Fulcrum Partners LLC https://www.fulcrumpartnersllc.com Mon, 25 May 2020 00:56:32 +0000 en-US hourly 1 91846647 How COVID-19 is Changing Life Insurance in the U.S. https://www.fulcrumpartnersllc.com/2020/05/22/covid-19-changing-us-life-insurance/ Fri, 22 May 2020 13:55:00 +0000 https://www.fulcrumpartnersllc.com/?p=12520 Discussing Life Insurance Program with Agent

The U.S. life insurance industry is changing. As Valmark Financial Group Chairman, Larry Rybka, said in a recent Wall Street Journal interview, “In 33 years, I have never seen more changes come more quickly to the life insurance products we sell.”

As it is with so many other aspects of life and business these days, the COVID-19 economy is shaping new guidelines and effecting new attitudes in life insurance. Today, due to interest rates being at an all-time low, the industry finds itself turning away business opportunities it would have sanctioned only months earlier. And life insurance carriers have no expectation that rates will change in the near future. 

With low and negative interest rates in play, some insurers also are declining to issue higher-risk policies, such as life insurance for people ages 70 and older who are in poor health. Select types of policies, for example, 30-year term life policies, have been suspended by many insurers while other insurance providers are limiting policy size for universal-life products.

Leslie Scism, author of the article, “Some Americans Are Being Turned Away Trying to Buy Life Insurance,” which was published May 11, 2020, wrote, “…when they (life insurers) price policies, they make assumptions about how much interest income they will earn investing these premiums years into the future. The less they earn, the more they may need to collect in premium or fees to turn a profit.”

Many Types of Life Insurance Products Are Still Very Available 

Larry Rybka praised the Wall Street Journal article and its author, saying they had done a “wonderful job of taking this very complex subject, putting a human face on it and connecting the impact of lower interest rates to the products consumers buy.” 

But Rybka also pointed out, “One item that did not make the final story was that an important sub-set of life insurance products remain open for consumers, largely without change or limits: these are variable life products. 

“With variable life products,” he explained, “insurance companies are not under pressure to commit to bonds and mortgages to make their guarantees; that is because these products are also filed as securities, and give the policyholder the choice of where to invest cash value. The cash value (any combination of equity or bond funds called sub-accounts) fluctuates with the value of the securities. This product type is offered by most companies and is typically purchased by more affluent clients.”

Our Changing World: Looking Ahead 

Historically, life insurance has been a core strategy for protecting and securing families and companies. Undoubtedly, the post-pandemic environment will continue to bring changes, at least in the near term to the industry and the products it offers. But as Steve Broadbent, Partner & Managing Director at Fulcrum Partners points out, “Over 70 million Americans are either uninsured or underinsured according to a recent study conducted by AALU and a life insurance industry working group. Life insurance should be at the core of any financial plan to protect families and businesses. The purchase of life insurance can seem like a daunting task to many; therefore, the development of a trusted relationship with a financial planner is an important step early in the process.”

#variablelife #lifeinsurance #SteveBroadbent 

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Fulcrum Partners Helping CPA Firms Serve Clients During Post-Pandemic Transition https://www.fulcrumpartnersllc.com/2020/05/20/fulcrum-partners-helping-cpa-firms-post-pandemic-transition/ Wed, 20 May 2020 14:24:30 +0000 https://www.fulcrumpartnersllc.com/?p=12508 Managing Director & Partner, Bruce Brownell, will represent Fulcrum Partners at the upcoming BDO Alliance Southeast Regional Meeting. Scheduled for June 25, 2020.

PONTE VEDRA BEACH, Fla. — (May 20, 2020) Managing Director & Partner, Bruce Brownell, will represent Fulcrum Partners at the upcoming BDO Alliance Southeast Regional Meeting. Scheduled for June 25, the event will be conducted virtually, starting at 9:00 AM Eastern Time.

The mini-conference will kick off with a panel discussion targeted to help BDO Alliance CPA firms in addressing the challenges and impacts of the COVID-19 pandemic. Specific discussion topics include: the impact of COVID-19 on internal and external communications, remote working and technology, personnel and work hours, team engagement, cash flow, client service, business development and other aspects of firm operations; guidance for leading your own firm and your client firms through the challenge and an overview of how COVID-19 has impacted firms, local markets and the accounting industry as a whole.

Bruce Brownell will participate in the second of two panel discussions, which will focus on BRN (BDO’s Business Resources Network) Alliance firms. Among the topics Bruce and other panelists will address are service offerings to assist with post-pandemic recovery for clients, including issues of workforce/HR, regulatory, cash flow, operations, technology and other relevant issues.

“The COVID-19 pandemic is likely to have a lasting effect on broad executive compensation issues, including incentive strategies, retirement preparedness and a much more heightened need for serious financial education,” said Bruce Brownell. “Pay elements may shift, risk tolerances may be lower and guarantees more coveted.  We hope to provide discussion topics for CPA advisors and CPA firms so they can proactively rethink compensation structures sooner rather than later.”

Joining Bruce will be panelists from The Capsa Group, LLC; LSQ Funding Group, L.C.; Reflective Energy Solutions LLC and OnDefend Services, LLC.

Bruce Brownell, Partner and Managing Director Fulcrum Partners
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Stock Option Repricing: When You Are Underwater Part 2 https://www.fulcrumpartnersllc.com/2020/05/12/stock-option-repricing-underwater-part-2/ Tue, 12 May 2020 14:13:15 +0000 https://www.fulcrumpartnersllc.com/?p=12460 Spawning European carp

Today we’re sharing Part 2 of an article written by Mike Melbinger on the timely and challenging matter of stock option repricing. Mike is a Partner in the Chicago Office of Winston & Strawn LLP. His law practice focuses exclusively on executive compensation and employee retirement benefit issues. Use this link to catch up, if you missed Part 1 yesterday of “Stock Option Repricing: When You Are Underwater.”

Follow-Up on Potential Alternative to Repricing Underwater Stock Options (Part 2) 

(first published May 6, 2020)

A couple weeks ago, I wrote on SEC approval of the New York Stock Exchange’s request to provide temporary waivers of the shareholder approval requirements applicable to certain kinds of equity sales to officers and directors, see A Potential Alternative to Repricing Underwater Stock Options. This week, the SEC approved a similar request by Nasdaq.

Similar to the NYSE, Nasdaq Listing Rule 5635(c) requires shareholder approval for certain sales to officers, directors, employees, or consultants (affiliates) when such issuances could be considered a form of “equity compensation.” In light of many companies’ need to quickly raise capital during the pandemic, the SEC approved Nasdaq’s proposal to adopt Listing Rule 5636T(c)1, which would provide for an exception from shareholder approval under Listing Rule 5635(c)2 for an affiliate’s participation in a capital-raising transaction alongside non-affiliated investors. Unlike the NYSE rule, however, this exception will only apply if the affiliate’s participation in the transaction was specifically required by unaffiliated investors.

In addition, to protect against self-dealing, under the exception, an affiliate investing in the transaction must not have participated in negotiating the economic terms of the transaction, any affiliate’s participation must be less than 5% of the transaction, and all affiliates’ participation collectively must be less than 10% of the transaction.

To rely on this exception, a company must execute a binding agreement governing the issuance of the securities and submit certain notices no later than June 30, 2020. The company also must file a Form 8-K3 describing the transaction, but is not required to notify Nasdaq at least 15 calendar days in advance of the transaction, as normally would be required by Listing Rule 5250(e)(2)4.

References:

  1. https://www.sec.gov/rules/sro/nasdaq/2020/34-88805.pdf
  2. https://listingcenter.nasdaq.com/
  3. https://www.sec.gov/files/form8-k.pdf
  4. http://nasdaq.cchwallstreet.com/NASDAQTools/

Additional Insights 

#COVID19 #stockprice #Nasdaq #stockvalue

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Stock Option Repricing: When You Are Underwater Part 1 https://www.fulcrumpartnersllc.com/2020/05/11/stock-option-repricing-when-you-are-underwater-part-1/ Mon, 11 May 2020 13:55:28 +0000 https://www.fulcrumpartnersllc.com/?p=12443 abstract underwater background with bokeh

Stock option repricing is a complex and typically problematic topic. Attorney Mike Melbinger has provided us his insights on the matter. Deferred Compensation News is sharing Mike’s comments here in a two-part series. Read Part 1 featured below along with Mike’s follow up, published here tomorrow.

If you have not done so already, ensure you catch all updates on Deferred Compensation News, by subscribing for delivery directly to your inbox.

A Potential Alternative to Repricing Underwater Stock Options?

(first published April 24, 2020)

With so many companies’ stock prices depressed, executive compensation professionals are talking about the possibility of stock option repricing. However, option repricing is difficult, costly, and despised by investors and proxy advisory firms.

Therefore, it caught my eye when earlier this month the SEC essentially gave fast-track approval of the New York Stock Exchange’s request (NYSE) to provide temporary waivers of the shareholder approval requirements applicable to certain kinds of equity issuances under the NYSE’s Listed Company Manual. Although focused on capital raising, this waiver could provide an alternative to option repricing for officers and directors at some companies.

Section 312.03(b) of the NYSE Manual requires shareholder approval of any issuance to a director, officer, or substantial security holder of the company (each a Related Party) or to an affiliate of a Related Party if the number of shares of common stock to be issued, or if the number of shares of common stock into which the securities may be convertible or exercisable, exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance.

A limited exception permits cash sales to Related Parties that meet the “Minimum Price” test and that relate to no more than 5% of the company’s outstanding common stock. However, this exception may only be used if the Related Party in question has Related Party status solely because it is a substantial security holder of the company.

Generally, the “Minimum Price” means a price that is the lower of: (i) the Official Closing Price immediately preceding the signing of the binding agreement; or (ii) the average Official Closing Price for the five trading days immediately preceding the signing of the binding agreement.

The NYSE proposed and the SEC approved a partial waiver of the application of Section 312.03(b) for the period as of the date of this filing through and including June 30, 2020, with the waiver specifically limited to transactions that involve the sale of the company’s securities for cash at a price that meets the Minimum Price requirement. In addition, to qualify for this waiver, a transaction must be reviewed and approved by the company’s audit committee or a comparable committee of independent directors.

This approach is not suited to all companies, but some companies may determine that a sale of stock to executives and directors at an historically low price is similar to an award of a stock option at that price (Note that the specific limitations the NYSE proposed to waive do not exist in the applicable Nasdaq rules).

Ordinarily, a proposed rule change does not become operative prior to 30 days after the date of the filing. However, the SEC waived the normal delay, “because, in the Exchange’s view, the market and general economic disruption caused by the global spread of the COVID-19 virus may give rise to companies experiencing urgent liquidity needs which they may need to meet by undertaking transactions that would benefit from the proposed relief.” Accordingly, the proposal became effective immediately.

#stock #stockoptions #underwater #execcomp

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Shortchanging Key Executives: New Report by Fulcrum Partners https://www.fulcrumpartnersllc.com/2020/05/06/shortchanging-key-executives-new-report-by-fulcrum-partners/ Wed, 06 May 2020 14:00:31 +0000 https://www.fulcrumpartnersllc.com/?p=12370 Fulcrum Partners publishes report examining how companies may be unintentionally shortchanging the key executives they rely on most.

PONTE VEDRA BEACH, FL — (May 6, 2019) Fulcrum Partners, one of the nation’s largest executive benefits advisories has released a report examining how companies may be unintentionally shortchanging the key executives they rely on most. The report, titled, The Benefits Gap: How it Happens and How to Fix Itis available for download on the  Fulcrum Partners website at  www.fulcrumpartnersllc.com.

“As organizations deal with the effects and aftereffects of the COVID-19 pandemic, retaining their key executives and decisionmakers is more important than ever,” said Scott Cahill, a Partner & Managing Director at Fulcrum Partners. “Often, neither Compensation Committees nor the executives themselves realize that the corporate spend for the disability and retirement plans of top leadership, based on percentage of salary, typically falls short, when compared to what a company is spending on its core employees.”

“The Benefits Gap: How it Happens and How to Fix It” shares specific examples illustrating how key executives fall short in group long term disability and retirement benefits. The report also includes examples of income protection and retirement plan solutions. 

“By following IRS Section 409A rules and deferring tax deductions, for example, an employer can allow eligible participants to defer, on a pre-tax basis, up to 100 percent of compensation,” said Partner & Managing Director, Bruce Brownell. “This strategy can restore benefits lost to the key executive because of 401(k) limitations. But the emphasis here is on ‘adhering to 409A regulations’.

“Each situation has unique considerations, especially as companies work to stay in compliance with loans, tax breaks or other relief they may have secured during the COVID-19 pandemic. This report is timely and, for many, eye opening.”

To read or download the report, visit Deferred Compensation News and Updates (www.fulcrumpartnersllc.com/news/).  Or click: The Benefits Gap: How it Happens and How to Fix It.

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It’s Giving Tuesday Now, in Response to COVID-19 https://www.fulcrumpartnersllc.com/2020/05/05/its-giving-tuesday-now-in-response-to-covid-19/ Tue, 05 May 2020 13:49:39 +0000 https://www.fulcrumpartnersllc.com/?p=12360

GivingTuesday has announced a day of global action for giving and unity in response to COVID-19. In addition to the Giving Tuesday event, which is an annual day for global generosity held on the first Tuesday following Thanksgiving, the nonprofit, charitable initiative is launching an additional event for 2020. May 5, 2020 has been designated as Giving Tuesday Now. (#GivingTuesdayNow). 

Established as an emergency response to the significant needs resulting from the COVID-19 pandemic, Giving Tuesday Now seeks to “drive an influx of generosity, citizen engagement, business and philanthropy activation, and support for communities and nonprofits around the world.”

Asha Curran, CEO of GivingTuesday, explained, “As a global community, we can mourn this moment of extreme crisis while also finding the opportunity to support one another. We each have the power to make an impact with acts of generosity, no matter how small, and to ensure the sustainability of organizations and services that are crucial to the care and support of our communities.”

Individuals and organizations are encouraged to support Giving Tuesday Now by sharing their time, talents, or abundance with others. Whether you choose to support healthcare workers through advocacy and donations, to give charitably to organizations that touch your heart or to personally help someone in need, you are making a meaningful difference. 

#GivingTuesdayNow is a specific emergency event and does not change how organizations and individuals can participate in #GivingTuesday, which is scheduled for December 1, 2020. 

The team at Fulcrum Partners is proud to support GivingTuesday. To learn more and participate in #GivingTuesdayNow, visit the GivingTuesday website www.givingtuesday.org.

Giving Tuesday NOW 05/05/2020

#COVID19 #FulcrumPartners #GivingTuesdayNow 

Related News from Fulcrum Partners:

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Portfolio Companies and Economic Stimulus Relief Part 2 https://www.fulcrumpartnersllc.com/2020/04/30/portfolio-companies-and-economic-stimulus-relief-part-2/ Thu, 30 Apr 2020 18:11:44 +0000 https://www.fulcrumpartnersllc.com/?p=12318 Portfolio companies and Economic Stimulus

We are sharing the second in a two-part report, “Portfolio Companies’ COVID-19 Economic Stimulus Relief Incentives”. This report looks at the Coronavirus Aid, Relief and Economic Security Act (CARES) including here in Part 2, the Economic Stabilization Loan Program; Main Street Business Lending Program for midsized and larger businesses, Payroll Tax Incentives; and insights for navigating the crisis.

This report was prepared by leading tax and business advisory professionals at BDO USA, LLP and is republished here with their permission.

Portfolio Companies’ COVID-19 Economic Stimulus Relief Incentives: Part 2

Download full report as a PDF

Midsized and Larger Businesses – $500 Billion Economic Stabilization Loan Program

Aside from SBA loans, the CARES Act allocates $500 billion for the Treasury to disburse as loans to midsized and large businesses of greater than 500 employees. These loans under the economic stabilization plan lack the option of being forgiven and come with public disclosure requirements but have attractive interest rates and give private capital-backed companies an opportunity to qualify for relief. Of the $500 billion, $46 billion is reserved for air carriers and businesses deemed critical to national security and $454 billion is allocated for other eligible businesses, states and municipalities. Of the $454 billion, $75 billion will be used to fund the Treasury collateral for the Main Street Business Lending Program, which results in $600 billion in Main Street Loans. The remaining $379 billion does explicitly include a loan program for midsized businesses—defined as organizations with between 500 and 10,000 employees, in addition to the general guidance provided in Title IV of the CARES Act.

Main Street Business Lending Program

The Main Street Business Lending Program is a subsequent action taken to offer companies liquidity. Using appropriated funds from the CARES Act, the Treasury will make a $75 billion equity investment in a special purpose vehicle to implement the Main Street Business Lending Program. This program aims to increase the flow of credit to small and medium-sized businesses that were in good financial standing prior to the COVID-19 crisis, including those that employ up to 10,000 employees or had 2019 annual revenues of $2.5 billion or less. This option is specifically aimed at the 40,000 medium-sized businesses that employ 35 million Americans.

Eligible borrowers cannot use the loan proceeds to repay other loan balances or other debt of equal or lower priority unless the borrower has repaid an eligible loan in full. Additionally, the borrower cannot cancel or reduce any existing lines of credit. Other important considerations for eligible borrowers include:

  • Attestation that the borrower requires financing due to the COVID-19 pandemic and will use loan proceeds to make reasonable efforts to maintain payroll and retain employees during the term of the loan
  • A requirement that loan proceeds not exceed a 4X multiple of 2019 EBITDA
  • A requirement that loans follow compensation, stock repurchase, and capital distribution restrictions as provided for in Title IV of the CARES Act

For more information on the Main Street Business Lending Program, see here.

The CARES Act’s Payroll Tax Incentives

The CARES Act provides payroll tax incentives to employers without regard to size or employee headcount. Sections 2301 and 2302 of the CARES Act provide two distinct employment tax benefits for employers, determined on a controlled group and affiliated service group basis. Section 2301-Employee Retention Credit provides a refundable payroll tax credit of 50% on qualifying wages paid from March 13 to December 31, 2020, up to $10,000 per employee, making the maximum credit $5,000 per employee. If an employer has more than 100 employees, on a controlled group or affiliated group basis, only wages paid for hours not worked qualify, while employers with 100 employees or fewer may include all wages to qualify for the credit. Procedures need to be established to document hours “not worked” that are eligible for this credit. This is also a troublesome provision for small businesses that have received external growth capital from a private equity or venture capital firm because any portfolio company treated as an affiliate that receives a PPP loan eliminates the Employee Retention Credit for all other portfolio companies.

Section 2302 provides additional cash flow to all employers, by allowing them to delay the payment of the employer’s share of social security tax (6.2% of wages) due from March 27-December 31, 2020, with 50% being due by the end of 2021 and the balance due by the end of 2022. Forgiveness of a PPP loan eliminates the ability to defer payroll taxes under this provision going forward. However, the statute does not use the term “employer” but indicates that the “taxpayer” who has loan forgiveness is not eligible. Therefore, a small business cannot lose its ability to defer payroll taxes allowed by this provision when a different portfolio company or investor receives forgiveness.

Spotlight on the Affiliations Rule

For portfolio companies that have further questions as to whether or not they qualify for SBA loans, understanding their affiliation rules is key. Pursuant to recently published SBA affiliation rules specifically applicable to PPP loans, affiliation generally exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses. Control may arise through ownership, management, or other relationships or interactions between the parties. Examples of control include an individual, concern, or entity owning or having the power to control more than 50% of voting equity; an individual, concern, or entity owning or having the power to control a block of stock that is large compared to others; or two or more persons owning, controlling or having the power to control less than 50% of voting equity with such holdings equal or about equal in size and large compared to other holdings and, in such cases, the SBA may presume that each controls or has the power to control. If voting equity is widely held and no block is large as compared to all others, then the Board and CEO/President will be deemed to control. Affiliation through management may be found where officers, managing members, or partners who control the management of the concern also control the management of another concern. Another case may be when individuals or entities that control the board of directors of the concern also control the board or management of another concern.

It’s important to note that control may be either affirmative or negative. Negative control includes instances where a minority shareholder has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders. SBA will consider the totality of the circumstances when determining whether affiliation exists and may find affiliation based on the totality of the circumstances even though no single factor alone may be sufficient to constitute affiliation.

Here are some other ways portfolio companies can protect themselves during the COVID-19 pandemic:

  • Develop a COVID-19 business continuity plan to counteract as much as possible the impact of slowdowns and unbudgeted costs.
  • Prioritize the business’s short-term survival and put a temporary hold on activities that relate to longer term progress.
  • Prepare a robust 13-week cash flow projection to proactively manage cash flow to preserve or generate cash. A cashflow projection is essential for liquidity and business planning and to enable difficult decisions to be made as early as possible as it helps to identify avoidable disbursements and determine potential covenant issues related to borrowing arrangements.
  • Perform various financial scenarios, sensitivity and ratio analyses, examining the overall threat to your organization should elective or non-urgent services decrease at various percentage rates.
  • Identify measures for controlling budgets and increasing cost savings, such as assessing the possibility of outsourcing or reduction of non-critical business activities.

Navigating the Crisis

Understanding your business’ needs and goals in the face of this pandemic is a critical factor in maximizing the total benefit from potential loans, payroll tax incentives, and other tax incentives.

Alternatively, some organizations are urging Congress and the presidential administration to do more. On April 3, the door opened for companies to begin applying for SBA loans and, as to be expected, the system hit overload. Just one day prior, the Small Business Investor Alliance (SBIA) addressed a letter to Secretary Mnuchin asking that as many small businesses as possible have access to PPP emergency loans as quickly as possible. This letter came just after the release of Speaker Pelosi’s letter to Mnuchin and the Treasury on March 31.

While there are obviously a multitude of negative financial impacts due to the coronavirus, there are also some business opportunities based on the heightened need for increased cybersecurity services associated with a remote workplace environment, claims automation, and consumables as we weather the storm. The impact of COVID-19 on valuation, capital deployment and M&A will continue to play out, causing fund managers to pivot strategies and reassess deal flow.

Whenever the current state of affairs levels out, fund managers looking to deploy capital will need to factor in both current and longer-term economic implications of the pandemic on existing portfolios, the scope and nature of which will largely be driven by the industries in which their portfolios operate. Opportunities for investing in distressed situations will become more prevalent and are likely to require more diverse and nimble investment strategies. Currently, many private equity fund managers are laser-focused on triage, conducting assessment of impacts to their portfolio and shoring up capital resources. During this critical time, many firms are performing weekly cash flow calculations and tracking benchmarks that would otherwise occur on a monthly or quarterly basis. This is key in measuring lending capacities before making any new commitment. These significant shifts have the potential to weigh heavily on portfolio companies and may call for a reassessment of debt and accounting issues, as well.

Make Sure You’ve Read: Portfolio Companies’ COVID-19 Economic Stimulus Relief Incentives: Part 1, published here on Deferred Compensation News and Updates.

#Covid19 #BDO #CARESAct #TaxIncentives #Payroll

ABOUT BDO USA LLP:

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, and advisory services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through more than 60 offices and over 500 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of more than 73,000 people working out of 1,500 offices across 162 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.

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Portfolio Companies and Economic Stimulus Relief Part 1 https://www.fulcrumpartnersllc.com/2020/04/29/portfolio-companies-and-economic-stimulus-relief-part-1/ Wed, 29 Apr 2020 13:25:06 +0000 https://www.fulcrumpartnersllc.com/?p=12259 Portfolio Companies and Economic Stimulus

Fulcrum Partners is sharing with you the following in-depth report, “Portfolio Companies’ COVID-19 Economic Stimulus Relief Incentives”. Presented in two parts, the report covers aspects of the Coronavirus Aid, Relief and Economic Security Act (CARES) including here in Part 1, the Paycheck Protection Program for Small Businesses; the Economic Stabilization Loan Program and Main Street Business Lending Program for midsized and larger businesses.

This report was prepared by leading tax and business advisory professionals at BDO USA, LLP and is republished here with their permission.

  • Scott Hendon, International Liaison Partner; National Leader of Private Equity; Co-leader of Global Private Equity, CPA, BDO Dallas Office
  • Jim Loughlin, Managing Director; Business Restructuring & Turnaround Services National Leader, CTP, BDO New York – Park Avenue Office
  • Jeff Bilsky, Partner; National Technical Practice Leader, Partnership Taxation, CPA, BDO Atlanta Office
  • Verenda Graham, Partner; Private Equity Tax National Leader, CPA, BDO Nashville Office

Portfolio Companies’ COVID-19 Economic Stimulus Relief Incentives: Part 1

Download full report as a PDF

Note: This piece was last updated on April 20, 2020.

The novel coronavirus (COVID-19) has disrupted businesses across every industry, requiring workforces to operate remotely and urgently pivot to crisis management mode. Meanwhile, the pandemic has ushered in a bear market and caused high unemployment, prompting massive economic uncertainty.

Given that the novel coronavirus’s economic damages have been acute and widespread, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2.2 trillion stimulus package signed into law on March 27, 2020, intended to help mitigate the economic devastation caused by COVID-19. Private capital-backed companies are generally ineligible for the prevalent Small Business Administration (SBA) loans due to the maximum employee test, described below. However, all hope for portfolio companies is not lost as there are several incentives outlined in Title IV of the CARES Act that merit attention for midsized and larger businesses as part of the $500B economic stabilization plan described in Title IV of the Act.

Unpacking the Coronavirus Aid, Relief and Economic Security (CARES) Act

The CARES Act comprises multiple loan programs targeted at different groups impacted by COVID-19. The programs PE and VC may be eligible for, both past and present, are highlighted in the figure below.

Programs PE and VC may be eligible for, both past and present

Small Businesses – $377 Billion

Paycheck Protection Program

Perhaps the most publicized feature of the CARES Act is the $349 billion in Paycheck Protection Program (PPP) loans being administered by the SBA. PPP loans are unique in that when they are used for certain designated purposes, such as payroll costs, the entire balance of the loan may be forgiven and excluded from taxable income.

The CARES Act outlines various qualifications that must be met by the borrower in order to obtain a PPP loan. One requirement that is significant for private capital-backed companies is the limit on the number employees that may be employed by the borrower and its affiliates. Small businesses that have received external growth capital from a private equity or venture capital firm will likely be required to include the employees of the private capital provider and its other portfolio companies when applying the 500-employee count, referred to as the maximum employee test. However, there are three potentially important exceptions. First, private equity-controlled hospitality and travel companies, those operating in food service industries (NAICS code 72) and franchises in the SBA’s Franchise Directory are not subject to the 500-Employee Test. Second, the SBA has published a list of maximum employees per industry, some of which include maximums in excess of 500 employees. The industry size standard set forth by the SBA can be found here. Third, there is an exception if a company is backed by a Small Business Investment Company (SBIC), in which case they might qualify for PPP loans.

Given the complexities associated with the affiliation rules as well as the possible exceptions, care should be taken in evaluating individual companies’ potential eligibility. Further guidance can be found here.

In addition, SBA’s Economic Injury Disaster Loans (EIDLs), which are not new, are surfacing in light of COVID-19 since this is the first time a virus or pandemic event has been defined as a disaster. The CARES Act specifically allots $10 billion for EIDLs as part of the support for small businesses, and private capital-backed companies may find this option appealing since many previous underwriting restrictions have been removed, and potential terms include loans of up to 30 years with interest rates as low as 3.75% for small business and 2.75% for non-profits.

Tomorrow Read: Portfolio Companies’ COVID-19 Economic Stimulus Relief Incentives: Part 2, published here on Deferred Compensation News and Updates.

#Covid19 #BDO #CARESAct #MainStreetBusiness

ABOUT BDO USA LLP:

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, and advisory services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through more than 60 offices and over 500 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of more than 73,000 people working out of 1,500 offices across 162 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.

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CESA Act Loans: Further Information and Insights https://www.fulcrumpartnersllc.com/2020/04/23/cesa-act-loans-further-information-and-insights/ Thu, 23 Apr 2020 14:04:40 +0000 https://www.fulcrumpartnersllc.com/?p=12248 Small Business Loan Form Concept

The Coronavirus Economic Stabilization Act (CESA)i was established to provide loans and loan guarantees for businesses to improve business liquidity resultant from the COVID-19 pandemic. Unlike the widely publicized Payment Protection Program (PPP), CESA Act loans do not include loan forgiveness. They do include substantial penalties, however, if terms of the loan agreement are breeched.

By accepting CESA Act loans and loan guarantees, companies are committing to comply with the terms and conditions of the loan, which include requirements specific to executive compensation. These guidelines, as we addressed in the Fulcrum Partners whitepaper published April 14, 2020, “Executive Compensation Restrictions and the CARES Act,” apply to any officer or employee who received total compensation greater than $425,000 in the calendar year 2019.

Revisiting Terms of CESA Act Loans

Throughout the period of a company’s loan or loan guarantee, and for one year afterward, (and longer for employers in certain industries) specific restrictions apply. Restrictions include limiting executives who receive between $425,000 and $3 million to receive no more in total compensation than they did in 2019.

Comparably, executives who received over $3 million in total comp in 2019, may receive no more than $3 million plus fifty percent of the amount above $3 million. For example: an executive earning $6 million in 2019, would be eligible to receive $3 million plus an additional $1.5 million, resulting in $4.5 million versus their previous year’s $6 million in total compensation. Companies also need to assess whether the terms of the loan and its required reductions in pay will result in a breech of the terms of individual employment contracts.

CESA Act Loan and Loan Guarantee Restrictions, Additional Details

Other restrictions that apply to companies receiving CESA Act Loans and loan guarantees include, but may not be limited to:

  • Executives may not receive severance or other termination benefits in excess of twice the total compensation the executive received in calendar year 2019.
  • Companies of 500 to 10,000 employees must commit to maintaining compensation and headcount at the same or greater level than it was when the loan is received.
  • Loan recipients must also commit to not sending jobs offshore and to remain neutral in matters of unionization.

Nonqualified Deferred Compensation to Reward Executives

Based on current guidelines, employers potentially could offset reduced pay to an executive through a nonqualified deferred compensation arrangement (NQDC). The NQDC plan would be subject to Internal Revenue Code Section 409A regulations, which include penalties for noncompliance.

Among other pertinent considerations for ensuring compliance with 409A regulations are the timing of future payments and the continued employment of the executive. Section 409A violations can result in deferred amounts becoming immediately recognized as taxable income, plus a twenty percent penalty tax, and other substantial penalties.

The current environment brings into consideration numerous complex compliance issues. Understandably, companies and executives are taking pragmatic steps to review their individual situations with knowledgeable and experienced executive benefit advisory professionals.

Any strategies under consideration by a compensation committee warrant careful review by executive benefits professionals for scrutiny of all aspects of 409A compliance, including documentary compliance, inadvertent new deferral arrangements caused by temporary salary reductions and repayments, and alterations to existing plans. Companies must be fully aware of any ways by which their CESA Act loan could put them in violation of new or existing 409A agreements.

#NQDC #FulcrumPartners #executivecomp #CESA #Covid19

i Subtitle A of Title IV of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

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Executive Comp Restrictions: Key Issues Regarding Executive Compensation and the CARES Act https://www.fulcrumpartnersllc.com/2020/04/21/executive-comp-restrictions-key-issues-regarding-executive-compensation-and-the-cares-act/ Tue, 21 Apr 2020 16:41:52 +0000 https://www.fulcrumpartnersllc.com/?p=12230 ]]> 12230