CARES Act Limits on Employee Compensation
CARES Act Limits on Employee Compensation
Updated as of 8 Apr 2020.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law by President Trump on March 27, provides emergency aid to businesses, families and individuals affected by the COVID-19 pandemic.
Any business that receives a loan or loan guarantee in accordance with the Coronavirus Economic Stabilization Act (CESA) provisions of the CARES Act – which includes the Federal Reserve’s Main Street Lending Program (which is supported by CARES Act appropriated funds) – is subject to limits on employee compensation. (Businesses that receive loans under the Paycheck Protection Program, a program for small businesses that is authorized separately in the CARES Act, are not subject to these limits on employee compensation.) The following Q&As summarize these limits and note some of the interpretive questions that will need to be answered to fully assess the impact of the limits. We will monitor any guidance that is issued that answers these questions
An air carrier or contractor that receives financial assistance under the air carrier worker support provisions of the CARES Act is subject to the same limits on employee compensation as a business that receives a CESA loan or loan guarantee, but for a different period (see Q/A-12).
1. Q: Who is covered by the limits on compensation?
A: The compensation limits apply to officers and employees who received more than $425,000 in total compensation in calendar year 2019 from a business that received a CESA loan or loan guarantee. The limits do not apply to independent contractors who are not officers or, generally, to union employees.
2. Q: For how long do the compensation limits remain in effect?
A: The limits apply during the period beginning on the date that a business entered into a loan or loan guarantee and ending one year after the date that the loan or loan guarantee is no longer outstanding (e.g., if a loan is entered into on April 15, 2020 and the loan is fully repaid on June 15, 2022, the compensation limits are in effect from April 15, 2020 to June 15, 2023). We refer to this period as the “limitation period” throughout this alert.
3. Q: What are the compensation limits?
A: CESA limits both the total compensation that an officer or employee may receive during any consecutive 12 months and the severance pay or other benefits that an officer or employee may receive on termination of employment. These limits, which apply during the limitation period, are as follows:
Officer or Employee with 2019 Total Compensation > $425,000
Officer or Employee with 2019 Total Compensation > $3,000,000
Total Compensation During Any Consecutive 12 Months During the Limitation Period
May not exceed 2019 total compensation received by officer or employee
May not exceed sum of:
Severance or Other Benefits on Termination of Employment During the Limitation Period
May not exceed 2x maximum total compensation received by officer or employee in 2019
The following table illustrates these limits for three executives:
2019 Total Compensation
Limit on Total Compensation During Any Consecutive 12 Months
Limit on Severance or Other Benefits on Termination of Employment
4. Q: How is “total compensation” defined for purpose of the compensation limits?
A: Total compensation includes salary, bonuses, awards of stock, and other financial benefits provided by a business to an officer or employee of the business.
CESA does not specify a method for calculating total compensation. One possibility is that total compensation will be required to be calculated in accordance with the rules under Item 402 of Regulation S-K for reporting compensation in the Summary Compensation Table of a public company’s proxy statement. If so, this will create a burden for private companies that are not otherwise required to prepare such calculations, and also for those public companies that will need to expand the group of employees for whom they perform these calculations. Regardless of how total compensation will be calculated, due to the rolling consecutive 12 month measurement periods, presumably the calculations will need to be made each month during the limitation period.
5. Q: Do the compensation limits apply on a controlled group basis?
A: CESA does not directly address whether the compensation limits apply only to officers and employees of, and compensation paid by, the specific entities that enter into the loan or loan guarantee or also to officers and employees of, and compensation paid by, affiliated entities. However, we expect that, in both cases, the limits will apply on a controlled or affiliated group basis.
6. Q: Do the compensation limits apply to post-2019 hires? How are 2019 hires treated?
A: The compensation limits apply by reference to compensation received by an officer or employee in 2019 from a business that that received a loan or loan guarantee. CESA does not directly address whether this means that officers or employees hired by the business after 2019 (and therefore who did not receive compensation from the business in 2019) are exempt from the limits. Nor does CESA directly address how 2019 hires are treated (e.g., whether their 2019 compensation received from the business will need to be annualized when calculating total compensation).
7. Q: How do the compensation limits apply to pre-existing compensatory agreements?
A: CESA does not directly address how the compensation limits apply to compensatory agreements (e.g., employment, severance and equity award agreements) that predate a loan or loan guarantee. It is possible that the Treasury will require, as a condition to a loan or loan guarantee, that the business obtain waivers from officers and employees of their contractual entitlements under pre-existing agreements to the extent that the entitlements otherwise would result in payments that violate the compensation limits.
8. Q: Can compensation be deferred until after the limitation period?
A: CESA does not directly address whether compensation (e.g., a bonus) that is earned during the limitation period, but where payment is not made until after the limitation period, is subject to the compensation limit. To the extent deferrals are available as a way to comply with CESA compensation limits, companies that defer compensation under existing or new compensation arrangements should seek advice regarding the interplay of such deferrals with other applicable tax regimes (e.g., Section 409A of the Internal Revenue Code and the doctrine of constructive receipt).
9. Q: Does the severance limit apply to payments that are triggered by a termination of employment during the limitation period, but that are paid after the limitation period?
A: For example, if an employee who is terminated during the limitation period is entitled to severance that is payable in installments over two years, do all of the installments count against the severance limit, or only those installments that are paid during the limitation period? CESA does not directly address this question.
10. Q: Does the severance limit apply to retirement payments and benefits?
A: It is not clear whether CESA severance limit is intended to apply to payments and benefits that come due on retirement, such as nonqualified retirement or other deferred compensation payments. The bill refers to “termination of employment” (and not, e.g., “involuntary termination of employment”) and therefore might be read to apply also to voluntary terminations such as retirement. Until clarifying guidance is issued, a business that is considering entering into a loan or loan guarantee may wish to assess whether any retirement payments and benefits could be impacted by the severance limit, if the limit were to apply to such payments and benefits.
11. Q: Does accelerated vesting of equity awards count against the severance limit?
A: CESA does not directly address this question. However, accelerated vesting of equity awards often constitutes a significant portion of the benefits received by an executive on termination of employment. In addition, under Item 402 of Regulation S-K, the value of equity award acceleration (calculated based on the closing stock price on the applicable date) is required to be reported as a termination benefit in a public company’s proxy statement. Therefore, it would not be surprising if guidance clarifies that equity award acceleration counts against the severance limit, perhaps calculated consistent with Item 402.
12. Q: What compensation limits apply to an air carrier or contractor?
A: The same limits on employee compensation apply to an air carrier or contractor that receives financial assistance under the air carrier worker support provisions of the CARES Act as apply to a business that receives a CESA loan or loan guarantee. However, in the case of an air carrier or contractor, the compensation limits remain in effect during the two-year period beginning on March 24, 2020 and ending on March 24, 2022.
 CESA limits severance and other termination benefits to two times the “maximum total compensation” received by the officer or employee in 2019, but does not define this term. This alert assumes that “maximum total compensation” is intended to have the same meaning as “total compensation” (see Q/A-4).