive Compensation Provisions for the COVID-19 Stimulus Bill
The Senate yesterday, March 25, 2020, passed by a vote of 96-0 the stimulus bill known as the Coronavirus Aid, Relief and Economic Security Act (the “Act”), which awaits the President's signature. It has been reported that the House will act on the bill on Friday, March 27, 2020, after which it would be sent quickly to the President for signature.
As discussed below, the Act contains provisions that, among other things, (i) relax rules governing certain early distributions, loans and required minimum distributions (“RMDs”) from tax-qualified retirement plans and (as applicable) individual retirement accounts (“IRAs”), and (ii) make certain adjustments to the rules relating to the funding of tax-qualified single-employer defined benefit plans, and (iii) limit compensation paid by employers to certain officers and other employees where those employers seek to qualify for loans under the Act. Also discussed below is certain additional relief that has been provided by the U.S. Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “IRS”) with respect to the filing of federal income tax returns, making of federal income tax payments and the timing of retirement plan and IRA contributions.
In the interest of getting information to you before significant time has elapsed after the passage of the Act, this NewsFlash is being distributed as the Act is being passed, before there has been the opportunity to confirm that there were no changes made in connection with its finalization. Thus, it is possible that last-minute changes to the Act made before its passage may not be reflected in the discussion below.
PROVISIONS RELATING TO RETIREMENT PLANS
Restrictions on Early Distributions and Loans
There are various provisions of the Internal Revenue Code of 1986 (the “Code”) that, in general terms, are designed to encourage people to save for retirement and to discourage people from drawing on those savings before retirement. In the case of past financial crises, Congress has been reluctant to make exceptions to these rules, ostensibly out of a concern that assets once withdrawn will then not be available during critical retirement years. In the case of the Act, however, Congress has now seen fit given the severity of present circumstances to relax certain restrictive rules.
The Act waives the 10% additional tax under Section 72(t) of the Code on early distributions from tax-qualified retirement plans and IRAs for any “coronavirus-related distribution” (a “CRD”). To be considered a CRD, (i) the distribution must be made on or after January 1, 2020 and before December 31, 2020 to an eligible individual1 and (ii) the aggregate amount of such distributions may not exceed $100,000. The Act also permits individuals who receive CRDs to pay tax on the income from the distribution ratably over a three-year period and allows individuals to repay such distributions to the plan or IRA over the three-year period after the distribution is received.2 Plans will not be treated as violating any requirements of the Code for having treated such distributions as CRDs, provided that the aggregate amount of such distributions from all plans maintained by the employer (and other members of its applicable controlled group) to any individual does not exceed $100,000.
The Act doubles the loan limits under Section 72(p) of the Code to the lesser of $100,000 or 100% of the participant’s vested account balance for any plan loan made during the 180-day period beginning on the date of enactment. Individuals with outstanding loans from a qualified employer plan with a repayment due from the date of enactment through December 31, 2020, can delay loan repayment for up to one year or, if later, until the date that is 180 days after the date of enactment.
The foregoing rules can be implemented immediately, even if the plan does not currently allow for hardship distributions or loans, provided that the plan is amended on or before the last day of the first plan year beginning on or after January 1, 2022 (or at a later date, if prescribed by the Treasury) and such amendment is applied retroactively.
Rules Governing RMDs
Certain rules under the Code are actually designed to limit the extent to which individuals can defer taxes on their retirement savings, and thereby limit the amount of the tax subsidy resulting from the rules governing retirement savings. For example, the rules under Section 401(a)(9) of the Code generally provide that RMDs are to be made from covered accounts by no later than April 1 of the calendar year following the calendar year in which the individual attains age 72 or, if later and applicable, the calendar year in which the individual retires.3 The Act allows for a delay in the taking of RMDs for calendar year 2020 from tax-qualified defined contribution plans and IRAs. The RMD-related provision in the Act includes both the RMDs for calendar year 2019 that must be taken before April 1, 2020, but have not yet been taken, as well as those RMDs for calendar year 2020. The temporary waiver of RMDs from tax-qualified retirement plans may be implemented immediately, provided that the plan is amended on or before the last day of the first plan year beginning on or after January 1, 2022.
Under these provisions, senior citizens who believe they are not in need of otherwise required RMDs may continue to allow those amounts to remain tax-deferred. One consequence of this added flexibility could be that greater amounts will remain under professional money management in plans and IRAs than would have been the case in the absence of the Act.
Funding Rules for Single-Employer Defined Benefit Pension Plans
Tax-qualified single-employer defined benefit plans are subject to detailed minimum funding requirements. Generally, the due date for the payment of a minimum required contribution for a plan year is 8-1/2 months after the end of the plan year. The Act delays the payment of any minimum required contribution that would otherwise be due (including quarterly contributions) during calendar year 2020 until January 1, 2021, with any such minimum required contribution to be increased by interest accruing for the period between the original due date for the contribution and the payment date. The Act also makes adjustments to the rules that apply to such defined benefit plans in the cases of plans that are underfunded by more than certain specified percentages.
Rules Governing Filing Deadlines and the Effect on Retirement Contributions
Separately, Treasury and the IRS have issued Notice 2020-18, providing that the due date for filing federal income tax returns and making federal income tax payments due April 15, 2020 is automatically postponed to July 15, 2020.4 In connection with the issuance of this relief, the IRS issued guidance clarifying the effect of such relief on deadlines applicable to IRAs and retirement plans.5 Because the due date for filing federal income tax returns has been postponed to July 15, 2020, the deadline for making contributions to an IRA in respect of 2019 is also extended to July 15, 2020. The guidance also clarifies that the reporting and payment of the Section 72(t) 10% additional tax have also been extended to July 15, 2020. However, any excess elective deferrals to a retirement plan in 2019 must be distributed from the plan no later than April 15, 2020 in order to exclude the distributions from gross income.
Certain ERISA Filing Deadlines
The Act also would expand the circumstances under which the Secretary of Labor can postpone certain filing deadlines under the Employee Retirement Income Security Act of 1974 ("ERISA" ). Thus, the Secretary of Labor would now be able to delay certain ERISA filing deadlines by up to one year if the Secretary of the Department of Health and Human Services declares a "public health emergency" - which is a declaration that indeed has already been made here (on January 31, 2020).
EXECUTIVE COMPENSATION PROVISIONS
Ever since the Enron/WorldCom-motivated tax provisions of the American Jobs Creation Act of 2004 that gave us Section 409A of the Code, Congress and regulators have regarded executive compensation with a jaundiced eye. Arguably, the Troubled Assets Relief Program ("TARP") established under the Emergency Economic Stabilization Act of 2008 would not have passed but for the limitations on executive compensation therein. TARP was followed by Treasury’s statement of principles regarding executive compensation and other regulatory developments, and by the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which included important executive compensation provisions. More recently, the Patient Protection and Affordable Care Act contained tax provisions limiting the deduction of compensation paid in excess of a certain level, and the 2017 Tax Cuts and Jobs Act contains provisions attempting to address what Congress perceived to be excessive compensation in certain situations.
In the Act, Congress has continued to focus on executive compensation. Under the Act, the Secretary of the Treasury is authorized to make or guarantee loans to eligible businesses up to certain specified amounts. To receive a loan under the Act, an eligible business generally must enter into an agreement with the Secretary of the Treasury pursuant to which such eligible business agrees that during the period beginning on the date such agreement is executed and ending on the date that is one year after the date on which the loan or loan guarantee is no longer outstanding6 (i) no officer or employee whose total compensation exceeds $425,000 in calendar year 20197 will receive (A) total compensation in excess of the total compensation received in calendar year 2019 during any 12 consecutive months of such period or (B) severance pay or other benefits upon a termination of employment in excess of twice the maximum total compensation received by such officer or employee in calendar year 2019 and (ii) no officer or employee whose total compensation exceeds $3,000,000 in calendar year 2019 will receive during any 12 consecutive months of such period total compensation in excess of the sum of (A) $3,000,000 and (B) 50% of the excess over $3,000,000 of the total compensation received by such officer or employee in calendar year 2019.8 It is noted that this latter provision will have the effect of requiring potentially substantially significant paycuts (with the cuts being higher, in terms of actual dollar amounts, where existing compensation levels are higher) for those making over $3,000,000 at companies seeking access to bail-out proceeds under the Act.
Companies seeking to participate in the Act’s bail-out provisions will need correctly – and quickly – to identify officers and executives who are or may be affected, and to examine existing plans, agreements and arrangements so as to determine what changes may be needed, and where necessary, make (and, where necessary (and possible)), procure consent to or other agreement with) appropriate changes. However, as was the case with TARP and various other prior legislation, it seems likely that there will be questions about precisely what will be considered “compensation” that participating companies will need to consider for these purposes.
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If you would like to discuss any aspect of the Act’s retirement-related and executive compensation provisions, please contact any of the Dechert lawyers listed below or any Dechert lawyer with whom you regularly work.
1) An individual is eligible for a CRD if (i) the individual or a spouse or dependent of such individual is diagnosed with COVID-19 or (ii) the individual experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated by the individual or other factors determined by Secretary of the Treasury. In determining whether any distribution is a CRD, a plan administrator may rely on an individual’s certification that the individual satisfies the foregoing requirements.
2) Individuals making repayments of CRDs other than from IRAs will be treated as having received such distributions in an eligible rollover distribution and as having transferred the amount to the eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution. CRDs from IRAs will be treated as being described in Section 408(d)(3) of the Code and as having been transferred to the eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution.
3) Recent legislation, had in fact just changed this provision to age 72 for those individuals who reach 70½ on or after January 1, 2020. See Dechert On Point: SECURE Act Passage Now Secure, available here.
4) IRS Notice 2020-18, Relief for Taxpayers Affected by Ongoing Coronavirus Disease 2019 Pandemic, available here.
5) IRS, Filing and Payment Deadlines Questions and Answers, Individual Retirement Accounts (IRAs) and Workplace-Based Retirement Plans, released March 23, 2020, available here.
6) With respect to an air carrier or contractor, the agreement must apply during the two-year period beginning on March 24, 2020 and ending on March 24, 2022.
7) Employees whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020 are excluded.
8) Total compensation expressly includes salary, bonuses, awards of stock and other financial benefits provided by the eligible business to an officer or employee.