The CARES Act Would Place Limits on Compensation

The CARES Act Would Place Limits on Compensation

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On the evening of March 25, 2020, the U.S. Senate passed H.R. 748, the CARES Act (Coronavirus Air, Relief, and Economic Security Act). Among helping folks with direct payments of cash and increase both the amount and length of time unemployment will be paid to folks out of work, the Act also provides the Secretary of the Treasury the authority to make loans and guarantee loans for certain businesses in distressed industries including air carriers and U.S. businesses that have not otherwise received adequate economic relief in the form of loans or loan guarantees under the Act.

Section 4004 places limitations on the compensation of certain employees of businesses that receive loans or loan guarantees under the Act. Specifically, the Act makes two separate limits for employees:

  1. General limit applies to officers and employees whose total compensation exceeded $450,000 in calendar year 2019 (except for pay pursuant to certain collective bargaining agreements in place prior to March 1, 2020).
    • Cannot receive total compensation which exceeds, during any 12 consecutive month period, the total compensation received in 2019.
    • Cannot receive severance pay or other benefits upon termination that exceeds twice the maximum total compensation received in 2019.
  2. Special limit applies to officers and employees whose total compensation exceeded $3 million in calendar year 2019.
    • Cannot receive total compensation during any 12 consecutive month period that exceeds the sum of:
      1. $3 million, and
      2. 50% of the excess over $3 million of the total compensation received in 2019

Total compensation includes salary, bonuses, awards of stock, and other financial benefits provided by a business.

UPDATE: These limits on compensation continue until 12 months after a company pays back any loan. During the time that a company has a loan with the federal government, it must also agree not to repurchase any of its equity securities listed on a national securities exchange (no share buybacks), except in accordance with a contractual obligation in place when the Act becomes effective, through 12 months after the company pays back the loan. Additionally, companies taking loans cannot pay dividends or make other capital distributions (no dividends) until 12 months after the loan is repaid. See Section 4003, Emergency Relief and Taxpayer Protections.

The House is expected to take up this Act today, March 26, 2020.

I was able to find the text of this Act on the website of the Tax Foundation. The text of the Act is not yet available on Congress’ website, Congress.gov. Here is the link to the text of the Act on which this post was based:

https://files.taxfoundation.org/20200325223111/FINAL-FINAL-CARES-ACT.pdf

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