New Legislation Includes Employee Benefits Changes: Why M&A Practitioners Should ‘CARE’

Deferred Payroll Taxes and Contributions to Pension Plans

Deferred Payroll Taxes. Eligible taxpayers may defer the deposit of Social Security tax for the remainder of the 2020 calendar year. 50% of the deferred amounts must be deposited by December 31, 2021, and the remaining 50% of the deferred amounts must be deposited by December 31, 2022. Note: Taxpayers taking advantage of the deferral are not able to take a deduction for Social Security tax until it is actually paid.

Deferred Contributions to Defined Benefit Plans. The due date for 2020 minimum required contributions to defined benefit plans has been postponed to January 1, 2021. However, the delayed payment of required contributions must include interest from the original due date of the minimum required contribution.

Buyers should consider whether any representations and warranties should require that all taxes and required contributions to qualified plans have been paid, as payroll taxes and/or defined benefit plan contributions that are deferred under the CARES Act will not be due until 2021 and, in some instances, 2022.

Where the business deal is that the definition of “Indebtedness” (or “Transaction Expenses” or their equivalent) should include all pre-closing costs to employees, the buyer should ensure that the applicable language picks up payroll taxes and/or defined benefit plan contributions that relate to pre-closing services, but that have been deferred till a post-closing date under the CARES Act.

Employee Retention Credit (ERC)

Employers that have been forced to shut down or incur a significant downturn (i.e., at least a 50% decline in gross receipts for the same calendar quarter in 2019) due to COVID-19 are eligible for a credit for wages paid from March 13, 2020 through December 31, 2020, up to a maximum of $5,000 per employee per calendar quarter. If an employer is basing its eligibility for the ERC on a significant downturn (i.e., 50% decline in gross receipts), it must aggregate the gross receipts of all entities in the controlled group to determine if the threshold decline has been met.

Further, the amount of the ERC depends on whether the employer had more than 100 full-time employees in 2019. In this regard, the CARES Act requires that all employees in the employer’s controlled group be considered for this purpose.

Note: Employers taking advantage of the ERC may not take a PPP Loan (see below).

Buyers should determine if the target is eligible for the credit pre- and post-transaction, and should consider including in the purchase agreement representations and warranties regarding the target’s compliance with the applicable Employee Retention credit requirements.

Sellers should consider negotiating a purchase price credit for the amount of the ERC.

Buyers should be aware that acquiring a company that has been using the ERC may potentially cause the entities in the buyer’s controlled group to reevaluate their eligibility for a PPP Loan in light of the post-closing controlled group. Similar issues could theoretically arise if the buyer has been using the ERC, and the target has taken a PPP loan. Guidance from the federal government on the application of these restrictions on the controlled group in connection with a change in control has yet to be issued. We would hope that the potentially far-reaching implications of these controlled group rules will ultimately be resolved by limiting the application of the controlled group rules to the point in time when the PPC loan was obtained. A more expansive view of the controlled group rules could deter buyers from acquiring target entities that have taken advantage of the CARES Act’s relief provisions where such buyers have not done so.

Paycheck Protection Program Loans (PPP Loan)

US businesses with less than 500 employees may receive a forgivable loan to cover the cost of payroll, healthcare, mortgage interest or interest on other debt obligations, rent, or utilities under the CARES Act’s Paycheck Protection Program. PPP Loans are forgivable as long as the company: does not lay off any employees making less than $100,000 a year; caps compensation for employees making over $425,000 in 2019 (see below); and does not the loan funds for any purpose other than payroll, mortgage/debt interest, rent or utilities.

Note: Companies that receive a PPP Loan may not take advantage of the ERC (see above).

The conditions for obtaining a forgivable PPP Loan apply across a controlled group. Thus, if a target entity has obtained a PPP Loan, the requirements that apply to the target as a result of the PPP Loan may apply to the buyer following the acquisition. As a result, if a target has taken a PPP Loan, the buyer, on a post-acquisition basis, will need to determine the implications of adding such an entity to its controlled group. See the controlled group discussion immediately above for a discussion of the potential forthcoming regulations relating to the scope of the controlled group rules in connection with mergers and acquisitions.

Restrictions on Certain Executive Compensation

Companies that obtain a PPP Loan must restrict compensation and severance benefits for employees whose 2019 compensation exceeded $425,000 (Covered Service Providers).

From the date that a company obtains a PPP Loan to the one-year anniversary of the date that the PPP Loan is no longer outstanding (Restriction Period), Covered Service Providers who made less than $3 million in 2019 may not receive compensation in excess of the amount they received in 2019.

• During the Restriction Period, Covered Service Providers who made more than $3 million in 2019 are prohibited from receiving compensation in excess of the sum of $3 million, plus 50% of the amount by which the Covered Service Provider’s 2019 total compensation exceeded $3 million.

Finally, during the Restriction Period, Covered Service Providers are prohibited from receiving severance pay or other benefits upon termination of employment that exceeds two times their 2019 total compensation.

As noted above, if a company takes a PPP Loan, the entire controlled group to which the company belongs must comply with the applicable restrictions. As a result, buyers should be aware that, without further guidance from the federal government on the application of the controlled group restrictions, recipients of a PPP Loan will be required to restrict the compensation of any of their employees who made over $425,000 in 2019 for the duration of the Restriction Period.