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Susan is ranked in Chambers USA among the top corporate/M&A attorneys in Minnesota. She represents clients in general corporate, taxation, and nonprofit matters, drawing from a diverse background in government, accounting, and law to serve as a holistic business advisor. Susan regularly counsels clients on mergers and acquisitions, business formation, joint ventures, and general corporate matters, and she frequently assists with tax controversies, audits, appeals, planning, and structuring, as well as researching tax law and drafting legal appeals and memoranda. Susan also serves on the Maslon board of directors.

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Matthew is an accomplished attorney and seasoned entrepreneur who returned to private practice after a decade of successfully running his own business. As the principal co-founder and board chair of Bauhaus Brew Labs, Matt has personally walked in the shoes of business owners, honing his capabilities in business finance, commercial transactions, strategic planning, and regulatory issues.

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• Term. The minimum term to repay any non-forgiven proceeds for any new PPP loans is extended from 2 to 5 years (the interest rate remains at 1%). For existing loans, lenders and borrowers will have to agree to an extension.
• Covered Period. Under the prior program rules, for the loan to be forgiven, a borrower needed to use loan proceeds on specified eligible expenses during the 8-week period after receiving the loan or the 8-week period starting on the date of the first payroll cycle after receiving the loan. Now, current PPP borrowers can opt to extend the period to 24 weeks following receipt of loan proceeds, or elect to keep the original 8-week period. Any new PPP borrowers will have a 24-week covered period, but such period cannot extend beyond December 31, 2020. It is unclear at the time how the move to a 24-week covered period will impact the $15,385 cap payment to any individual employee during the 8-week period (i.e. $100,000 annualized for the 8-week period), referenced in the SBA Rules and Loan Forgiveness Application. Updated guidance from the SBA is expected. Importantly, the extension of the covered period does not extend the deadline to apply for a PPP loan, with applications for new PPP loans being accepted through June 30, 2020.
• Payroll Cost. To qualify for loan forgiveness, borrowers now must spend 60% of loan proceeds on payroll costs (previously, the SBA imposed a 75% requirement), and may use up to 40% of loan proceeds on interest payments on mortgage obligations (excluding prepayments of or payments of the principal), rent payments, or utility payments. Importantly, although this 60/40 requirement provides additional flexibility, it now appears to be a "cliff." The borrower must spend a minimum of 60% of its loan on payroll costs or none of the loan will be forgiven (i.e. if you spend 41% of loan proceeds on rent and utilities, the entire loan becomes ineligible for forgiveness).
• Rehire Safe Harbor. Previously, to be eligible for full loan forgiveness, a borrower was required to restore its full-time equivalent employee ("FTE") level and restore reduced wages (reduced by more than 25%) to the February 15, 2020 levels by June 30, 2020. This date is extended to December 31, 2020.
• Employee Availability Exemption. New under the Act, borrowers will be now exempted from a proportional reduction in loan forgiveness due to a reduction in the number of FTEs if, in "good faith," the borrower is able to document that between February 15, 2020, and December 31, 2020, the borrower was unable to (1) rehire employees who had been employed on February 15, 2020, or hire similarly qualified employees for unfilled positions on or before December 31, 2020; or (2) return to the same level of business activity at which such business was operating at before February 15, 2020, due to compliance with federal guidance related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
• Extended Deferral Period. The Act removes the previous 6-month period to defer PPP loan payments and provides instead for deferral until the borrower applies for forgiveness. However, in the event the borrower fails to apply for forgiveness within 10 months after the last day of the covered period for PPP loan forgiveness, the borrower must then begin making payments of principal, interest, and fees on the loan.
• Defer Payroll Taxes. Borrowers may now defer payment of payroll taxes incurred between March 27 and December 31, 2020 (previously, borrowers were prohibited from both obtaining a PPP loan and utilizing this tax deferral under the CARES Act).

Next Steps

In light of these reforms, current borrowers should consider taking the following steps:

1. Reach out to your lender to request a loan term extension if you think any portion of the loan might not be forgiven.
2. If you elect to use the 24-week covered period, recalculate your payroll costs for the 24-weeks from your loan origination date. If you reduce the amount of loan proceeds you are using on payroll costs, ensure you are still using at least 60% of the proceeds on payroll.
3. If you anticipate difficulties in eliminating the reduction in the number of FTEs by December 31, 2020 (i.e., hiring similarly qualified or re-hiring the same employees to your pre-February 15, 2020 numbers), or you have concerns about the ability for your business to return to the same level of business activities by such time, thoroughly document any evidence supporting these concerns and your related business decisions. For example, document all written job offers, rejections and job postings, and all steps your business is taking to comply with OSHA, CDC, and HHS procedures.

We Can Help

Please contact Maslon's Corporate & Securities Group if you have questions or need assistance taking advantage of the relief provided under the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020.

Ordinarily, to be eligible for an SBA Section 7(a) business loan, businesses must be unable to obtain credit elsewhere. The PPP waives this "credit elsewhere" test, thereby expanding greatly the pool of potential business applicants. However, the PPP requires that a business certify in good faith that "[c]urrent economic uncertainty makes [its] loan request necessary to support [its] ongoing operations."

Prior to April 23, 2020, the SBA had offered little guidance on the meaning of this certification. But in the wake of high-profile publicly held companies returning their PPP loan proceeds, the SBA clarified on April 23, 2020, that this certification requires businesses to "take into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business." The SBA stated further that "it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to the SBA, upon request, the basis for its certification." Unfortunately, neither "substantial market value" nor "access to capital markets" was defined.

Key Considerations
This guidance raises potential issues for businesses who have already received PPP loans. Business recipients of a PPP loan must consider whether, in light of the SBA's new guidance, its certification of need ("necessary to support ongoing operations") remains accurate and made in good faith. This applies with equal force to private and publicly held companies.

However, the language in the SBA's new guidance raises especially difficult issues for publicly held companies. Despite meeting PPP size and affiliation requirements, publicly held companies need to consider whether they have "substantial market value" and "access to capital markets" given the lack of definitions of these terms. Further, the SBA's requirement that businesses analyze "their ability to access other sources of liquidity sufficient to support their ongoing business operations" appears to directly contravene the waiver of the "credit elsewhere" test.

While the SBA's language does not preclude all publicly held companies from obtaining a PPP loan, given the SBA's explicit example of an ineligible business as one that is publicly held, these companies must take extra precaution in analyzing their certification of need. Without further clarification on what constitutes "substantial market value," even publicly held companies with relatively small market capitalization must analyze whether they remain eligible.

Consequences of Bad Faith
Making a false statement in connection with obtaining a PPP loan can lead to serious consequences, including, but not limited to, criminal liability. However, on April 24, 2020, the SBA issued a supplemental Interim Final Rule on the PPP, providing a safe harbor for any business that applied for a loan prior to April 24, 2020, but now believes it is ineligible for lack of need. So long as such business applicant repays the loan in full by May 7, 2020, the SBA will deem the business to have made its certification in good faith.

Best Practices for Good Faith
Reports are emerging that some public companies of relatively large size are determining that they can retain their PPP loans despite the unclear language of the SBA guidance, while other companies are repaying their loans. Companies retaining the loans may have relied on language in the guidance that they are eligible if they are not able to "access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business." Given the requirement that the certification must be made in good faith, we encourage companies that conclude that they are eligible to obtain or retain the PPP loans in light of the SBA's guidance to carefully document their analysis in support of this conclusion.

We Can Help
Please contact Maslon's Corporate & Securities Group if you have questions or need assistance analyzing your eligibility for a loan under the Paycheck Protection Program.

President Trump signed into law an updated version of the CARES Act (the "Act") on March 27, 2020. The Act provides an estimated two trillion dollars' worth of relief for individuals and businesses in an effort to mitigate the effects of the ongoing COVID-19 pandemic. The Act makes available emergency funds in the form of loans, credits, and grants to businesses of all sizes.

Given the emergent situation, the Act was drafted and passed expeditiously, which resulted in certain provisions (and programs) lacking detail or otherwise requiring further rulemaking. The summary below provides our current understanding of the Act, but as more details are made available (i.e., rules are promulgated by the applicable government bodies and/or insight is gained from our experience with the Act), Maslon will provide updates. 

Update: The summary below has been updated to include information on the Main Street Lending Program announced on April 9, 2020, and to reflect clarifications found within the Interim Final Rule for the Paycheck Protection Program released on April 2, 2020 (the "Interim Final Rule"). The full Interim Final Rule is available at sba.gov.

Scroll down to view the full information on key resources available to businesses, including provision eligibility and processes, or use the below links to go directly to the section which interests you most:

• Business Loans
  • Paycheck Protection Loans for Small Businesses
  • Expansion of SBA Disaster Loans
  • Direct Loans for Eligible Businesses
  • Mid-Size Direct Lending Program (Pending)
  • Main Street Lending Program
• Tax Credits
  • Employee Retention Tax Credits
  • Delay of Payment of Employer Payroll Taxes
  • Net Operating Losses
• Additional Provisions

Business Loans

Paycheck Protection Loans for Small Businesses

The most significant financial resource available for small businesses under the Act is the "Paycheck Protection Program" (the "Program"). Employers with 500 or fewer employees can obtain loans under this Program through the Small Business Administration ("SBA") Section 7(a) loan program to pay for payroll costs and other expenses (e.g., interest on mortgage loans and other secured debt, rent and utility costs) from February 15, 2020, through June 30, 2020. Payroll costs include employee salary (up to $100,000/year for an individual employee), wages, commissions, payment for vacation, parental, family, medical, or sick leave, health and retirement benefits payments, and other costs.

The SBA clarified in the Interim Final Rule that payments made to independent contractors do not constitute payroll costs. The SBA clarified in the Interim Final Rule – Additional Eligibility Criteria and Requirements for Certain Pledges of Loans that payroll costs also include partnership draws. Partnerships and limited liability companies filing taxes as a partnership may report the self-employment income of general active partners as payroll costs (up to $100,000 annualized) on a PPP loan application filed by or on behalf of the partnership. A partner cannot submit a separate loan application as a self-employed individual. The Interim Rule is inconsistent on whether the payroll cost calculation is based upon the trailing twelve months prior to submitting a loan application or the prior calendar year. Maslon will provide additional updates as more guidance becomes available.

Loan Eligibility

Loans under the Program are available to the following businesses as long as the business was operational as of February 15, 2020, had employees, and paid wages and payroll taxes:

• Businesses with up to 500 employees, including part time employees.
• "Small business concerns" are generally eligible for SBA loans, which are independently owned and operated for-profit companies with a place of business in the U.S. (and that operate primarily within the U.S. or make significant contributions to the U.S. economy through the payment of taxes or use of American products, materials, or labor). This would generally exclude nationally-recognized companies. Whether a business is an eligible small business concern is determined by established SBA regulations, based upon limits on either revenue or employee count. Such limits vary by industry. Refer to the SBA's Table of Small Business Size Standards Matched to NAICS Codes, available at sba.gov.
• Businesses in the Accommodation and Food Service Industries (e.g., full-service restaurants, hotels) are eligible provided that if the business has more than one physical location, it does not employ more than 500 employees at each location.
• SBA "affiliation rules"—meaning that the SBA generally counts the employees or annual receipts of a business's affiliates when determining eligibility—are also waived for: (1) businesses in the Accommodation and Food Service Industries that employ not more than 500 employees; (2) franchises; or (3) businesses that receive financial assistance from a small venture investment company licensed under the SBA. For example, if a restaurant owner owns 51% of another restaurant business, the general SBA rule that the employees or receipts of the second restaurant is/are counted in determining the business's eligibility is waived.

Loan Details

• Non-seasonal businesses (in existence between February 15, 2020, through June 30, 2020) may obtain loans for up to $10 million. However, the amount of the loan a non-seasonable business is eligible for would be the lesser of: (1) The average monthly payroll costs (as described above) during the year prior to making the loan x 2.5; or (2) $10 million. Note, however, that the outstanding amount of any loan made under the SBA's Disaster Loan Program between January 31, 2020, and the date upon which such loan may be refinanced as part of the Program will be added to the preceding sub-section (1), which could further increase the loan money available to a business.
• Standard fees for SBA Section 7(a) loans are waived for loans made under the Program. The SBA's "credit elsewhere" test (i.e., the requirement that a small business is unable to obtain credit elsewhere) is also waived for these loans.
• Loans are required to be without recourse, must be unsecured, and cannot require a personal guarantee. 
• No yearly or guarantee fees for the loan, and all prepayment penalties are waived.
• The SBA clarified in the Interim Final Rule that the interest rate for a loan is 1%.
• The SBA clarified in the Interim Final Rule that loan payments are deferred for six months. Interest will continue to accrue during the deferment period.
• The SBA clarified in the Interim Final Rule that least 75% of the loan amounts must be used for payroll costs.
• The SBA clarified in the Interim Final Rule that loan maturity is 2 years.
• Because payroll costs only include employee cash compensation and partnership draws up to $100,000/year, businesses should take care not to use loan proceeds to pay any portion of these items in excess of $100,000. For example, if an employee earns $120,000/year, the employer may use loan proceeds to pay $100,000 on a pro rata basis of the employee’s salary, but must pay the remaining $20,000 on a pro rata basis using other funds. For purposes of loan forgiveness, this means a maximum of $15,385 per individual of loan proceeds may be used during the eight-week covered period.
• Please note that if PPP funds are used for unauthorized purposes, the SBA will direct businesses to repay those amounts. Knowingly misusing these funds may subject the business, shareholders, partners, and/or members to additional liability, such as fraud charges.

Loan Forgiveness

• Loans used for eligible expenses incurred during the 8-week period following the date of origination may be forgiven. In addition to payroll costs, eligible expenses include mortgage and other secured-debt interest payments, rent, and utilities, so long as those expenses existed as of February 15, 2020. For non-seasonal employers, the amount eligible for forgiveness is reduced by the following formulas:
  1. For reductions in employees, the maximum amount eligible for forgiveness, multiplied by:
     1. The average number of full-time equivalent employees ("FTEs") per month, calculated by the average number of FTEs for each pay period within a month, for the period between February 15, 2020, through June 30, 2020, divided by either, at the election of the employer:
        • The average number of FTEs per month employed from February 15, 2019, to June 30, 2019; or
        • The average number of FTEs per month employed from January 1, 2020, to February 29, 2020.
  2. For reductions in wages, the amount of any reduction in total salary or wages of any employee for the period between February 15, 2020, through June 30, 2020, that exceeds 25% of the employee's salary or wages during the employee's most recent full quarter of employment before the period before February 15, 2020.
• Employers who have terminated employees or reduced employee wages may be relieved from these forgiveness reduction penalties if they rehire employees or make up for wage reductions by June 30, 2020. Specifically, the above calculations to reduce amounts eligible for forgiveness will not apply if an employer either:
  1. Reduces its number of employees between February 15, 2020, and April 26, 2020, but subsequently "eliminated the reduction in the number of full-time equivalent employees"; or
  2. Conducts a salary reduction between February 15, 2020, and April 26, 2020, but subsequently raises salaries to pre-February 15, 2020, levels by June 30, 2020.
• Loan funds used to pay additional wages to tipped employees are also eligible for forgiveness. The Act is unclear if this includes tips and base wages or just base wages.
• Any forgiven amounts will not be considered taxable gross income.
• The SBA is required to issue regulations on the specifics of loan forgiveness (and deferment) under the Program within 30 days of the Act's enactment (i.e., by April 26, 2020).
• The SBA clarified in the Interim Final Rule that forgiveness for non-payroll costs (e.g. mortgage interest, utilities) is limited to 25% of the total amount forgivable.

Loan Process

• To obtain a loan under the Program, eligible businesses should apply through participating lenders offering SBA loans. In applying, the business must make good faith certifications that:
  1. The uncertainty of current economic conditions makes the loan necessary;
  2. Acknowledge the funds will be used for the allowable expenses (i.e., applicable payroll costs, mortgage, and other secured loan interest, rent, and utilities);
  3. The eligible business does not have a duplicate SBA loan application pending; and
  4. The eligible business has not received any duplicative loan amounts under the Program at any time after February 15, 2020, through the date on which the business obtains a loan through the Program.
• A business may not obtain multiple loans through the Program for the same purpose (i.e., loans that are duplicative of other loans received under the Program).
• Self-employed individuals, sole proprietors, and independent contractors applying for loans under the Program are required to provide certain documentation to prove eligibility, such as payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship. Beyond the additional documentation requirements, the application process for these individuals is the same as for other businesses.

Expansion of SBA Disaster Loans

The Act also expands business access to economic injury disaster loans ("EIDL") through the SBA Economic Injury Disaster Loan Program. This expansion will be in effect between January 31, 2020, through December 31, 2020. These types of loans were previously available only for small business concerns, as defined by SBA, but are now temporarily available to business concerns with up to 500 employees.

Loan Eligibility

• Small business concerns, defined above; or
• Businesses with up to 500 employees.

Loan Details

• Unlike the Paycheck Protection Program, the Act does not provide for forgiveness of EIDLs.
• The amount available under an EIDL is based upon cash flow projections and demonstrated need, with a cap at $2,000,000.
• Loans may be used to pay expenses incurred in the ordinary course of business. Ordinary expenses include, but are not limited, to:
  1. Providing sick leave to employees unable to work because of the ongoing pandemic;
  2. Maintaining payroll;
  3. Meeting increased supply chain costs;
  4. Rent and mortgage payments; and
  5. Repaying debts that cannot be paid due to lost revenue.
• In general, existing rules applicable to the terms of EIDLs apply. However, two existing requirements are revised for EIDLs obtained through December 31, 2020. Specifically, for loans made during this period:
  1. Personal guarantees are not required for loans up to $200,000; and
  2. The SBA will not require that the business is unable to obtain credit elsewhere.
• Interest rates are subject to change, but currently set at 3.75%.
• Term lengths of EIDLs are either 15 or 30 years.

Loan Advance

• A business applying for an EIDL in response to COVID-19 may request an emergency advance from the SBA for up to $10,000. The advance must be paid by the SBA to the business within three days after receipt of the application.
• An advance received does not have to be repaid by the business, even if the SBA ultimately denies the business's application for an EIDL.

Direct Loans for Eligible Businesses

The Act also provides $500 billion for loans, loan guarantees, and investments in the Federal Reserve's lending facilities to support "eligible businesses" particularly distressed by the ongoing pandemic, which include air carriers and U.S. businesses that have not received "adequate economic relief" in the form of other loans or loan guarantees under the Act. Note that loans under this program are not generally available to businesses that may have been adversely affected by COVID-19. Rather, particular industries that are most affected (e.g., airlines) would be eligible. The $500 billion is allocated as follows: $25 billion in loans and loan guarantees for air carriers; $4 billion in loans and loan guarantees for cargo air carriers; $17 billion in loans and loan guarantees for businesses critical to maintaining national security; and $454 billion for loans, loan guarantees, and investments in support of facilities established by the Federal Reserve.

Loan Eligibility

The business must:

• Be created or organized in the U.S.; and
• Have significant operations in and a majority of its employees based in the U.S.

Loan Details

• The loan must be entered into directly by the eligible business as the borrower and cannot be forgiven.
• The interest rate of the loan must be based on the risk and the current average yield on outstanding marketable obligations of the United States of comparable maturity.
• Any business receiving a direct loan is prohibited for 12 months after the term of the loan, from:
  1. For any officer or employee whose total compensation exceeded $425,000 in calendar year 2019, providing:
     1. Compensation to such individual over such amount over any consecutive 12 months during the covered period; or
     2. Severance benefits exceeding more than two times such 2019 compensation amount.
  2. For any officer or employee whose total compensation exceeded $3,000,000 in calendar year 2019, providing compensation that exceeds the sum of:
     1. $3,000,000, plus
     2. 50% of the amount in excess over $3,000,000 that the officer or employee received in calendar year 2019.
• Air Carriers and related contractors (e.g., persons that perform catering functions or other functions at an airport directly related to the air transportation of persons, property, or mail) are subject to the same executive compensation limits outlined above, except that the limits apply to the two-year period ending on March 24, 2022, rather than the 12 months following the term of the loan.
• Businesses that receive a loan may not conduct a stock buyback beyond the term of the loan, and must maintain at least 90% of its employment levels as of March 24, 2020, until September 30, 2020.

Mid-Size Direct Lending Program (Pending)

The Act also directs the Treasury Secretary to create a program to provide financing to banks and other lenders who make direct loans to mid-size businesses. Additional guidance on this program will be issued by the Treasury Secretary, including guidance that may permit receiving warrants, stock options, common or preferred stock or other equity under the program without triggering an ownership change under Section 382 of the Internal Revenue Code of 1986 (i.e., allowing more favorable treatment and flexibility regarding net operating loss carryforwards).

Loan Eligibility

The business:

• Have between 500 to 10,000 employees;
• Be created or organized in the U.S.; and
• Have significant operations in and a majority of its employees based in the U.S.

Loan Details

• Loans made under the to-be created program are capped at a 2% (annualized) interest rate. During the first 6 months after a direct loan is made, or for such period set by the Treasury Secretary, no principal or interest will be due and payable.
• Loans may be used for employee retention purposes, and funds must be used to retain at least 90 percent of the business's workforce, at full compensation and benefits, until September 30, 2020.

Loan Process

• To apply for a loan under this program, an eligible business must make a good faith certification that:
  1. The uncertainty of economic conditions makes the loan necessary to support the ongoing operations;
  2. The funds received will be used to retain at least 90 percent of the business's workforce, at full compensation and benefits, until September 30, 2020;
  3. The business intends to restore not less than 90 percent of the workforce of the business that existed as of February 1, 2020, and to restore all compensation and benefits to the workers of the business no later than 4 months after the termination of the public health emergency declared on January 31, 2020;
  4. The business is domiciled in the United States with significant operations and employees located in the United States;
  5. The business is not a debtor in a bankruptcy proceeding;
  6. The business is created or organized in the United States or under the laws of the United States;
  7. The business will not pay dividends with respect to the common stock of the eligible business, or repurchase an equity security that is listed on a national securities exchange of the business while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of the Act's enaction;
  8. The business will not outsource or offshore jobs for the term of the loan and 2 years after completing repayment of the loan;
  9. The business will not do away with existing collective bargaining agreements for the term of the loan and 2 years after completing repayment of the loan; and
  10. The business will remain neutral in any union organizing effort for the term of the loan.

Main Street Lending Program

On April 9, 2020, the Federal Reserve announced preliminary details of the Main Street Lending Program, a lending program established pursuant to Section 4003(C)(3)(d)(ii) of the CARES Act, which permits the Federal Reserve to make programs aimed at providing financing to small and mid-sized businesses affected by the COVID-19 pandemic. This program offers potential relief for businesses too large to take advantage of the Paycheck Protection Program ("PPP") (which is an SBA-based lending program for small companies). More details about this program can be found at: CARES Act: The Main Street Lending Program Offers Relief for Small and Mid-Sized Businesses.

Tax Credits

Employee Retention Tax Credits

The Act creates a tax credit each quarter to offset 50% of each employee's qualifying wages, including qualifying health care plan costs, on up to $10,000 of wages paid per employee (i.e., up to $5,000 in actual credit per employee). This employee retention tax credit is available for wages incurred from March 12, 2020 – December 31, 2020, but is unavailable for paid sick leave or expanded FMLA wages paid under the Families First Coronavirus Response Act (FFCRA). Notably, this credit is in addition to the payroll tax created under the FFCRA.

Employer Eligibility

• The credit is available to employers, who do not receive a loan under the Paycheck Protection Program discussed above, whose (1) operations were shut-down or partially suspended due to a COVID-19 related shut down order, or (2) gross receipts fell more than 50% when compared to the same quarter in the previous year.
• For employers eligible for the credit due to a decline in gross receipts, eligibility ends with the calendar quarter in which the gross receipts exceed 80 percent of the calendar quarter in the previous year.
• Private employers of all sizes may apply for the credit; however, employers with more than 100 full-time employees, may only receive the tax credit for employee wages where the employee was not providing services due to one of the reasons listed above. Employers with 100 or fewer employees qualify for the credit, regardless of whether the business is shut down pursuant to a shut-down order.

Claiming Credit

• The tax credit only offsets employment taxes owed by an employer. To the extent 50% of the qualifying wages exceed the employer's employment tax liability, the employer will be refunded the difference. The Treasury Secretary is expected to issue further guidance, forms, and regulations for these tax credits, including provisions allowing businesses to receive advance payment of the credit.
• The CARES Act also facilitates reimbursement for employee wages paid pursuant to the Families First Coronavirus Response Act ("FFCRA").
• Employers can claim the credit each quarter they are eligible through December 31, 2020.

Delay of Payment of Employer Payroll Taxes

To provide further assistance to employers, the CARES Act authorizes deferral of 2020 payroll taxes to 2021 and 2022. Half of the deferred 2020 employment taxes must be paid by December 31, 2021. Any remaining amount owed for 2020 employment taxes is due to the IRS by December 31, 2022. Like the employee retention tax credits, this deferral is unavailable to employers who receive a small business "paycheck protection" loan. Note, there is also no provision in the Act that the IRS "trust fund recovery penalty" (which is equal to 100% of unpaid employment taxes) is being altered in any way. This penalty may be assessed against any person (including officers, employees, members, and directors) who is responsible for managing and paying employment taxes on behalf of the employer and who willfully fails to collect or pay such taxes. Accordingly, if a business is unable to pay the deferred taxes after the deferral period (e.g., due to insolvency and bankruptcy), key officers and employees may remain liable for payroll taxes.

Net Operating Losses

The Act also suspends certain deduction limits previously imposed by the Tax Cuts and Jobs Act (TCJA), including:

• Allowing Net Operating Losses (NOLs)—which occur when a businesses's allowable deductions exceed its taxable income within a tax period—arising in 2018, 2019, and 2020 to be carried back for up to five years (under the TCJA, no carrybacks were permitted);
• Suspending the TCJA's 80 percent cap on NOL carryovers for three years (cap would not apply to taxable years beginning in 2018, 2019, and 2020); and
• Suspending certain rules relevant to farming losses for NOLs arising in taxable years beginning in 2018, 2019, and 2020.

Additional Provisions

The Act includes a number of additional provisions for the benefit of unemployed workers, financial institutions, community banks, the health care industry (including medical device companies), and borrowers of federally backed mortgage loans. For more information about these and other provisions, reach out to Maslon's Corporate & Securities Group.

We Can Help

Please contact Maslon's Corporate & Securities Group and Labor & Employment Group if you have questions or need assistance taking advantage of the relief provided under the CARES Act.

The process related to Paycheck Protection Program ("PPP") loans under the CARES Act is moving quickly. Lenders may begin processing PPP loans as early as Friday, April 3, 2020, but it's unlikely all lenders will be ready to process and/or fund loans by this time. Although PPP loans will be available through June 30, 2020, eligible businesses should apply as soon as possible given concerns that the allocated funds may not cover demand. Funds will be given on a first come, first serve basis.

On April 2, the U.S. Small Business Administration ("SBA") published its Interim Final Rule, which provides guidance on the implementation of the PPP, including a helpful Q&A section. Comments on the Interim Final Rule will be accepted through the Federal eRulemaking Portal for 30 days after date of publication of the Interim Final Rule in the Federal Register. The SBA will provide further guidance through SBA notices and a program guide, which will be posted to the SBA’s website. While full details about the PPP are still forthcoming, current guidance provides the following information:

Proactive Steps to Apply

Eligible businesses can apply through existing SBA Section 7(a) loan program lenders or through any participating federally insured depository institution, federally insured credit union, and Farm Credit System institution. Additional lenders will be able to make PPP loans once approved and enrolled in the PPP. It is anticipated that lenders will provide their specific application process information once available, which may be as soon as Friday, April 3, 2020.

Register to Submit Application

If a business believes it may be eligible for a PPP loan, it should connect as soon as possible with a PPP lender to get registered. Applications for a PPP loan will be specific to each lender, and you should obtain the proper forms from your lender. While businesses cannot yet apply, businesses may be able to "get a spot in line" to submit applications by reaching out to lenders now.

Assemble Potentially Required Application Documentation

While PPP loan application processes will be specific to each lender, the SBA has issued a sample application form to assist businesses in preparing for the lender's application. Based on the sample application form provided and traditional SBA loan rules, we suggest you assemble the following documentation to get a head start, keeping in mind that actual document requirements may vary across lenders. If you have an existing relationship with an SBA-approved lender, consider reaching out to that lender first for a PPP loan, as the lender likely already has on file potentially required documentation, which may speed up the application process.

• Traditional SBA Loan Documentation Requirements:
  • Articles or Certificate of Incorporation/Organization for each borrower;
  • Bylaws/Operating/Member Control Agreement for each borrower; and
  • Driver's licenses for all owners.
• Payroll Expense Verification Documents:
  • IRS Form 941 Employers Quarterly Tax Return and Form 944 Employers Annual Tax Return (if filed);
  • Payroll summary report form provided with corresponding bank statements or employee paystubs as of February 15, 2020 (or corresponding period) with corresponding bank statements;
  • 1099s for independent contractors;
  • Statement that all employees are United States residents or detailed list of employees outside the United States with their salaries (whose wages must be excluded); and
  • Profit and loss statement for the prior 12 months.
• Most recent mortgage statement or rent invoice and lease.
• Documentation of the average monthly payroll based on the 12 months between April 2019 to March 2020, reduced for payroll individuals that exceed $100,000 on an annualized basis (i.e., average payroll, capped at $100,000 (annualized) per employee).
  • Average payroll should be separated by category: Salary, Hourly, Commissions, Vacation, Sick Leave, Group Health Care (both union / non-union), and Retirement Contributions (both union / non-union).
• Total monthly rent (or mortgage interest) over the prior 12 months.
• Total amount spent on utilities over the prior 12 months (Electricity, Gas, Water, Transportation, Telephone, and Internet, etc.).
• Total interest on other debt obligations incurred before February 15, 2020.
• Entity's tax EIN and full legal name (you can find this on your tax return).
• Personal financial statements may be requested for all owners.

Potential Disqualifiers

Based on questions borrowers must answer on the SBA sample application form, the following factors may disqualify certain businesses from PPP loans. As more information is made available, we will clarify this list:

• If the business or any of its owners are presently involved in any bankruptcy;
• If the business or any of its owners are presently suspended, debarred, proposed for debarment, declared ineligible, or are voluntarily excluded from participation in the PPP by a federal department or agency;
• If the business or any of its owners, or any business owned or controlled by any of them, have ever taken a loan from the SBA or any other federal agency that is currently delinquent or that has defaulted in the last seven years and caused a loss to the government;
• If any 20% or more owner of the business is currently subject to an indictment, criminal information, arraignment, or any other means by which formal criminal charges are brought in any jurisdiction;
• If any 20% or more owner of the business is currently incarcerated, on probation, or on parole; and
• If any 20% or more owner of the business has, within the last seven years, pleaded guilty to, pleaded nolo contendere, been placed on pretrial diversion, been placed on any form of parole or probation, or been convicted of any felony or misdemeanor against a minor.

We Can Help

Please contact Maslon's Corporate & Securities Group if you have questions or need assistance applying for a PPP loan.

• Previously, borrowers could only use the 8-week period after receiving the loan (the "Covered Period") to calculate forgiveness for the loan. Now, borrowers with a bi-weekly (or more frequent) payroll cycle (i.e., paying employees every other week or more frequently) may choose to calculate forgiveness only for amounts spent on payroll using the 8-week period beginning on the first day of the first payroll cycle. Forgiveness of loan amounts spent on non-payroll costs, however, can only be calculated using the initial "Covered Period" (8 weeks after receiving the loan).
• The Rule also clarified several points left open by the CARES Act and other guidance from the SBA:
  • Payroll costs incurred but not paid during the borrower's last payroll cycle are eligible for forgiveness if paid on or before the next regular payroll date (regardless of which 8 week period is used to calculate forgiveness).
    • Payroll costs are generally incurred on the day the employee's pay is earned (i.e., on the day the employee worked).
    • Payroll costs include hazard pay, bonuses, and compensation for furloughed employees, in addition to other compensation to employees (e.g., salary, wages, commissions, etc.).
  • Similarly, non-payroll costs incurred but not paid during the 8 weeks after receiving the loan are forgivable if paid on or before the next regular billing cycle, even if that date is after such 8-week period.
  • An FTE is defined as an employee who works 40 hours or more, on average, each week.
    • A single employee cannot count as more than 1.0 FTE (e.g., if the employee works an average of 45 hours per week they are still a 1.0 FTE).
    • A borrower has two choices for calculating how part-time employees count towards its average number of FTEs. The borrower may either:
      • Calculate the average number of hours for which the part-time employee was paid per week during the 8-week period being used to calculate forgiveness (so, for example, if an employee was paid for an average of 10 hours per week, that employee would be a 0.25 FTE (10 hours/week divided by 40)); or
      • Elect to use an FTE of 0.5 for each part-time employee.
  • For reductions in forgiveness based upon salary or wage reductions, the amount of forgiveness will only be reduced if not attributable to an FTE reduction. That is, if the borrower ends up paying an employee less because they had to cut the employee's hours, the company could still count the amounts paid to such employee for forgiveness (but forgiveness will be reduced because of the effect this has on the borrower's FTE levels). However, the forgivable amount will be reduced if the employee's compensation rate decreased but they still had to work the same amount of hours (e.g., reducing someone's hourly rate but still keeping their same hours).
  • The amount of loan forgiveness for owner-employees and self-employed individuals' payroll compensation is capped at the lesser of 8/52 of 2019 compensation (approximately 15.38% of 2019 compensation) or $15,385 per individual in total across all businesses (because the maximum compensation eligible for PPP loan use is up to $100,000 per-person, per-year). It is unclear at this time what is meant by "owner-employees," but it likely means S-Corp shareholders that are also employees of the company. General partners are also capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.
• Forgiveness will not be reduced if an employee:
  • Is fired for cause;
  • Voluntarily resigns; or
  • Voluntarily requests a reduced schedule during the applicable 8-week covered period.
• The borrower may exclude any reduction in total FTE headcount attributable to a single employee if:
  • the borrower made a good faith, written offer to rehire the employee (or, if applicable, restore the reduced hours of the employee) during the covered 8 weeks;
  • the offer was made on the same terms (e.g., wages and hours) the employee had in the last pay period prior to the separation or hours reduction;
  • the offer was rejected by the employee;
  • the borrower has maintained records documenting the offer and its rejection; and
  • the borrower informed the applicable state unemployment insurance office of the employee's rejected offer or re-employment within 30 days of the employee's rejection.
• For the "Re-Hire Exemption" (outlined below), the Rule still did not definitively state whether a 100% of a company's workforce has to be rehired or whether 100% of wages have to be restored to pre-loan levels. However, the SBA's loan forgiveness application states the borrower is required to restore "its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the [b]orrower's pay period that included February 15, 2020." This likely means that (at least with respect to re-hiring), 100% of the workforce that was terminated/furloughed needs to be re-hired by June 30th (subject to the exception above regarding employees who reject the offer to return).
• Other than these clarifications, the majority of the rules for the loan forgiveness process remain the same. For instance, 75% of the loan proceeds must be used for payroll costs (for such amounts to be forgiven), eligible expenses remain the same, and there has been no change to the formula for calculating any reductions to loan forgiveness.

Pursuant to the CARES Act (the "Act"), up to 100% of a PPP loan may be forgiven if loan proceeds are used for specified eligible expenses during the Covered Period, or, as an alternative for payroll costs, the 8-week period beginning the first day of the first payroll cycle in the Covered Period (the "Alternative Payroll Covered Period"). Important considerations to maximize loan forgiveness are outlined in this legal alert.

This legal alert does not address additional considerations for borrowers who are independent contractors, sole proprietors, or self-employed individuals.

Loan Forgiveness Requirements under the PPP

• Loans under the PPP are eligible for forgiveness to the extent the proceeds are used to pay the eligible expenses incurred during the Covered Period, which are payroll costs, interest on secured debt, rent, and utilities. The amount of loan forgiveness is only for that portion of the loan used to pay such expenses, which can be up to the full loan amount (including principal and interest).
• The SBA requires that at least 75% of the loan proceeds used on eligible expenses be used for payroll costs for those loan proceeds to be eligible for forgiveness.
• For the purposes of federal income tax, amounts forgiven are not considered gross income of the borrower. However, borrowers should note that each state will determine whether forgiven amounts will be considered income for state income tax purposes.

Eligible Expenses

More specifically, expenses eligible for forgiveness are:

• Payroll costs
  • Proceeds used to pay compensation to employees:
    • Salary, wages, commissions, or similar compensation (including the employee's share of federal payroll taxes);
    • Payment of cash tip or equivalent;
    • Payment for vacation, parental, family, medical, or sick leave;
    • Allowance for dismissal or separation;
    • Payment required for the provision of group health care benefits, including insurance premiums;
    • Payment of any retirement benefits; and
    • Payment of state or local tax assessed on the compensation of employees.
  • Payroll costs do not include:
    • The sum of payments of any cash compensation of an individual employee, including severance payments, in excess of $100,000, as prorated for the period between February 15, 2020, through June 30, 2020 (put otherwise, employees who make more than $100,000 of cash compensation are capped at $100,000 for the purpose of calculating payroll costs);
    • The borrower's share of federal payroll taxes;
    • Qualified sick leave or family leave wages for which credit is allowed under the Families First Coronavirus Response Act (which provides for, among other things, 14-day paid leave for American workers affected by the pandemic); or
    • Payments made to independent contractors.
• Mortgage Interest (Real Estate & Other Secured Credit)
  • Proceeds used to pay interest on a mortgage loan are eligible for forgiveness if the mortgage:
    • Was first incurred prior to February 15, 2020.
    • Is on real or personal property (i.e., the statute seems to cover interest on secured credit lines, etc., even if they are secured by something other than real estate, provided the other requirements are met); and
    • Is the borrower's liability;
    • However, to be forgivable, loan proceeds may not be used to prepay or make principal payments on the mortgage obligation.
• Rent
  • Proceeds used to pay for rent owed under a lease agreement in force prior to February 15, 2020, are eligible for forgiveness.
• Utilities
  • Proceeds used to pay for electricity, gas, water, transportation, telephone, or internet access ("Covered Utility Payments") are eligible for forgiveness, so long as service began prior to February 15, 2020.

Reduction of Amounts Forgivable

• The amount eligible for forgiveness will be reduced if the borrower, during the Covered Period:
  • Reduces the number of full-time equivalent employees ("FTEs"); or
  • Reduces an employee's salary or wages by more than 25% compared to what the employee earned during the most recent full quarter during which the employee was employed before the Covered Period. Note that this applies to any employee who did not receive wages or salary of more than $100,000 annualized during any single pay period during 2019.
• For non-seasonal borrowers, the reduction in the amount that can be forgiven due to a reduction of FTEs is calculated as:
  • Amounts used for eligible expenses, multiplied by:
    • The average number of FTEs per month employed by the borrower during the Covered Period, divided by, at the borrower's election, either:
      • The average number of FTEs employed per month during the period between February 15, 2019, through June 30, 2019; or
      • The average number of FTEs employed per month during the period between January 1, 2020, through February 29, 2020.
• For the purposes of forgiveness, the average number of FTEs is determined by calculating the average number of FTEs employed during each pay period falling within a month. Put otherwise, borrowers should find the average FTEs per pay period in a given month, do that for each month, and then find the average of the monthly numbers.

Re-Hire Exemption

• If the borrower reduced the number of FTEs or salaries and wages paid to any employees during the period between February 15, 2020, and April 26, 2020, thereby reducing the loan proceeds eligible for forgiveness, such proceeds become re-eligible for forgiveness if:
  • The borrower eliminates the reduction in the number of FTEs by June 30, 2020; or
  • The borrower eliminates the reduction in salary or wages of employees by June 30, 2020.
• A plain reading of the Act indicates a 100% elimination of the reduction of FTEs or employee salary or wages is required to make loan proceeds re-eligible for forgiveness. However, the Act gives the SBA discretion to issue regulations granting minor exceptions to this 100% elimination requirement, and we are hopeful the SBA will do so. Maslon will update this legal alert as additional guidance becomes available on this key issue.

Application for Forgiveness

• To seek loan forgiveness, borrowers will "apply" to the lender originating the loan, by submitting the SBA's loan forgiveness application (SBA Form 3508 or a lender equivalent). Documents that all lenders will require from borrowers include:
  • Payroll tax filings reported to the Internal Revenue Service (for the 8-week covered period);
  • State income, payroll, and unemployment insurance filings (for the prior-year baseline period);
  • Evidence of the payment of eligible expenses, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on eligible mortgage interest payments, rent obligations, and utility payments;
  • Certifications that: (i) the documentation provided is true and correct; and (ii) the amount for which forgiveness is being requested was used to retain employees, make interest payments on eligible mortgage interest, rent, or utilities; and
  • Any other documentation the SBA deems necessary.
• The lender is required to issue a decision within 60 days after receiving an application for forgiveness.

What If A Loan Isn't Forgiven?

Loan portions that are not forgiven have a term of 2 years and an interest rate of 1%. There is no pre-payment penalty.

Proactive Steps To Take

Borrowers can take the following steps to maximize their chances of loan forgiveness:

• Properly document fund use and allocation. This includes keeping track of cancelled checks, payment receipts, and transcripts of accounts.
• Consider separating PPP loan proceeds from other funds (i.e., in a different bank account) and putting other accounting controls in place (such as keeping a separate ledger for loan proceeds). Many SBA lenders are requiring borrowers to take similar actions.
• If there has been any reduction in FTEs or employee salaries or wages, begin strategizing now to try and ensure a full elimination of the reduction by June 30, 2020 (if feasible, understanding that your business circumstance may not allow for this).
• Work with your accountant to calculate your total eligible expenses in the Covered Period or Alternative Covered Period. After the proceeds hit your bank account, spend as much as you can on eligible expenses, but not more than 25% of your anticipated forgivable amount on non-payroll expenses.

We Can Help

Please contact Maslon's Corporate & Securities Group if you have questions or need assistance taking advantage of loan forgiveness afforded by the Paycheck Protection Program.

The Main Street Lending Program is distinct from the yet-to-be created "Mid-Size Direct Lending Program," which is expected to provide financing to banks and other lenders who make direct loans to businesses with between 500 to 10,000 employees. Preliminary details on the Mid-Size Direct Lending Program are available at: Maslon Legal Alert: COVID-19 - Key Business Resources Under the CARES Act. It is unclear at this time whether a business may receive a loan under both the Main Street Lending Program and the Mid-Size Direct Lending Program.

The summary below provides our current understanding of the Main Street Lending Program, the terms and conditions of which may be—and likely will be—adjusted. Because many lenders are still processing PPP loan applications, additional guidance on the Main Street Lending Program (such as when and how businesses can apply) may be slow. This summary reflects current guidance released by the Federal Reserve on April 9, 2020, and will be updated as more details are made available.

Loan Overview

Under the program, eligible businesses (as defined below) can apply for either a Main Street New Loan Facility ("MSNLF") loan or Main Street Expanded Loan Facility ("MSELF") loan from eligible lenders, which are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. MSNLF loans are new, unsecured term loans that originate on or after April 8, 2020. MSELF loans increase the size of existing loans (originated prior to April 8, 2020) to businesses. Businesses may participate in either the MSNLF or the MSELF, but not both. Lenders can sell up to 95% of each loan to a Special Purpose Vehicle ("SPV") (with lenders retaining 5% of the loan). The Federal Reserve will purchase up to $600 billion in MSNLF and MSELF loans. The SPV will stop purchasing loans on September 30, 2020, unless the MSNLF and MSELF are extended.

Loan Eligibility

To be eligible under either the MSNLF or MSELF, businesses must:

• Be in "good financial standing" before the crisis. It is unclear how this will be evaluated, but commentators speculate it will likely be left up to lenders given that they will retain 5% of the loan.
• Have 10,000 (or fewer) employees or less than $2.5 billion in 2019 annual revenues.
• Be created in the United States with significant U.S.- based employees and operations.
• Only participate in one of the following: (i) MSNLF; (ii) MSELF; or (iii) the Primary Market Corporate Credit Facility, which the Federal Reserve established on March 23, 2020, in response to the COVID-19 pandemic to support credit to employers through new bond and loan issuance.

It is unclear whether a business will be considered together with its affiliates for purposes of determining program eligibility. Guidance is expected, but it is unclear when.

Loan Details

Although MSNLF and MSELF loans contain many similar features, they operate differently, and for purposes of clarity are discussed separately below:

MSNLF

A MSNLF loan is an unsecured term loan originating on or after April 8, 2020, with the following features:

• 4-year maturity
• Unsecured
• Principal and interest payments will be deferred for one year from origination date
• An interest rate equal to the Secured Overnight Financing Rate ("SOFR") in effect on the date the loan is made (which is published each business day by the New York Federal Reserve), plus 250-400 basis points. It is unclear whether the Federal Reserve or individual lenders will determine the rate above basis.
• Loan to each business will be at least $1 million, but is capped at the lesser of (i) $25 million or (ii) an amount that, when added to the business's existing outstanding and committed but undrawn debt, does not exceed four times the business's 2019 earnings before interest, taxes, depreciation, and amortization ("EBITDA")
• Pre-payment is permitted without penalty
• Required attestations (detailed below)

MSELF

A MSELF loan is an existing term loan issued by an eligible lender to an eligible business that originated before April 8, 2020. Put otherwise, the MSELF permits eligible lenders to expand on loans previously issued to eligible businesses, provided that the upsized tranche of the loan has the features detailed below. It is unclear at this time whether any loan previously issued by an eligible lender to an eligible business may be expanded under the MSELF, or if additional restrictions are forthcoming.

• 4-year maturity
• May be secured or unsecured:
  • Any collateral securing a loan, whether the collateral was pledged under the original terms of the loan or at the time of upsizing, will secure the loan participation on a pro rata basis
• Principal and interest payments will be deferred for one year from origination
• Adjustable rate of SOFR + 250-400 basis points
• Loan to each business will be at least $1 million, but is capped at the lesser of (i) $150 million; (ii) 30% of the business's existing outstanding and committed but undrawn bank debt; or (iii) an amount that, when added to the business's existing outstanding and committed but undrawn debt, does not exceed six times the business's 2019 EBITDA (Please note: This differs from MSNLF loans, which only requires four times the business's 2019 EBITDA.)
• Pre-payment is permitted without penalty
• Required attestations (detailed below), that apply with respect to the upsized tranche of each eligible loan (not the pre-existing portion of the loan)

Loan Proceed Uses

It is unclear at this time exactly how businesses may use loan proceeds under the Main Street Lending Program. However, we do know that at a minimum, businesses must use proceeds to make "reasonable efforts" to maintain payroll and retain its employees during the term of the loan.

Loan proceeds cannot be used for the following:

• To repay or refinance pre-existing loans or lines of credit made by the lender to the business. In the context of MSELF loans, this includes using the proceeds of the upsized tranche of the MSELF loan to repay or refinance the pre-existing portion of the MSELF loan.
• To repay other loan balances; or repay debt of equal or lower priority, with the exception of mandatory principal payments, unless the business has first repaid the MSNLF or MSELF loan in full.

Loan Restrictions

Businesses receiving a loan under the program must comply with the following stock repurchase, capital distribution, and compensation restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act:

• Stock Repurchase: While the loan is outstanding and for 12 months thereafter, businesses cannot repurchase an equity security that is listed on a national securities exchange of the business or any parent company of the business (unless there is a contractual obligation to do so that predates March 27, 2020).
• Capital Distribution: Until the date 12 months after the date on which the loan is no longer outstanding, business are prohibited from paying dividends or making other capital distributions with respect to the common stock of the business.
• Compensation: Any business receiving a loan is prohibited for 12 months after the term of the loan, from:
  1. For any officer or employee whose total compensation exceeded $425,000 in calendar year 2019, providing:
     1. Compensation to such individual over such amount over any consecutive 12 months during the covered period; or
     2. Severance benefits exceeding more than two times such 2019 compensation amount.
  2. For any officer or employee whose total compensation exceeded $3,000,000 in calendar year 2019, providing compensation that exceeds the sum of:
     1. $3,000,000, plus
     2. 50% of the amount in excess over $3,000,000 that the officer or employee received in calendar year 2019.

Loan Process

The specific loan application process will be left to lenders and is not yet available. However, all applicants will be required to meet (at a minimum) the following requirements:

Fees

• Origination Fee: For MSNLF loans, businesses will pay the lender an origination fee of 100 basis points of the principal amount of the loan. Similarly, for MSELF loans, businesses will pay the lender a fee of 100 basis points of the principal amount of the upsized tranche of the loan at the time of upsizing.
• Facility Fee: For MSNLF loans, lenders may choose to require businesses to pay the "facility fee" that lenders are required to pay to the SPV, which is equal to 100 basis points of the principal amount of the loan participation purchased by the SPV.

Attestations

In addition to certifications required by applicable statutes and regulations, businesses must make the following attestations when applying for either a MSNLF or MSELF loan:

1. Attest to the loan proceed use restrictions discussed above pertaining to repaying or refinancing pre-existing loans or lines of credit, and paying down other debt.
2. Attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the lender providing the loan or any other lender.
3. Attest that it requires financing due to the exigent circumstances presented by the COVID-19 pandemic, and that, using the proceeds of the MSNLF loan (or proceeds of the upsized tranche of the MSELF loan), it will make reasonable efforts to maintain its payroll and retain its employees during the loan term.
4. Attest it meets the EBITDA leverage condition stated above (i.e, the loan size does not exceed an amount that, when added to the business's existing outstanding and committed but undrawn debt, does not exceed 4x the business's 2019 EBITDA in the case of a MSNLF loan, or 6x the business's 2019 EBITDA in the case of a MSELF loan).
5. Attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act.
6. Certify that the entity is eligible to participate in the MSNLF or MSELF, as applicable, including in light of the conflicts of interest prohibition in Section 4019(b) of the CARES Act, which prohibits business from receiving funds if they are directly or indirectly owned by the President, certain executive branch officials, or members of Congress.

We Can Help

Please contact Maslon's Corporate & Securities Group if you have questions regarding the Main Street Lending Program.

• Healthcare and public health, including workers supporting manufacturers and technicians, logistics, and warehouse operators.
• Food and agricultural, such as grocery workers, restaurant carry-out and delivery employees, and farm workers.
• Transportation and logistics, including truck drivers, dispatchers, warehouse workers, and roadway construction, maintenance, and utility project workers.
• Critical manufacturing, meaning workers manufacturing materials and products for medical supply chains and supply chains associated with transportation, energy, communications, food, and agriculture.
• Construction and critical trade, including skilled trade workers (i.e. electricians, plumbers, HVAC, and elevator technicians).

Verify Business Eligibility

Businesses can also determine eligibility by reviewing the MN Critical Businesses List. If an industry description is marked as YES in the "Critical Industry" column, then a worker in that industry is essential and is exempt from the Order to the extent the worker is going into the business's physical location for job functions that cannot be done from home.

Employee Verification Letters

Although not required under the Order, it is best practice for employers to provide a letter to their employees to keep on hand that verifies that the employee works for the employer, and the employee's work for the employer is in furtherance of the employer's business operations that fall within one of the Order's identified sectors. This is a particularly good idea as the Order provides criminal penalties for willful violators. Providing employees with an employee verification letter can help put the employee's mind at ease if they are stopped by law enforcement on the way to work.

We Can Help

Please contact attorneys in Maslon's Corporate & Securities and/or Labor & Employment Groups if you have questions or would like assistance drafting an employee verification letter.

April 15th Income Tax Return Filing Deadline
Today, Treasury Secretary Steve Mnuchin stated the IRS will move the income tax filing deadline from April 15 to July 15. This will allow taxpayers additional time to file and make payments without the imposition of penalties or interest. Individual taxpayers and entities being taxed as S corporations, C Corporations, sole proprietorships, or single member limited liability companies, are subject to the April 15th deadline and will benefit from this extension.

Proposed Legislation: The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act")
On March 19, Senate Republicans unveiled proposed legislation seeking to provide individuals and businesses with a variety of benefits to combat the financial fall-out associated with the ongoing COVID-19 pandemic. Although the bill is likely to change as it moves through Congress, if passed into law in its current form, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") would potentially impact businesses. The Act is comprised of seven divisions, each divided into further titles and subdivisions. Those most applicable to business owners include:

Division A
Division A seeks to support small businesses by expanding the Small Business Administration ("SBA") Section 7(a) loan program through December 31, 2020. Under the expansion, certain businesses that employ less than 500 employees would be eligible to receive a loan, the proceeds of which could be used for payroll support (including paid sick, medical, or family leave), employee salaries, rent, utilities, or other debt obligations. Each loan would be capped at the price of covering the business's monthly operating costs (e.g. payroll, utilities, mortgage and other debt payments) for up to four (4) months—up to the maximum amount of $10,000,000. All loan amounts used for applicable payroll costs would be eligible for forgiveness.

Division B
Title II of Division B would provide several tax-related benefits to businesses to mitigate financial damage caused by the COVID-19 pandemic. Proposed benefits include:

• Delay of estimated tax payments for corporations. Allows corporations to postpone estimated tax payments due after the enactment of the bill until October 15, 2020.
• Delay of payment of employer payroll taxes. Allows deferring of payment of the business's share of the Social Security tax for which they are otherwise responsible, with deferred taxes being paid over the two years after enactment.
• Modifications for net operating losses. Relaxes limitations on the business's use of losses from prior years—particularly that a loss from 2018, 2019, or 2020 can be carried back five years—and temporarily removes the taxable income limitation to allow net operating losses to fully offset income.
• Modification of limitation on losses for taxpayers other than corporations. Modifies the loss limitation applicable to pass-through entities and sole proprietors so they can benefit from the net operating loss carryback rules described above.
• Modification of credit for prior year minimum tax liability of corporations. Accelerates a company's ability to recover Alternative Minimum Tax credits.
• Modifications of limitation on business interest. Temporarily increases the amount of interest expense businesses may deduct on their tax returns, by increasing the 30-percent limitation to 50 percent of the taxable income for 2019 and 2020.
• Technical amendment regarding qualified improvement property. Enables business—with particular attention to the hospitality industry—to immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building.
• Installments not to prevent credit or refund of overpayments or increase estimated taxes. Corrects an error in the Tax Cuts and Jobs Act to allow businesses to recover any overpayment of taxes paid pursuant to the Section 965 one-time repatriation toll charge.
• Restoration of limitation on downward attribution of stock ownership in applying constructive ownership rules. Clarifies that certain foreign subsidiaries should not be subject to certain requirements of the Tax Cuts and Jobs Act, and will allow those companies to amend their 2018 tax return to reflect the clarification.

Division C
Division C, which is titled "Coronavirus Economic Stabilization Act of 2020," seeks to provide loans to eligible, severely distressed businesses impacted by COVID-19 (up to $208,000,000,000 in the aggregate). This includes up to $50,000,000,000 to passenger air carriers, $8,000,000,000 to cargo air carriers, and $150,000,000,000 to other eligible businesses. Executives at companies receiving money may not make more than $425,000 in total annual compensation for two years, or receive severance pay or other termination benefits which exceed twice the maximum total compensation the executive received in 2019.

Division D
Title III of Division D provides various provisions relating to paid leave. This includes providing guidance on the applicability of the Emergency Family Medical Leave Expansion Act ("EFMLEA") eligibility for rehired employees after a layoff. Currently, rehired employees would not be EFMLEA eligible until employed for at least 30 days. The bill would change that, providing that employees who were laid off after March 1, 2020, and were rehired would be immediately eligible for EFMLEA protections, provided the employee had worked for that employer for at least 30 of the last 60 calendar days prior to the layoff. Further, the bill provides that if an employer fails to make an employment tax deposit with the IRS due to the anticipation of EFMLEA payroll credits, any tax penalties will be waived.

Division E
Division E provides that Section 131 of the Emergency Economic Stabilization Act of 2008, which relates to certain restrictions on guaranteeing money market mutual funds, would not apply during the national emergency period for COVID-19.

We Can Help
Maslon is closely monitoring this bill as it moves through Congress and will continue to provide updates on policies that will affect your businesses. In the meantime, Maslon's Corporate & Securities and Labor & Employment attorneys are here to answer any questions you may have relating to new and proposed laws addressing the COVID-19 pandemic.

To receive future COVID-19-related legal alerts, please email us.

TOPICS:

• Most Recent
• Corporate
• Mergers & Acquisitions
• Labor & Employment
• Product Liability Litigation
• Construction
• Insurance Coverage
• Cybersecurity
• Estate Planning
• Supporting the Effort
   

Most Recent:

• January 14, 2022 — Supreme Court Halts OSHA's COVID-19 Vaccine and Testing Mandate
• December 20, 2021 — OSHA's COVID-19 Vaccine and Testing Mandate Is Back in Business After Sixth Circuit Court of Appeals Lifts Stay
• November 8, 2021  — Fifth Circuit Court of Appeals Stays OSHA's COVID-19 Vaccine and Testing Mandate: Next Steps for Employers
• November 5, 2021 — What Employers Need to Know About OSHA's New Vaccine and Testing Requirements
• November 1, 2021 — 5 New Legal Risks for Product Manufacturers During COVID-19
• September 10, 2021 — Path Out of the Pandemic: Biden Administration Will Require Employers with 100+ Employees to Mandate COVID-19 Vaccination or Weekly Testing
• August 24, 2021 — Updated COVID-19 Guidance from OSHA and the CDC: What It Means for Your Business

Corporate:

• February 16, 2022 — Can You Spot a Liar? Key Factors for Determining Credibility in Internal Investigations
• January 8, 2021 — New SBA Guidance Released: Interim Final Rules on the Revived Paycheck Protection Program
• December 28, 2020 — Coronavirus Relief Under the Consolidated Appropriations Act, 2021
• June 5, 2020 — CARES Act PPP Reform: Paycheck Protection Program Flexibility Act of 2020
• April 27, 2020 — New SBA Guidance Released: PPP Loan Certification Requirements for Good Faith
• April 16, 2020 — CARES Act: Paycheck Protection Program Loan Forgiveness
• April 10, 2020 — CARES Act: The Main Street Lending Program Offers Relief for Small and Mid-Sized Businesses
• April 2, 2020 — CARES Act: Paycheck Protection Program - Proactive Steps to Apply
• March 30, 2020 — COVID-19: Key Business Resources Under the CARES Act
• March 26, 2020 — COVID-19: Key Business Considerations for Minnesota Emergency Executive Order 20-20
• March 20, 2020 — COVID-19 Business Update: Tax Deadline and Proposed CARES Act
• March 16, 2020 — COVID-19: Force Majeure Contract Clauses
   

Mergers & Acquisitions:

• April 18, 2020 — Video: COVID-19 Business Owner's Survival Guide—M&A After COVID-19 (29:00), Presented by Terri Krivosha
   

Labor & Employment:

• February 16, 2022 — Can You Spot a Liar? Key Factors for Determining Credibility in Internal Investigations
• January 14, 2022 — Supreme Court Halts OSHA's COVID-19 Vaccine and Testing Mandate
• December 20, 2021 — OSHA's COVID-19 Vaccine and Testing Mandate Is Back in Business After Sixth Circuit Court of Appeals Lifts Stay
• November 8, 2021  — Fifth Circuit Court of Appeals Stays OSHA's COVID-19 Vaccine and Testing Mandate: Next Steps for Employers
• November 5, 2021 — What Employers Need to Know About OSHA's New Vaccine and Testing Requirements
• November 1, 2021 — 5 New Legal Risks for Product Manufacturers During COVID-19
• September 10, 2021 — Path Out of the Pandemic: Biden Administration Will Require Employers with 100+ Employees to Mandate COVID-19 Vaccination or Weekly Testing
• August 24, 2021 — Updated COVID-19 Guidance from OSHA and the CDC: What It Means for Your Business
• May 24, 2021 — What Employers Need to Know Now That the CDC Has Relaxed Mask Recommendations for Those Who Are Fully Vaccinated
• March 24, 2021 — The American Rescue Plan Act of 2021—Key Implications for Employers
• December 30, 2020 — New Year, New Rules: Employer Implications of the New COVID-19 Relief Legislation
• December 22, 2020 — Employers: EEOC Releases New Vaccine Guidelines to Address Five Key Concerns
• September 14, 2020 — FFCRA Update: Department of Labor Revises Regulations, Largely Rejects SDNY Court Ruling
• August 5, 2020 — Key FFCRA Regulations Vacated by Federal Court, Dramatically Expand FFCRA Leave Eligibility
• July 24, 2020 — #MaskUpMN: Key Employer Re

National "Best Law Firm" Ranking:

Appellate Practice [Tier 3]

Commercial Litigation [Tier 3]

Litigation — Banking & Finance [Tier 3]

Regional/Metro: Minneapolis "Best Law Firm" Ranking:

Appellate Practice [Tier 1]

Bet-the-Company Litigation [Tier 1]

Commercial Litigation [Tier 1]

Litigation—Labor & Employment [Tier 1]

Product Liability Litigation—Defendants [Tier 1]

Trust & Estates Law [Tier 1]

Employee Benefits (ERISA) Law [Tier 2]

Employment Law — Management [Tier 2]

Litigation—Banking & Finance [Tier 2]

Securities / Capital Markets Law [ Tier 2]

Securities Regulation [Tier 2]

Litigation—Intellectual Property [Tier 3]

Litigation—Securities [Tier 3]

To view the full rankings, go to: U.S. News - Best Lawyers® "Best Law Firms" rankings for 2020.

U.S. News Media Group and Best Lawyers rank more than 15,000 firms. The 2020 "Best Law Firms" covers 202 practice areas across all 50 states and the District of Columbia. The rankings are based on a rigorous evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys in their field, and review of additional information provided by law firms as part of the formal submission process. Achieving a high ranking is a special distinction that signals a unique combination of professional excellence and breadth of expertise.

National "Best Law Firm" Ranking:

Appellate Practice [Tier 3]
Commercial Litigation [Tier 3]
Litigation – Banking & Finance [Tier 3]

Regional/Metro: Minneapolis "Best Law Firm" Ranking:

Appellate Practice [Tier 1]
Commercial Litigation [Tier 1]
Litigation – Banking & Finance [Tier 1]
Litigation – Labor & Employment [Tier 1]
Product Liability Litigation – Defendants [Tier 1]
Employee Benefits (ERISA) Law [Tier 2]
Employment Law – Management [Tier 2]
Litigation – Intellectual Property [Tier 2]
Securities/Capital Markets Law [Tier 2]
Trusts & Estates Law [Tier 2]
Litigation – Securities [Tier 3]

To view the full rankings, go to: U.S. News - Best Lawyers® "Best Law Firms" rankings for 2019.

U.S. News Media Group and Best Lawyers rank more than 11,000 firms. The 2019 "Best Law Firms" covers 137 practice areas across all 50 states and the District of Columbia. The rankings are based on a rigorous evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys in their field, and review of additional information provided by law firms as part of the formal submission process. Achieving a high ranking is a special distinction that signals a unique combination of professional excellence and breadth of expertise.

Earlier this year, Maslon attorneys Cooper Ashley, Mark Baumann, David Herr, Geoff Jarpe, Susan Link, Mike McCarthy, Bill Pentelovitch, Larry Purdy, Marty Rosenbaum, and Howard Tarkow were selected by their peers for inclusion in The Best Lawyers in America® 2019. In addition, Bill Pentelovitch was recognized by Best Lawyers as the 2019 Litigation—Banking and Finance "Lawyer of the Year" award winner in Minneapolis. To view the full article, go to: Maslon Attorneys Selected for Inclusion in The Best Lawyers in America® 2019.

Tier 3 National Ranking
Appellate Practice
Commercial Litigation

Tier 1 Metropolitan Ranking [Minneapolis]
Appellate Practice
Commercial Litigation
Litigation—Labor & Employment
Product Liability Litigation—Defendants

Tier 2 Metropolitan Ranking [Minneapolis]
Employee Benefits (ERISA) Law
Litigation—Banking & Finance
Litigation—Intellectual Property
Trusts & Estates Law

Tier 3 Metropolitan Ranking [Minneapolis]
Litigation—Securities

To view the full rankings, go to: U.S. News - Best Lawyers® "Best Law Firms" rankings for 2017.

U.S. News Media Group and Best Lawyers rank more than 11,000 firms. The 2017 "Best Law Firms" covers 137 practice areas across all 50 states and the District of Columbia. The rankings are based on a rigorous evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys in their field, and review of additional information provided by law firms as part of the formal submission process. Achieving a high ranking is a special distinction that signals a unique combination of professional excellence and breadth of expertise.

Earlier this year, Maslon attorneys Cooper Ashley, Mark Baumann, David Herr, Geoff Jarpe, Susan Link, Mike McCarthy, Bill Pentelovitch, Larry Purdy, and David Schultz were selected by their peers for inclusion in The Best Lawyers in America® 2017. David Herr and Bill Pentelovitch have the distinct honor of being listed by the publication since 1995. To view the full article, go to: Maslon Attorneys Selected for Inclusion in The Best Lawyers in America® 2017.

Shawn McIntee, Terri Krivosha, and Bill Mower, partners in Maslon's Business & Securities Group, will serve as Minnesota Cup review board members. Shawn has participated in the Minnesota Cup since the competition's inception and will serve on a Grand Prize Review Board. Terri will serve on the review board for the General Division, a division that supports ideas and entrepreneurs with innovative services and solutions not associated with other divisions including consumer products, education, and retail. Bill will serve on the review board for the Food, Agriculture & Beverage Division, which includes businesses related to food and beverage products, food technologies in manufacturing, materials and ingredients technologies, food safety and farming. They join the other six Minnesota Cup divisions: Energy/Clean Technology/Water, High Tech, Life Science/Health IT, Social Entrepreneur, Student, and Youth.

Shawn concentrates his practice in the areas of advising public and private businesses, mergers and acquisitions, corporate and commercial law (including contracts and electronic commerce), technology and software transactions, and emerging companies. He has extensive experience advising clients on day-to-day legal and business matters, as well as in assisting them with the purchase and sale of businesses, including the divestiture of divisions, and management buyouts. Shawn is also the lead attorney in Maslon's Advertising & Marketing Group and represents both advertisers and Fortune 500 companies creating, using, and purchasing advertising and marketing.

Terri works with a vibrant network of entrepreneurial and dynamic businesses and those who fund them. She uses her broad strategic skills together with extensive experience to help her clients achieve success in all phases of their development and growth. Terri writes and speaks regularly on topics related to her practice and teaches a course on start-ups at William Mitchell College of Law. In August 2014, Terri's book Founding a Startup: What You Need to Know was published by Thomson/Reuters and is available on Amazon.com.

Bill has been helping clients solve problems and pursue opportunities with legal-related advice and counsel for more than 30 years. He represents a wide variety of clients in connection general corporate matters, with a special emphasis on mergers and acquisitions, venture financing, private placements and securities law compliance.

For more information about the competition, go to: Minnesota Cup.

Inclusion in Best Lawyers is based entirely on peer review. Best Lawyers employs a survey process designed to capture, as accurately as possible, the consensus opinion of leading lawyers about the professional abilities of their colleagues within the same geographical area and legal practice area.

Each attorney was selected for work in the following areas:

Cooper Ashley
Product Liability Litigation—Defendants

Mark Baumann
Employee Benefits (ERISA) Law

David Herr
Appellate Practice
Bet-the-Company Litigation
Commercial Litigation

Geoff Jarpe
Commercial Litigation
Litigation—Securities

Susan Link
Trusts and Estates

Mike McCarthy
Commercial Litigation

Bill Pentelovitch
Bet-the-Company Litigation
Commercial Litigation
Litigation—Banking & Finance
Litigation—Intellectual Property
Litigation—Labor & Employment

Larry Purdy
Product Liability Litigation—Defendants

David Schultz
Commercial Litigation
Litigation—Intellectual Property

For more information on the Best Lawyers selection process, go to: Best Lawyers.

Marty has more than 30 years' experience advising public and privately held companies on securities and corporate matters. His practice is concentrated in securities and corporate finance, including public offerings, private placements, venture capital financings, and mergers and acquisitions involving public and private companies. Marty regularly advises public companies of all sizes regarding preparation of public reports and proxy statements, public disclosures, insider trading, securities regulatory compliance, corporate governance matters, executive compensation, and stock plan issues. He provides business legal services to privately held corporations, partnerships, and limited liability companies in all stages, from organization through their initial public offering or sale. Marty also serves as president of LegalCORPS, a Minnesota non-profit organization providing pro bono business law services to low-income entrepreneurs and small non-profits.

Tier 3 National Ranking
Appellate Practice
Commercial Litigation

Tier 1 Metropolitan Ranking [Minneapolis]
Appellate Practice
Commercial Litigation
Product Liability Litigation—Defendants

Tier 2 Metropolitan Ranking [Minneapolis]
Employee Benefits (ERISA) Law
Litigation—Banking & Finance
Litigation—Intellectual Property
Litigation—Labor & Employment
Trusts & Estates Law

Tier 3 Metropolitan Ranking [Minneapolis]
Litigation—Securities

To view the full rankings, go to: U.S. News - Best Lawyers® "Best Law Firms" rankings for 2016.

U.S. News Media Group and Best Lawyers rank more than 11,000 firms. The 2016 "Best Law Firms" covers 137 practice areas across all 50 states and the District of Columbia. The rankings are based on a rigorous evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys in their field, and review of additional information provided by law firms as part of the formal submission process. Achieving a high ranking is a special distinction that signals a unique combination of professional excellence and breadth of expertise.

Earlier this year, Maslon attorneys Cooper Ashley, Mark Baumann, David Herr, Geoff Jarpe, Susan Link, Bill Pentelovitch, Larry Purdy, and David Schultz were selected by their peers for inclusion in The Best Lawyers in America® 2016. David Herr and Bill Pentelovitch have the distinct honor of being listed by the publication since 1995. To view the full article, go to: Eight Maslon Attorneys Selected for Inclusion in The Best Lawyers in America® 2016.

Inclusion in Best Lawyers is based entirely on peer review. Best Lawyers employs a survey process designed to capture, as accurately as possible, the consensus opinion of leading lawyers about the professional abilities of their colleagues within the same geographical area and legal practice.

Each attorney was selected for work in the following areas:

Cooper Ashley
Product Liability Litigation—Defendants

Mark Baumann
Employee Benefits (ERISA) Law

David Herr
Appellate Practice
Bet-the-Company Litigation
Commercial Litigation

Geoff Jarpe
Commercial Litigation
Litigation—Securities

Susan Link
Trusts and Estates

Bill Pentelovitch
Bet-the-Company Litigation
Commercial Litigation
Litigation—Banking & Finance
Litigation—Intellectual Property
Litigation—Labor & Employment

Larry Purdy
Product Liability Litigation—Defendants

David Schultz
Commercial Litigation
Litigation—Intellectual Property

For more information on the Best Lawyers selection process, go to: Best Lawyers.

Shawn McIntee, Terri Krivosha, and Bill Mower, partners in Maslon's Business & Securities Group, will serve as Minnesota Cup review board members. Shawn has participated with the Minnesota Cup since the competition's inception and will serve on a Grand Prize Review Board. Terri will serve on the review board for the Social Entrepreneur Division, a division which seeks out, supports, and celebrates Minnesota's most innovative and effective social entrepreneurs and the organizations they lead. Bill will serve on the review board for the Food, Agriculture & Beverage Division, which includes businesses focused on food products, food processing technologies, material innovation, ingredients technologies, agriculture innovation, food safety advancements, and more. They join the other five Minnesota Cup divisions: Energy/Clean Tech/Water, General, High Tech, Life Science/Health IT, and Student.

Shawn McIntee concentrates his practice in the areas of advising public and private businesses, mergers and acquisitions, corporate and commercial law (including contracts and electronic commerce), software and software licensing, and emerging companies. He has extensive experience advising clients on day-to-day legal and business matters, as well as in assisting clients with the purchase and sale of businesses, including the divestiture of divisions, and management buyouts. He is also lead attorney for Maslon's Advertising & Marketing Group and represents both advertisers and Fortune 500 companies creating, using, and purchasing advertising and marketing.

Terri Krivosha works with a vibrant network of entrepreneurial and dynamic businesses and those who fund them. She uses her broad strategic skills together with extensive experience to help her clients achieve success in all phases of their development and growth. She writes and speaks regularly on topics related to her practice, and teaches a course on start-ups at William Mitchell College of Law. In August 2014, Terri's book Founding a Startup: What You Need to Know was published by Thomson/Reuters and is available on Amazon.com.

Bill Mower has been helping clients solve problems and pursue opportunities with legal-related advice and counsel for more than 30 years. He represents a wide variety of clients in connection with mergers and acquisitions and management buy-outs. Bill counsels public companies in connection with their securities law compliance and general corporate matters, and represents issuers and underwriters in connection with public and private securities offerings, secondary offerings, and alternative offerings.

For more information about the competition, go to: Minnesota Cup.

Tier 3 National Ranking
Appellate Practice
Commercial Litigation

Tier 1 Metropolitan Ranking [Minneapolis]
Appellate Practice
Commercial Litigation
Product Liability Litigation – Defendants
Trusts & Estates Law

Tier 2 Metropolitan Ranking [Minneapolis]
Employee Benefits (ERISA) Law
Litigation – Banking & Finance
Litigation – Intellectual Property
Litigation – Labor & Employment

Tier 3 Metropolitan Ranking [Minneapolis]
Litigation – Securities

To view the full rankings, go to: U.S. News - Best Lawyers® "Best Law Firms" rankings for 2015

U.S. News Media Group and Best Lawyers rank more than 11,000 firms. The 2015 "Best Law Firms" covers 137 practice areas across all 50 states and the District of Columbia. The rankings are based on a rigorous evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys in their field, and review of additional information provided by law firms as part of the formal submission process. Achieving a high ranking is a special distinction that signals a unique combination of professional excellence and breadth of expertise.

Earlier this year, Maslon attorneys Cooper Ashley, Mark Baumann, David Herr, Geoff Jarpe, Susan Link, Bill Pentelovitch, Larry Purdy, and David Schultz were selected by their peers for inclusion in The Best Lawyers in America® 2015. David Herr and Bill Pentelovitch have the distinct honor of being listed by the publication since 1995. To view the full article, go to: Maslon Attorneys Selected for Inclusion in The Best Lawyers in America® 2015.

Terri Krivosha, Shawn McIntee and Bill Mower, partners in Maslon’s Business & Securities Group, will serve as Minnesota Cup review board members. Review board member selections are based on extensive experience working with leading, early-stage growth companies and providing feedback, mentorship and resources that have led to success.

Shawn has participated with the Minnesota Cup since the competition's inception and will serve on a Grand Prize Review Board. Terri will serve on the review board for the Social Entrepreneur Division, a division which seeks out, supports, and celebrates Minnesota's most innovative and effective social entrepreneurs and the organizations they lead. Bill will serve on the review board for the new Food, Agriculture & Beverage Division, which includes businesses focused on food products, food processing technologies, material innovation, ingredients technologies, agriculture innovation, food safety advancements and more. It joins the other six Minnesota Cup divisions: Energy/Clean Tech/Water, General, High Tech, Life Science/Health IT, Social Entrepreneur, and Student.

Terri Krivosha works with a vibrant network of entrepreneurial and dynamic businesses and those who fund them and uses her broad strategic skills together with extensive experience to help her clients achieve success in all phases of their development and growth. She focuses her practice on mergers and acquisitions, financing, contract negotiation, strategic partnerships, distribution agreements, joint ventures, governance issues, exit strategies, and sales and recapitalizations. 

Shawn McIntee has extensive experience advising clients on day-to-day legal and business matters, as well as in assisting clients with the purchase and sale of businesses, including the divestiture of divisions, and management buyouts. He is also lead attorney for Maslon's Advertising & Marketing Group and represents both advertisers and Fortune 500 companies creating, using, and purchasing advertising and marketing.

Bill Mower represents a wide variety of clients in connection with mergers and acquisitions and management buy-outs. He counsels public companies in connection with their securities law compliance and general corporate matters, and represents issuers and underwriters in connection with public and private securities offerings, secondary offerings and alternative offerings.

For more information about the competition, go to Minnesota Cup.

Doug Holod helps entrepreneurs and small to mid-sized companies achieve their potential by maximizing opportunities while managing risk and minimizing expenses. Doug represents clients in a broad range of industries, with a particular focus on the technology, healthcare, and restaurant industries. He also acts as a value-conscious general counsel for companies, coordinating and utilizing other Maslon lawyers when needed with employment, litigation, real estate or technology expertise.

Alan Gilbert practices primarily in the areas of securities, corporate finance, mergers and acquisitions, and general corporate and commercial matters. Alan represents issuers (both seasoned and emerging companies), underwriters, and placement agents in connection with private placements and public securities offerings, advises clients in connection with merger and acquisition transactions and assists public companies on matters related to SEC regulatory compliance, corporate governance, and executive compensation.

• notices of privacy practices distributed to individuals covered by health plans and patients of health care providers, 
• other policies and procedures with respect to PHI, and 
• business associate agreements with contractors that use, create, maintain or transmit PHI for the plan or provider. For example, a self-insured health plan must have a business associate agreement with a third party administrator. 

• Notice of privacy practices distributed by a health plan or health care provider. The following new information must be added to (a) a notice of privacy practices distributed by a health plan; and (b) any other policies and procedures of the plan or provider with respect to PHI: 
  
  • An individual's right to a copy of his or her PHI now includes the right to an electronic copy of any PHI held in the electronic records of the plan or provider; and
  • The plan or provider is required by law to promptly notify affected individuals after it discovers a breach of unsecured PHI, based on an assessment of the risk of unauthorized disclosure. However, unsecured PHI does not include PHI that is unusable, unreadable or indecipherable by unauthorized persons.

• The plan is prohibited from using or disclosing any PHI that is genetic information, for the plan's underwriting or premium rating purposes. Genetic information includes an individual's family medical history and any genetic testing results. 

• If any of the following disclosures of an individual's PHI may be made by a health care provider, the type of disclosure must be described, along with a statement that the disclosure will be made only with the individual's written authorization (which may be revoked): 
  
  • disclosure of psychotherapy notes,
  • disclosures for marketing, and
  • any sale of the PHI.
• If the provider will use an individual's PHI to contact him or her for fund-raising, that use must be stated along with the individual's right to opt out of receiving those communications. 
• Except for disclosures required by law, the provider must agree to an individual's request to restrict disclosure of his or her PHI, if the PHI relates to a health care item or service for which the individual (or a person other than a health plan) has paid the provider in full. For example, a patient might want to prevent disclosure of an embarrassing condition to other providers or a health plan covering the patient. 

• If the health plan does not have its own web site, the plan must provide the revised notice (or a description of the material changes and how to obtain the revised notice), to covered individuals within 60 days after September 23, 2013. 
• If a health plan has a web site, the revised notice (or a description of the material changes) must be prominently posted on the web site by September 23, 2013; and the revised notice (or a description of the changes and how to obtain a copy) must be distributed with the plan's next annual mailing to covered individuals. 
• A health care provider must make its revised notice available on or after September 23, 2013, as follows: (a) to any new patient, (b) upon any patient's request; and (c) if the provider has a facility for delivery of health care: 
  
  • copies of the revised notice must available to individuals at the facility, and
  • the revised notice must be posted in a prominent location at the facility where individuals seeking health care service are able to read the notice.

• The agreement should state that the privacy and security rules of HIPAA now apply directly to the business associate, in addition to the requirements of the agreement. 
• The business associate must be required to quickly report to the plan or provider any breach of unsecured PHI (a new term that should be defined in the agreement). 
• If a business associate delegates any work to a subcontractor who will create, receive, maintain or transmit PHI, the business associate and the subcontractor must sign a business associate agreement that complies with the HIPAA rules and the business associate's service agreement with the plan or provider. 
• If the business associate will carry out any HIPAA privacy obligations of a plan or provider, the business associate must be required to comply with the HIPAA privacy rules that apply to the plan or provider for those obligations. 
• The business associate must be required to safeguard electronic PHI, including performing and documenting a risk analysis. 

• Any business associate agreements that are first effective on or after January 25, 2013, or are renewed or changed between that date and September 22, 2013, must comply with the revised rules by September 23, 2013. 
• Any business associate agreement that was in effect before January 25, 2013, but did not comply with the HIPAA rules in effect on that date, must comply with the revised rules by September 23, 2013. 
• Any business associate agreement that (a) was in effect before January 25, 2013, (b) complied with the HIPAA rules in effect on that date, and (c) is not renewed or changed between that date and September 22, 2013, need not be amended before September 22, 2014, unless it is renewed or changed on or after September 23, 2013. 

For more information on the Best Lawyers selection process, go to Best Lawyers.

We expect to hear more about the effects of this decision from key federal agencies including the Internal Revenue Service, Department of Labor, and Securities and Exchange Commission, which heavily regulate employers. In the meantime, employers should begin planning for the inevitable changes that must take place, because the term "spouse" for many purposes now includes a same-sex spouse. This is particularly important for employers in Minnesota, whose employees residing here have, as of August 1, 2013, the legal right to marry a same-sex partner or have an out-of-state same-sex marriage recognized in Minnesota. 

For your convenience, we've provided a Quick Reference Guide for spotting DOMA issues.

The Windsor Decision
In United States v. Windsor ("Windsor"), the Supreme Court held that the federal definition of "spouse" in DOMA, which the law limited to a person of the opposite sex, is unconstitutional. At least two immediate possible outcomes may arise from the invalidation of that federal definition of "spouse."

1. Federal law may consider two persons to be spouses if their marriage is valid in the state where the marriage occurred (the "Celebrated Test"). 
2. Federal law may consider them to be spouses if their marriage is valid in the state in which they live at the time (the "Residence Test"). 

1. If the federal agencies decide to use the Celebrated Test, those employers are likely to be obligated to recognize same-sex marriages that are valid in other states for purposes of complying with federal laws, including employee benefits, federal tax laws, and leave policies. 
2. If the Residence Test applies in those states, employers may be subject to state laws that protect employees from discriminatory treatment on the basis of a number of factors, often including sexual orientation and marital status.

• Is an employee with a same-sex spouse eligible for FMLA leave if he or she lives in a state that recognizes same-sex marriage but works in a state that does not recognize same-sex marriage? Because the FMLA regulations base the definition of a "spouse" on the Residence Test, we believe that the employer must grant FMLA leave to that employee.
• Is an employee eligible for FMLA leave if he or she has a same-sex spouse under the law of one state but lives in a state where same-sex marriage is not lawful? We believe the answer is technically no, although employers should certainly consider whether it is important for recruitment and employee relations strategies to voluntarily provide FMLA benefits to any eligible employee in a lawful same-sex marriage, even if the person lives where the law does not recognize same-sex marriage.

1. Review enrollment paperwork, plan documents, plan summaries and other written materials and communications with employees for the use of the term "spouse" and/or references to an employee's marital status. Flag those occurrences for further review when guidance is provided. Immediately eliminate any references to husbands and wives, so that these materials refer only to spouses without a gender identification. For your convenience, we have provided a Quick Reference Guide for spotting DOMA issues.
2. Be prepared to promptly and effectively respond to requests from employees and plan participants who might be impacted by the change.
3. Evaluate employee and plan participant requests with extra caution if the request might be implicated by the definition of "spouse" under a benefit plan or applicable law. The effect of Windsor is expected to be immediate, and may be retroactive, so decisions made now should attempt to comply as closely as possible with the principles of Windsor. 
4. Employers should provide training to managers and human resources professionals so they understand that eligibility and protections have been expanded for certain employees and the employee's same-sex spouse.
5. Employers should provide anti-discrimination and anti-harassment training based on sexual orientation as well as marital status.

Start Counting Full-Time Employees Now

• Are you a "large employer?"
• Who must be offered affordable health coverage to avoid employer penalties?

• Are the hours of new employees and ongoing employees counted in the same way?
• Which new employees of a large employer should be offered health coverage in 2014?

• How may a large employer use an "administrative period" to offer health coverage to ongoing full-time employees for the next coverage period?
• For what "stability period" may a large employer continue to treat an ongoing employee as having the same status determined during its standard measuring period?
• May an employer use different measuring periods, administrative periods and stability periods for different classes of employees?

• Are the time periods for offering health coverage the same for new full-time employees and ongoing full-time employees?
• For what period should a large employer offer health coverage to a new employee who starts as a full-time employee?
• May a large employer use an administrative period for health coverage enrollment of a new variable-hour or seasonal employee who qualifies as full-time during his or her initial measuring period?
• What is the initial stability period for a new variable-hour or seasonal employee?
• When will a new variable-hour or seasonal employee's weekly hours be counted again after his or her initial measuring period?

• What penalty would apply if minimum essential coverage is not offered?
• What penalty would apply if minimum essential coverage is offered, but is not affordable or does not provide minimum value?
• How is a full-time employee's household income measured for the 9.5% test?
• What is the "minimum value" standard for affordable health coverage?
• How does a plan calculate whether it provides minimum value?

• Do any ACA penalties apply to the employer during the part of 2014 that is before the start of its group health plan's fiscal year that begins in 2014?
• What if a plan wants to delay enrolling non-covered employees until its fiscal year begins in 2014, but the employees did not meet the eligibility test in item number 1 above?
• May an employee minimize the risk of personal ACA penalties, or obtain coverage in an ACA exchange, by making or changing a health coverage election during the fiscal plan year of a large employer's "cafeteria plan" (under Code section 125) that begins in 2013?
• If a large employer contributes to a multiemployer health plan under a union contract, does that coverage prevent employer penalties under the ACA, for any of its employees working under that contract in 2014?

• What Notices and Reports are Required?
• Must an Employer Report to IRS on Coverage Status of Employees for the 2014 Portion of a Health Plan's Fiscal Year that Begins in 2013?

• What does a self-insured health plan sponsor need to know about the PCORI Fee?

• What does an employer need to know about the Exchange Notice?
• How must a health plan's COBRA election notice be revised for ACA?

An employer group should start counting employees soon, so it can see within six months whether it is a large employer. Then it will have time to evaluate future staffing and the potential costs of health coverage or ACA penalties in 2014.

Q: Are you a "large employer?" For this purpose, all members of a group of employers under common ownership (or in an affiliated service group) are treated as one employer (an "employer group"). A "large employer" for 2014 is defined as an employer group that employed an average of 50 or more full-time employees (including full-time equivalent employees), on business days during a measuring period of at least six consecutive months in 2013. The group may choose the length of this 2013 measuring period, but after 2013 each measuring period must be 12 months. "Full-time employees" and "full-time equivalent employees" are defined below.

• Who is a full-time employee? An employee is a "full-time employee" for a month if employed by the employer group, on average, at least 30 hours of service weekly during the month. As an alternative for the large employer test, 130 hours of service in a month may be treated as 30 hours weekly. An employer group must count all employees required to receive a Form W-2 for work in the United States, but does not count the group's leased employees, sole proprietor, partners, or 2% shareholders of an S corporation.
• How are full-time equivalent employees (FTEQs) counted? An FTEQ is a group of employees who are not full-time employees, and whose hours of service are combined to count as the equivalent of one full-time employee. An employer group's FTEQs for a month are figured by (1) counting the total hours of service (up to 120 hours for each employee) for all employees who were not full-time employees for the month, and (2) dividing their total hours by 120. That result is the number of FTEQs, which may include a fraction.
• What hours are counted? "Hours of service" are those for which the employee is paid, whether working or not. Specific rules apply for (1) employees not paid on an hourly basis, (2) teachers who are not paid for preparation time or during school year breaks; and (3) unpaid hours during FMLA and USERRA leaves and time off for jury duty.
• How does an employer group figure whether it has 50 full-time employees? Combine the monthly full-time employee and FTEQ totals for each month in the 2013 measuring period (which may be as short as six months), and divide by the number of months in that period, to find the average number of full-time employees for the large employer test.
• Can seasonal employees be excluded? A specific rule allows an employer group to exclude some seasonal employees from the 2013 measuring period, if needed to avoid being a large employer.

Q: Who must be offered affordable health coverage to avoid employer penalties?
To avoid penalties in 2014, a member of a large employer group must offer affordable health coverage (including at least minimum essential benefits) to at least 95% of the member's full-time employees and their dependents (other than spouses).

• Whose full-time employees are counted for the employer penalty rules? For the penalty rules, each member of a large employer group (1) counts its own full-time employees (at least 30 hours of service weekly, on average, per month), and (2) does not count any FTEQs described above.
• What 2013 measuring period is used to count ongoing employees? The employer may choose a 2013 measuring period between three and 12 months to determine average weekly hours that will identify its ongoing full-time employees. An "ongoing employee" is an employee who is employed throughout that measuring period.

Practical Point. For example, the 2013 measuring period could be a six-month period ending October 31, 2013. That would allow two months for the employer to review staffing levels and health coverage, plan for ACA compliance in 2014 and, if health coverage will be offered, allow enrollment for coverage in 2014. A six-month measuring period would be the most flexible.

• Are ongoing and new employees counted in the same way? Separate rules apply for counting the hours of "ongoing employees" (described below) and "new employees." The below section answers questions about counting new employees (those hired after the start of the following 2013 measuring period).

Q: Are the hours of new employees and ongoing employees counted in the same way? No. Separate rules apply for counting the hours of service of "new employees" and "ongoing employees" to determine if they are full-time for health coverage purposes.

• Who is an ongoing employee for health coverage in 2014? An "ongoing employee" is one who is employed by a large employer throughout its 2013 standard measuring period (between three and 12 months long). An ongoing employee is treated as full-time for 2014 health coverage if he or she works on average at least 30 hours weekly during the 2013 standard measuring period. However, standard measuring periods do not apply to new employees.
• Who is a new employee? A "new employee" is an employee who starts work for a large employer and: (1) never worked for the employer; (2) previously worked for the employer; but had a break in service at least 26 weeks long; or (3) previously worked less than 26 weeks for the employer, and had a break in service that was at least four weeks and was longer than the employee's last period of work for the employer. If an employee previously worked for the employer, but does not fit into category (2) or (3), the employee is treated as an ongoing employee instead of a new employee. A "break in service" is a period in which no hours of service were credited to the individual by the employer.

Q: Which new employees of a large employer should be offered health coverage in 2014? A new employee who should be offered coverage in 2014 is one who is hired after the start of the employer's 2013 standard measuring period for ongoing employees (described above), and qualifies as a full-time employee in one of the following two ways:

1. Some new employees are treated as full-time right away. If a new employee (other than a seasonal employee described below) of a large employer is reasonably expected to work on average at least 30 hours weekly, based on facts known at his or her start date, then he or she is immediately treated as a full-time employee. In that case, he or she should be offered health coverage within three months after the start date. However, this offer need not be made until 2014.

2. The status of a new employee whose hours are variable or seasonal may be determined during an initial measuring period. If a large employer does not know if a new employee will work on average at least 30 hours weekly, because he or she will be working variable hours, or is a seasonal employee described below, the employee's weekly hours may be counted during an initial measuring period chosen by the employer for all such new employees. The initial measuring period may begin on any date between the employee's start date and the first day of the next month, and may be any period between three and 12 months long.

• Who are seasonal employees? "Seasonal employees" perform services on a seasonal basis, as defined by the Department of Labor, including (but not limited to) (1) retail workers employed only during holiday seasons and (2) certain agricultural workers. An agricultural worker performs work on a seasonal basis if the work is ordinarily performed only at certain seasons or periods of the year, and the work by its nature may not be carried on throughout the year. However, for counting full-time employees under ACA, seasonal employees can include other types of employees, in addition to retail and agricultural workers. This definition may change after 2014.
• When should a new variable hour or seasonal employee be offered health coverage? If a new variable hour or seasonal employee is found to be a full-time employee of a large employer during the employer's initial measuring period (between three and 12 months long), the employee should be offered health coverage in 2014, by the first day of the month beginning on or after the anniversary of his or her start date.

Practical Point: For example, the initial measuring period for a new variable hour or seasonal employee who starts on July 15, 2013, could be a 10-month period beginning August 1, 2013, and ending May 31, 2014. If the employee is found to be a full-time employee during that period, the employer would have two months to offer health coverage to the employee and allow enrollment by August 1, 2014 (the first day of the month beginning after the anniversary of the start date).

• If a new variable hour or seasonal employee's status changes to full-time during the initial measuring period, when should health coverage be offered in 2014? If the employment status of a new variable hour or seasonal employee changes during his or her initial measuring period, so that the employee is now expected to be a full-time employee (working at least 30 hours weekly in the future), the new employee should be offered health coverage to the employee by the first day of the fourth month after the change in status, even if the initial measuring period is not over. However, this offer need not be made until 2014. Also, this offer need not be made if the employee was offered health coverage for any reason before the fourth month.

A large employer may find it impractical to determine which ongoing full-time employees should be offered affordable health coverage on a monthly basis during 2014. The Q&A below explains the optional "administrative period" and "stability period" that a large employer may use to offer coverage to ongoing full-time employees at intervals less frequent than monthly. 

Please note: If you are unsure whether your company qualifies as a "large employer," or how to identify its ongoing and new "full-time employees" during certain measuring periods for counting hours of service in 2013, please refer to "Start Counting Full-Time Employees Now" and "How to Count New Employees" sections above.

Q: How may a large employer use an "administrative period" to offer health coverage to ongoing full-time employees for the next coverage period? Ongoing employees may be identified as full-time during an employer's "standard measuring period" before a plan year or any shorter coverage period. However, the employer will need a period of time between the end of the standard measuring period and the start of the next coverage period to see which ongoing employees are eligible for health coverage during that coverage period, to offer the coverage, and to enroll those who choose to participate. The period that an employer may use for those administrative functions is called an "administrative period."

• What rules apply to an administrative period? An employer may choose an administrative period of up to 90 days between the end of each standard measuring period and the start of the next coverage period. After 2013, the administrative period must overlap any prior coverage period in which health coverage is available, so that employees who are covered during that coverage period will remain covered during the administrative period before the next coverage period. For example, employees covered for a year must remain covered during the administrative period that precedes the next year.

Practical Point: If an employer chooses a six-month standard measuring period ending on October 31, 2013, and its health plan year begins January 1, 2014, it should choose November and December of 2013 as its administrative period to prepare for the next plan year. The administrative period would be the same in later years when the employer changes to a 12-month standard measuring period ending each October 31, assuming the employer continues the same plan year.

Q: For what "stability period" may a large employer continue to treat an ongoing employee as having the same status determined during its standard measuring period? If an ongoing employee is found to be a full-time employee during a standard measuring period, or does not qualify as full-time during that period, the employer may continue to treat him or her as having that same status for health coverage available during a "stability period" beginning at the start of the next plan year.

• What rules apply to a stability period? A "stability period" must be a coverage period (between six and 12 months long) that is chosen by the employer and immediately follows its standard measuring period and any administrative period used for enrollment.
• How long should a stability period last? The employer can use two possible stability periods, based on the status of the employee during the prior measuring period. The period could vary as follows: (1) if an ongoing employee was a full-time employee during a standard measuring period, the following stability period (when coverage should be offered to the employee) must be at least six months long, but may not be shorter than the measuring period; or (2) if the employee was not a full-time employee during a standard measuring period, the following stability period (when coverage need not be available to the employee) may not be longer than the measuring period.

Practical Points: To avoid any inconsistency between those two possible stability periods, an employer should choose a stability period that is the same length as the prior standard measuring period. To simplify health plan administration, many employers will use a 12-month period for both purposes in 2014 and later years, except that the 2013 measuring period could be as short as six months. In that case, the stability period would be the plan year. If an employer's standard measuring period and stability period are both six months long, it must allow open enrollment twice during each plan year, so that ongoing full-time employees qualifying during a six-month standard measuring period may enroll for the next six-month stability period.

• May an employer choose a 2014 stability period longer than its 2013 measuring period? If an employer chooses a 2014 stability period that is longer than six months (such as its plan year), the employer may choose a 2013 standard measuring period that is shorter than the stability period. However, the 2013 measuring period must be at least six months long and end no earlier than 90 days before the next health plan year begins (January 1, 2014 or later). If the 2013 measuring period ends before that plan year, this will allow an employer time to determine, before that plan year, whether or not its ongoing employees are full-time, and to rely on their full-time or part-time status for that plan year or any shorter stability period starting in 2014.
• May an employer change its standard measuring period and stability period for ongoing employees? An employer may change future standard measuring periods and related stability periods, but generally may not change a stability period after the prior standard measuring period has begun.

Q: May an employer use different measuring periods, administrative periods and stability periods for different classes of employees? A member of a large employer group may choose different measuring periods, administrative periods, and stability periods only for the classes of employees within each of the following categories: (1) each group of employees covered by a collective bargaining agreement, (2) collectively bargained and non-collectively bargained employees, (3) salaried employees and hourly employees, and (4) employees whose primary places of employment are in different states. For example, different periods may be used for salaried employees and hourly employees.

A large employer may find it impractical to determine every month which new full-time employees should be offered affordable health coverage during 2014. The Q&A below:

• states the length of time that a large employer may delay offering coverage to a new full-time employee;
• explains the optional administrative and stability periods that a large employer may use to either (1) avoid offering coverage every month to each new variable-hour or seasonal employee who qualifies as full-time for that month, or (2) exclude the employee for an extended period if he or she does not qualify as full-time during his or her unique initial measuring period; and
• recommends a health plan amendment that, among many others, may be required for 2014.

• New employees: Each new employee may be offered coverage within 90 days after being hired as a full-time employee. However, if it was not clear whether the employee would be full-time until the end of his or her unique "initial measuring period," the coverage may be offered during an "administrative period" starting after that measuring period and ending before that employee's unique "initial stability period" for that coverage.
• Ongoing employees: As explained above in the section titled "Optional Enrollment and Coverage Periods for Ongoing Full-Time Employees of Large Employers," ongoing full-time employees may be offered coverage during an "administrative period" starting after an employer's "standard measuring period" and ending before the employer's next "stability period" (usually a plan year).

Q: For what period should a large employer offer health coverage to a new employee who starts as a full-time employee?

• When should a new full-time employee first be offered health coverage? If a new employee is a full-time employee when hired, but is not a seasonal employee, he or she should be offered health coverage within 90 days after the employee's start date.

• For what stability periods should the new full-time employee's eligibility continue? After the employee's initial waiting period (up to 90 days), his or her eligibility for health coverage should continue during (1) the employer's stability period for ongoing employees' coverage in which the employee first becomes eligible, and (2) any later stability period starting before the employee transitions from "new" to "ongoing" employee status. Those "stability periods" are coverage periods (between six and 12 months long, but usually a plan year) chosen by the employer. After the employee is employed for a standard measuring period (generally the same length as the stability period), the employee's full-time status will be tested again during that measuring period, just like other ongoing employees.

Q: May a large employer use an administrative period for health coverage enrollment of a new variable-hour or seasonal employee who qualifies as full-time during his or her initial measuring period? Yes, most employers will need time between the end of the employee's initial measuring period and the beginning of the employee's initial stability period for coverage to (1) see whether the employee is eligible for health coverage, (2) offer the coverage, and (3) enroll the employee for that stability period.

• What is a new employee's administrative period after his or her initial measuring period? An employer may choose to have an administrative period of up to 90 days between (1) the end of the initial measuring period in which a variable-hour or seasonal employee qualifies as full-time, and (2) the start of his or her initial stability period for coverage.

For example, if an employer hires a new variable-hour or seasonal employee on May 15, 2013, the employer's 10-month initial measuring period for the employee starts on that date and ends March 14, 2014, and the employer's 12-month initial stability period for coverage of the employee starts May 1, 2014, the administrative period to prepare for the employee's initial stability period would be the six-week period between March 14 and May 1 of 2014.

• What is the initial stability period for new variable-hour or seasonal employees who qualify as full-time during their initial measuring periods? The initial stability period for these new full-time employees must be the same length as the employer's stability period for ongoing employees (usually the plan year). The new full-time employee's initial stability period after his or her initial measuring period must be at least six months long (but not less than the initial measuring period), and must begin right after the employee's initial measuring period and any administrative period needed for enrollment.

For example, if (1) a new variable-hour or seasonal employee qualified as full-time during his or her 10-month initial measuring period ending March 14, 2014; and (2) the employer chose a six-week administrative period to enroll the employee, his or her initial stability period for coverage could be a 12-month period starting on May 1, 2014.

• What is the initial stability period for a new variable-hour or seasonal employee who does not qualify as a full-time employee during his or her initial measuring period? In this case, the employer may treat the employee as not full-time during an initial stability period that immediately follows the employee's initial measuring period. The employee's initial stability period for exclusion from coverage cannot (1) be more than one month longer than his or her initial measuring period, nor (2) exceed the balance of the employer's standard measuring period for ongoing employees (plus any administrative period) in which the new employee's initial measuring period ends.

The extra month allows an employer to use an initial stability period of up to 12 months, plus a one-month administrative period, for exclusion from coverage. As an alternative, an employer could use a shorter initial measuring period, such as 10 months, plus a more practical administrative period of three months. In each case, the employer would still comply with the rule that the initial measuring period and administrative period combined may not extend beyond the end of the first calendar month beginning on or after the anniversary of the employee's start date.

Practical Point: However, any such maximum initial stability period will often be cut short if the employer's standard measuring period (plus any administrative period) ends before the initial stability period. An employer's standard measuring period will usually be a 12-month period ending two or three months before its plan year, and its administrative period will be that two or three-month period.

For example, if (1) a new variable-hour or seasonal employee did not qualify as full-time during his or her 10-month initial measuring period ending March 14, 2014; and (2) the employer chose an 11-month stability period and two-month administrative period for such employees, that would result in a maximum 13-month exclusion period ending April 14, 2015. However, if the employer's plan year is a calendar year, that exclusion period would instead end on December 31, 2014. That would occur because the employer's standard measuring period for ongoing employees would probably be a 12-month period ending September 30, 2014, and its administrative period in that case would be the three-month period ending December 31, 2014.

Q: When will a new variable-hour or seasonal employee's weekly hours be counted again after his or her initial measuring period? After a new variable-hour employee or seasonal employee has been employed for an entire standard measuring period used by the employer for ongoing employees, the employer will again test the employee for full-time status during that measuring period, just like other ongoing employees. An employer's standard measuring period will usually be a 12-month period ending two or three months before its plan year.

Under the federal Affordable Care Act ("ACA"), a "large employer" may have to pay severe penalties to the IRS if it does not offer affordable health coverage to its full-time employees and their dependents during certain periods in 2014. A large employer must consider two possible kinds of penalties under ACA, as explained below. None of these penalties are deductible for federal income tax purposes, so they are more costly than they may appear.

Please note: If you are unsure whether your company qualifies as a "large employer," or how to identify its ongoing and new "full-time employees" during certain measuring periods for counting hours of service in 2013, please refer to the "Start Counting Full-Time Employees Now" and "How to Count New Employees" sections above.

Q: What penalty would apply if minimum essential coverage is not offered? Each employer in a large employer group must pay a $2,000 annual penalty (prorated on a monthly basis) for each of its full-time employees (except its prorated share of the first 30 of the group's employees), if:

• during 2014 (or any later year) any of its full-time employees buys federally subsidized health insurance in a public health insurance exchange operated under ACA; and
• during that year, the employer did not offer "minimum essential coverage" (as described below) to at least 95% of its full-time employees and each of their dependents (other than a spouse).

After 2014, the $2,000 penalty will be increased for any inflation in the average per-person cost of health insurance premiums in the U.S.

• What is "minimum essential coverage?" ACA defines it as coverage under any group health plan (insured or self-insured) offered by an employer to an employee. However, this does not include (1) on-site medical clinics; (2) separate coverage limited to dental or vision benefits, accident or disability income benefits, or long-term care benefits; (3) separate coverage limited to a specified disease or illness; or (4) separate hospital indemnity or other fixed indemnity insurance. In addition, health coverage provided by employer contributions to a health reimbursement account, health savings account or health flexible spending account under a "cafeteria plan" will probably not qualify as minimum essential coverage. To avoid the $2,000 penalty, the employer's minimum essential coverage does not have to be affordable or provide minimum value (although a different penalty may apply as described below).
• What does it mean to "offer" health coverage? The employer must provide the employee with an opportunity to enroll or decline coverage at least once during the plan year.

Practical Point: This offer will generally be made during an open enrollment period for the plan year. Most employers will use an "administrative period" before the plan year as the open enrollment period. See the sections above entitled Optional Enrollment and Coverage Periods for Ongoing Full-Time Employees or New Employees for more information.

Q: What penalty would apply if minimum essential coverage is offered, but is not affordable or does not provide minimum value? Even if an employer avoids the $2,000 penalty, the employer must pay a $3,000 annual penalty (prorated on a monthly basis) for each full-time employee who buys federally subsidized health insurance in a state health insurance exchange operated under ACA, if one of the following three situations exists:

• The coverage is unaffordable. An employee's required contribution (before or after taxes), for the lowest cost single health coverage offered by the employer is not affordable if it exceeds 9.5% of the employee's household income (measured as described below).
• The coverage has less than minimum value. Minimum value can be tested several ways, as described below.
• The employee is not covered. The employer avoided the $2,000 penalty by offering minimum essential coverage to 95% of its full-time employees, but the employee was among the five percent who did not receive the offer.

Practical Point: For most plans, the most difficult test is affordability, when applied to the lowest paid full-time employees. The health plans offered by most employers will pass the minimum value test, which is described below after the household income definition.

The total of these $3,000 penalties for all affected employees cannot exceed the total of all $2,000 penalties the employer would have had to pay if it did not offer minimum essential coverage to any of its full-time employees. An employer cannot be liable for both types of penalties.

After 2014, the $3,000 penalty will be increased for any inflation in the average per-person cost of health insurance premiums in the U.S.

Q: How is a full-time employee's household income measured for the 9.5% test? Technically, "household income" under ACA includes the modified adjusted gross income of the employee, his or her spouse and any dependents who must file an income tax return. However, because employers do not know an employee's household income, most employers would rather use the employee's income paid by the employer. To do so, an employer may choose among the following three "safe harbor" options, which may be used separately for different categories of full-time employees, if the employer offers health coverage that provides minimum value (described below):

1. Rate of Pay: If the employer wants to determine affordability at the earliest time in a health coverage period, the employer may assume that the employee's household income for all months during that period is one of the following amounts (if his or her pay is not reduced during the calendar year or any shorter period of employment):
   • For a salaried employee, his or her monthly salary as of the first day of the coverage period; or
   • For an hourly employee, an amount equal to 130 hours multiplied by his or her hourly rate of pay as of the first day of the coverage period.
2. Wages: If the employer is willing to determine affordability after each calendar year, and each employee's required contribution during the plan year is a consistent dollar amount or percentage of the employee's wages reported in Box 1 of his or her IRS Form W-2, those wages may be treated as the employee's household income. If necessary for a partial year of eligibility, annual W-2 wages may be prorated for each month of employment during the year.
3. Federal Poverty Line: The federal poverty line for a single individual, under the most recently published poverty guidelines as of the first day of the plan year, may be treated as the household income of an employee. However, this will allow an employer to comply with the affordability rule only if a category of its full-time employees is required to make relatively small employee contributions for single health coverage. For example, if the federal poverty line is $11,000 for 2014, single coverage with at least minimum value would be affordable only if the monthly required contribution by an employee is not more than $87.08 ($11,000 x .095 = $1,045 ÷ 12).

Q: What is the "minimum value" standard for affordable health coverage? A plan provides "minimum value" if the plan (rather than participants) is designed to pay at least 60% of the total "allowed costs" of benefits provided under the plan. However, the minimum value calculation is not affected by the level of employer or employee contributions for the plan's insurance premiums or self-insured benefits.

As described below, "minimum value" is determined by an actuarial estimate based on plan design and national benefit usage statistics, rather than the actual cost of plan benefits. "Allowed costs" are the estimated costs covered by the plan before applying any deductibles, copayments or coinsurance ("cost-sharing payments"). In other words, a plan provides minimum value if participants are not expected to pay more than 40% of estimated allowed costs through cost-sharing payments.

A portion of a plan sponsor's annual contributions to covered employees' health reimbursement accounts (if integrated with the plan and usable only for cost-sharing payments) or health savings accounts can be applied to reduce their estimated cost-sharing payments for a plan year.

Practical Point: "Minimum essential coverage" offered to avoid the $2,000 employer penalty (based on all full-time employees) does not have to meet the minimum value standards. The minimum value standard is needed only to avoid the $3,000 employer penalty, which is based on the limited number of full-time employees who buy federally subsidized health insurance in a state health insurance exchange operated under ACA.

Q: How does a plan calculate whether it provides minimum value? The U.S. Department of Health and Human Services ("HHS") rules allow one of the following three methods to be used:

1. MV Calculator: To determine whether a typical health plan provides minimum value ("MV"), a plan sponsor may enter information into the MV Calculator created by HHS. This information will include the plan's benefits, coverage of services, and cost-sharing terms. If the plan includes non-typical terms, either of the following two methods can be used instead of the MV Calculator.
2. Safe Harbor Checklists: HHS will provide plan design-based "safe harbor" checklists that plan sponsors may compare with the benefits and cost-sharing terms of their health plans. If the plan provides at least the level of benefits in a checklist, the plan will be treated as providing minimum value without being evaluated by an actuary. However, these checklists are not yet available.
3. Actuarial Certification: If a plan includes non-typical features that do not fit into the MV Calculator or any safe harbor checklist described above, the plan sponsor may have an actuary review the plan and certify whether it provides minimum value.

Regulations issued under the federal Affordable Care Act ("ACA") provide three transition rules that will help a member of a large employer group (an "employer") minimize the risk of IRS penalties in 2014, for itself, its employees and their families, if the employer maintains a group health plan or "cafeteria" plan using a fiscal year other than a calendar year (a "fiscal year plan") that begins in 2013 and ends in 2014. Those risks could arise during that part of the plan's fiscal year which extends into 2014, if the employer does not offer affordable health coverage (with minimum value) to its full-time employees and their dependents during that part of the fiscal year in 2014.

A fourth transition rule simplifies compliance with ACA in 2014 if the employer contributes to a multiemployer health plan under a union contract.

All of these transition rules are described below.

Q: Do any ACA penalties apply to the employer during the part of 2014 that is before the start of its group health plan's fiscal year that begins in 2014? ACA regulations will provide the employer with transition relief from ACA penalties for that part of 2014, if the following two steps are taken:

1. Identify employees eligible for the 2014 plan year under the plan's 2012 rules. If the employer maintained the fiscal year plan as of December 27, 2012, the relief applies for each full-time employee of the employer (whenever hired) who would be eligible for coverage on the first day of the plan's fiscal year beginning in 2014 (the "2014 plan year"), under the plan's eligibility rules that were in effect on December 27, 2012.
2. Offer those employees affordable coverage. If each of those employees is offered affordable coverage (with at least minimum value) no later than the first day of the 2014 plan year, no employer penalty will be due for that employee during the portion of 2014 before the first day of the 2014 fiscal plan year. The terms "affordable coverage" and "minimum value" are explained in the section above titled "ACA Penalties That Could Apply to Large Employers in 2014."

Practical Point: This transition rule is important for fiscal year plans, because the terms of health coverage are difficult to change in the middle of a plan year. For example, if a plan's next fiscal year begins October 1, 2013, but did not qualify for the transition relief, it would have to comply with ACA as of January 1, 2014, for the last nine months of that plan year. In this case, the plan would have to decide whether to comply for its entire fiscal year beginning in 2013, change its plan year to a calendar year beginning January 1, 2014, or try to qualify under the following additional transition rules for fiscal year plans.

Q: What if a plan wants to delay enrolling non-covered employees until its fiscal year begins in 2014, but the employees did not meet the eligibility test in item number 1 above?

• 1. Significant percentage test. The ACA regulations also provide relief for an employer that has a significant percentage of its employees eligible for (or covered under) one or more fiscal year plans that have the same plan year as of December 27, 2012, and wants to offer coverage to certain other employees who did not meet the eligibility test described in item 1 above under questions Q1. A "significant percentage" means that either:
  • Coverage Percentage. At least 25% of the employer's employees are covered under one or more of its fiscal year plans that have the same plan year as of December 27, 2012; or
  • Eligibility Percentage. At least one-third of the employer's employees were eligible for coverage under those plans during the most recent open enrollment period before December 27, 2012.

An employer may determine whether a "significant percentage" of its employees was eligible for (or covered under) the fiscal year plan or plans as of (a) the end of the most recent enrollment period, or (b) any date between October 31, 2012, and December 27, 2012.

• 2. Which employees can be added to the fiscal year plan in its 2014 plan year? If either of those significant percentage tests is met by an employer, no employer penalty will be due for any month before the first day of the 2014 plan year of each of its fiscal year plans, for any of the employer's full-time employees who satisfy both of these tests:
  • Not eligible for a calendar year plan. The employee would not have been eligible for coverage under any group health plan maintained by the employer as of December 27, 2012, that uses a calendar year as its plan year.
  • Coverage offered by fiscal year plan. The employee is also offered affordable coverage (with at least minimum value) under a fiscal year plan no later than the first day of its 2014 plan year.

Practical Point: If either of the two transition rules for fiscal year plans (under questions Q1 and Q2) is satisfied, no employer penalty will be assessed for full-time employees who are not offered coverage that complies with ACA during the portion of a 2013 plan year that continues into 2014.

Q: May an employee minimize the risk of personal ACA penalties, or obtain coverage in an ACA exchange, by making or changing a health coverage election during the fiscal plan year of a large employer's "cafeteria plan" (under Code section 125) that begins in 2013? Yes, if the employer amends the cafeteria plan by the end of 2014 to allow those actions, which otherwise would not be allowed during the fiscal plan year without a status change. The amendment can be retroactive to the start of the fiscal plan year beginning in 2013. This would allow eligible employees to coordinate their health coverage with ACA (and minimize the risk of penalties on the employee or family members) during the fiscal plan year as follows:

• Late health coverage election. An eligible employee who did not elect the cafeteria plan's health coverage for its fiscal plan year starting in 2013 would have a second chance to enroll the employee and eligible family members in the health coverage option on or after January 1, 2014. An employee might do this to avoid ACA's individual penalty for the first part of the 2014 calendar year.
• Cancel or change health coverage election. A participant who did enroll in the cafeteria plan's health coverage, for its fiscal plan year starting in 2013, would be allowed to cancel or change that election once during that fiscal plan year. An employee might change an election by enrolling eligible family members who were not enrolled for the fiscal plan year starting in 2013, but wants to avoid ACA's individual penalty for 2014. Another employee might cancel the employer's health coverage because it is not affordable, if the employee, a spouse or a dependent becomes eligible to purchase subsidized coverage through a health insurance exchange under ACA.

Q: If a large employer contributes to a multiemployer health plan under a union contract, does that coverage prevent employer penalties under the ACA for any of its employees working under that contract in 2014? Yes, if the following transition rule conditions are met (for coverage in 2014 only):

• Full-time employee. The employer may identify each of the employer's full-time employees who are eligible for the multiemployer health plan by counting only their hours worked for the employer during its measuring period under ACA.

Practical Point. This means that the ACA penalties will not apply to the employer in 2014, for any employee (such as a construction worker) who qualifies for the multiemployer health plan's coverage as a full-time worker in the covered industry, based on hours worked for this employer and other contributing employers, but does not work enough hours for the employer to be treated as full-time under the ACA. This may change for 2015.

• Plan contributions. The union contract requires the employer to contribute to the multi-employer health plan for each of its full-time employees (as determined above).
• Offer of coverage. The multiemployer health plan offers coverage to the full-time employee and his or her dependent children.
• Affordable coverage. The personal health coverage offered to the full-time employee by the multiemployer health plan is affordable coverage and provides benefits with at least a minimum value. The terms "affordable coverage" and "minimum value" are explained above in the section above titled "ACA Penalties That Could Apply to Large Employers in 2014"

Under the federal Affordable Care Act ("ACA"), a group health insurer or an employer sponsoring a group health plan may have to pay severe penalties to the U.S. Department of Labor or the IRS if the insurer or employer does not deliver certain employee notices and government reports each year, beginning in 2013. Those reports also apply to plans with fiscal years that begin in 2013 and end in 2014.

Q: What Notices and Reports are Required? The four required notices and reports are described below in the order in which they must be delivered.

1. Summary of Benefits and Coverage
   During any group health coverage enrollment period beginning after September 13, 2012, the insurer of a group health insurance plan (or the plan administrator of a self-insured plan) must provide a brief Summary of Benefits and Coverage ("SBC") of the plan to each eligible employee along with other enrollment materials. If an employee is allowed to enroll during a plan year, an SBC must be delivered to employees who enroll during plan years beginning on or after September 13, 2012. The U.S. Department of Labor has provided a sample form for an SBC.

   Practical Point. The SBC requirement applies to all employee enrollments that occur in the 2013 plan year and later years. For example, if an employer enrolls any newly hired or newly eligible employees in its group health plan this year, those employees must receive an SBC.

   Generally, the SBC must include the following:

   • uniform definitions of standard insurance terms and medical terms;
   • descriptions of:
     • the health coverage and limitations on coverage;
     • cost-sharing provisions (including deductible, coinsurance and copayment obligations); and
     • provisions on renewability and continuation of coverage;
   • a section labeled "coverage facts," including examples of common benefit situations;
   • a statement that the SBC is a summary and the plan document should be consulted;
   • a contact number for additional questions; and
   • an Internet address where a copy of the actual plan document can be reviewed and obtained.

   An SBC describing coverage to be offered after 2013 must also include the following statements:

   • whether or not the plan provides minimum essential coverage (as described above under the title "What penalty would apply if minimum essential coverage is not offered?"); and
   • whether or not the plan provides minimum value, which means that it covers at least 60% of the total allowed costs of benefits provided under the plan. To pass this test, the plan's deductible and co-payment rules would not require a typical covered person to pay more than 40% of the cost of those benefits.
2.  Health Plan Cost Information Report on Form W-2
   For each calendar year after 2011, every employer that sponsors a group health plan must include the cost of each employee's group health coverage (if any) on the employee's IRS Form W-2, which is due during January of the next year. That cost must include the per-employee premium (or similar cost for a self-insured plan) paid during the year by both the employer and the employee for the coverage (including any employer contribution to a flexible spending account or health reimbursement account). This cost report is required only for information purposes and will be separate from the employee's taxable compensation reported on the Form W-2. However, this report need not include costs for separate dental, vision, or long-term care coverage. Employers that filed fewer than 250 W-2 Forms for 2011 were exempt from this reporting for 2012, but they will have to include group health coverage cost information on Forms W-2 filed for 2013 (due in January 2014).
3. Written Notice to Employees Regarding ACA Health Insurance Exchanges and the Employer's Health Plan
   Each employer that is subject to federal overtime laws is required to send a written notice to current employees by October 1, 2013, including the following information informing the employee:
   • of the existence of the health insurance exchanges, including a description of services provided by the exchanges, and how the employee may contact an exchange;
   • whether or not the employer sponsors a group health plan;
   • if the employer's group health plan (if any) pays less than minimum value (60% of the total allowed costs of benefits provided under the plan), that the employee may be eligible for a premium tax credit against his or her federal income taxes, if the employee purchases a qualified health plan through an exchange; and
   • if the employee purchases qualified health coverage through an exchange, that (a) the employee may lose any employer contribution available to pay some or all of the premiums for a group health plan offered by the employer; and (b) any such employer contribution may be excludable from the employee's income for federal income tax purposes.
4. Reports to IRS and Employees about the Health Coverage Status of Full-Time Employees in 2014

   (a) Report to IRS. For 2014 and each later calendar year, each employer that is a member of a large employer group is required to file with the IRS a report including the following information on the employer's health coverage and its full-time employees:

   • The number of full-time employees for each month of the year, which may be based on a "look-back" measuring period in the prior year;
   • whether or not the employer offered minimum essential coverage (described above under the title "What penalty would apply if minimum essential coverage is not offered?") to those full-time employees (and their dependent children);
   • if any such coverage offer was made:
     • the length of the waiting period for that coverage;
     • the months during the year for which the coverage was available;
     • the monthly premium for the lowest cost coverage option in each enrollment category;
     • the percentage of total allowed costs of plan benefits that was payable by the plan for the year; and
   • the name, address and taxpayer identification number of each of those full-time employees; and the months in which the employee (and any dependent children) were covered under any such plan.

(b) Statement to Employees. If an employer is required to make such an IRS report, the employer is also required to send, to each full-time employee named in the report, a statement of the information reported to IRS for that employee, along with the employer's name and address, and the telephone number of a contact person designated by the employer.

(c) Due Date for Report and Statements. The report to the IRS and the statements to employees will be due by January 31 after each reporting year. The first reporting year is 2014, so the first reports will be due in January 2015.

(d) Coordination with Insurer. If an employer's coverage is provided by a group health insurer, the employer may contract with the insurer to have the insurer make the general report to IRS and send the individual statements to employees.

Unfortunately, the IRS has not yet issued any guidance on the IRS reporting and employee statement rules.

Q: Must an Employer Report to IRS on Coverage Status of Employees for the 2014 Portion of a Health Plan's Fiscal Year that Begins in 2013? Yes. An employer that is a member of a large employer group may be able to use the transition relief for fiscal year health plans to delay complying with ACA health coverage rules until the start of the plan's fiscal year beginning in 2014 (as described above under the title "Do any ACA penalties apply to the employer during the part of 2014 that is before the start of its group health plan's fiscal year that begins in 2014?"). However, the employer must still comply with the employee coverage reporting requirements (described under the preceding item 4) for the entire 2014 calendar year, including the 2014 portion of a fiscal year that begins in 2013. The calendar year reporting will be essential to IRS administration of the premium tax credit for employees who qualify during 2014 and purchase coverage through an ACA exchange. For purposes of the initial coverage report due in January 2015 for the calendar year 2014, any such employer will be able to identify its full-time employees for the 2014 portion of the 2013 fiscal year of its plan, after 2014 has ended, by using actual service data rather than a "look-back" method for measuring hours.

Please note: If you are unsure whether your company qualifies as a member of a "large employer group," please refer to the section above entitled "Start Counting Full-Time Employees Now."

Under the federal Affordable Care Act, a health insurer or an employer sponsoring a self-insured health plan must pay an annual PCORI Fee to fund a trust fund for a new government program, beginning as soon as July 31, 2013. That program is the Patient Centered Outcomes Research Institute (PCORI). This Legal Alert will discuss the PCORI Fee payable by employers that sponsor self-insured health plans, but not the similar PCORI Fee payable by health insurers.

Practical Point: The PCORI Fee must be paid by health insurers or employers regardless of the number of individuals covered by the plan.

Q: What does a self-insured health plan sponsor need to know about the PCORI Fee?

• Who must pay the PCORI Fee? Two kinds of entities that provide health benefits in the U.S. must pay the PCORI Fee:
  • 1. The plan sponsor of each self-insured health plan: The PCORI Fee cannot be paid from any health plan assets that are not general assets of the plan sponsor.
  • 2. The insurer: If an employer sponsors an insured health plan, the insurer will pay the PCORI Fee, but the insurer may include the cost in premiums.
• How are "self-insured health plans" defined for the PCORI Fee? For this purpose, "self-insured health plans" generally provide major medical benefits, but do not include health savings accounts, separate dental, vision or long-term care plans, or health flexible spending accounts primarily funded by employee contributions. Health reimbursement accounts are also treated as self-insured health plans unless offered to employees covered by a self-insured health plan providing major medical benefits. Health flexible spending accounts primarily funded by employers are also treated as self-insured health plans. Employee assistance plans and wellness programs are not treated as self-insured health plans unless they provide significant medical care. If an employer purchases "stop loss" insurance to limit its risk under a self-insured health plan, the plan is still considered self-insured.
• When and how must the PCORI Fee be reported and paid?
  • 1. July 31, 2013 Deadline. The first PCORI Fee is due to the IRS by July 31, 2013, for policy and plan years that ended in 2012 (but not before October 1, 2013). For example, an employer sponsor sponsoring a self-insured health plan must report and pay the fee by July 31, 2013, for a plan year that ended on December 31, 2012. The PCORI Fee must be reported on IRS Form 720 filed with the payment.
  • 2. Deadlines After 2013. For policy and plan years ending after 2012, the PCORI Fee and Form 720 is due by July 31 of the calendar year beginning after the last day of the policy year or plan year. For example, a plan sponsor must report and pay the fee by July 31, 2014, for a plan year that ended on June 30, 2013. However, no PCORI Fee or report will be due for plan years ending after September 30, 2019, unless the law is changed.
• How is the PCORI Fee calculated? The PCORI Fee for a plan year of a self-insured health plan is equal to $1.00 times the average number of individuals covered by the plan during that year. The $1.00 PCORI Fee increases to $2.00 for the first plan year ending on or after October 1, 2013, and may be further increased each year before it expires in 2019. "Covered individuals" mean (a) covered employees and their covered family members, (b) qualified beneficiaries receiving continuation coverage under COBRA, and (c) covered retirees and their covered family members. Any individual covered by more than one self-insured plan with the same plan sponsor is counted only once.

  One of three alternative methods may be used to figure the average number of individuals covered by a self-insured health plan during a plan year, as follows:

  • 1. The Actual Count Method. Under this method, the average number of covered individuals during the plan year is equal to the sum of the totals of covered individuals on each day of the year, divided by the total number of days in the year.

  For example, if 10 individuals were covered for the first 100 days of the year, and 12 were covered for the last 265 days of the year, the sum of the daily totals on each day would be 4,180 (10 x 100 days = 1,000 + 12 x 265 days = 3,180), and the average number of covered individuals would be 11.45 (4,180 ÷ 365 days).

  • 2. The Snapshot Methods. To use either of the following two snapshot methods, the employer chooses a date in each quarter of the plan year to count the relevant individuals, but the dates in the last three quarters must be within three days of the date chosen in the first quarter. For example, if January 25th is used in the first quarter, a date near the 25th day of the first month in the quarter must be used in the other three quarters.
    • Snapshot Count Method. On each of those four dates, the employer counts all of the covered individuals. To find the average for the plan year, the employer then adds those four quarterly totals and divides that total by four.
    • Snapshot Factor Method. On each of those four dates, the employer (a) counts the number of participants with spouse or family coverage and multiplies that number by 2.35, (b) counts the number of participants with self-only coverage, and (c) adds both of those totals for the quarter. To find the average for the plan year, the employer then adds those four quarterly totals and divides that total by four.
  • 3. The Form 5500 Method. If the self-insured health plan sponsor files Form 5500 for the plan year being taxed, by July 31 of the next calendar year (when the PCORI Fee is due), this method allows the plan sponsor to determine the average number of individuals covered by the plan during the plan year from the Form 5500, as follows:
    • Self-only Coverage. If the plan covers only employees, and not spouses or dependents, the average number of covered individuals is the sum of the total participants at the beginning of the year and the total participants at the end of the year, divided by two. For example, if the plan had 100 participants at the beginning and 120 at the end of the year, the average would be 110 (100 + 120 ÷ 2).
    • Family Coverage. If the plan covers employees and any of their family members, the average number of covered individuals is the sum of the total participants at the beginning of the year and the total participants at the end of the year. For example, if the plan had 100 participants at the beginning and 120 at the end of the year, the average would be 220 (this represents the average number of covered employees (110), plus their family members (assumed to be one for each covered employee, on average).

Practical Point: For the PCORI Fee due on July 31, 2013, transition rules allow plan sponsors to use any reasonable method to calculate the average number of individuals covered during the plan year being reported.

• Is the PCORI Fee deductible for federal income tax purposes? Yes, when paid by an employer as an ordinary and necessary business expense.

Under the federal Affordable Care Act ("ACA"), a group health insurer or an employer sponsoring a group health plan must notify current employees about the ACA Health Insurance Exchanges by October 1, 2013 and revise its COBRA election notices for use in 2014. These notices apply to current and future employees, in addition to any continuation of coverage that begins after 2013.

How Must an Employer Notify its Employees about the ACA Health Insurance Exchanges? In the near future, most employers will have to give two notices about the public health insurance exchanges created under the federal Affordable Care Act:

1. Exchange Notice. Nearly all employers must notify their employees about the availability of coverage after 2013 through a public health insurance exchange (an "Exchange Notice"). An Exchange Notice must be given to current employees before October 1, 2013. If an employee is hired on or after that date, the notice must be given within 14 days after the hire date.

Practical Point: The Exchange Notice requirement is not limited to large employers, or employers who offer health plans.

2. Revised COBRA Notice. Employers that are required to offer continuing group health coverage under the federal law called "COBRA" must revise the plan's COBRA election notices to describe a public health insurance exchange as an alternative to continuing the employer's coverage at the covered person's expense. The revised COBRA notice must be used for COBRA continuation coverage that begins after 2013.

Q: What does an employer need to know about the Exchange Notice?

• What employers must give the Exchange Notice? Employers governed by the federal Fair Labor Standards Act ("FLSA") must give the Exchange Notice.
• Which employers are governed by the FLSA? The FLSA applies to nearly every employer that does more than a half million dollars of business annually; and certain other employers, regardless of their revenues.
• Who must receive the Exchange Notice? All full-time and part-time employees of the employer, whether or not they are eligible for any health plan sponsored by the employer. The Exchange Notice need not be given to any former employees or dependents of employees.

Practical Point: The FLSA, which also includes overtime rules, has a broader definition of employee than the one used for payroll tax purposes. Some individuals working as independent contractors may be considered employees under the FLSA, if they are economically dependent on the employer. This means that an employer should give the Exchange Notice to individual contractors who work a high percentage of their time for the employer, to avoid missing anyone who may be an employee under the FLSA.

• What must be included in the Exchange Notice? The Exchange Notice must include the following information:
  • A statement that a new public health insurance exchange exists, a brief description of the services provided by the exchange, and contact information for the exchange;
  • A statement informing the employee that, if he or she purchases a qualified health plan through the exchange, the employee may be eligible for a premium tax credit under section 36B of the Internal Revenue Code; and
  • A statement informing the employee that, if the employee purchases a qualified health plan through the exchange, (a) the employee may lose the employer contribution (if any) to any health plan offered by the employer and (b) all or a portion of any such contribution may be excludable from income for federal income tax purposes.

Practical Point: The U.S. Department of Labor has made available two model forms of Exchange Notice, one for employers that sponsor a group health plan and another for employers that do not. The model notice for employers with a health plan includes an extra page on which the employer may provide information about its plan that an employee would need to apply for coverage through an exchange. The model notices are available on the Department's website at www.dol.gov/ebsa/healthreform. The model notices refer to an exchange as a "Health Insurance Marketplace."

Q: How must a health plan's COBRA election notice be revised for ACA?

A health plan's COBRA election notice must be revised to advise an individual who is eligible to purchase continuing health coverage under COBRA that (a) a new coverage alternative is available after 2013 through a public health insurance exchange and (b) a tax credit may be available to help pay premiums for coverage purchased on the exchange.

Practical Point: The U.S. Department of Labor's model COBRA notice, which is available on the Department's website at www.dol.gov/ebsa/healthreform, now includes the following revised language referring to an exchange (referred to as the Health Insurance Marketplace):

• The first paragraph of the model COBRA Notice has been revised as follows:

  "This notice contains important information about your right to continue your health care coverage in the [enter name of group health plan] (the Plan), as well as other health coverage alternatives that may be available to you through the Health Insurance Marketplace. Please read the information contained in this notice very carefully."

• This new paragraph has been inserted at the end of the model COBRA notice:

  "There may be other coverage options for you and your family. When key parts of the health care law take effect, you'll be able to buy coverage through the Health Insurance Marketplace. In the Marketplace, you could be eligible for a new kind of tax credit that lowers your monthly premiums right away; and you can see what your premium, deductibles and out-of-pocket costs will be before you make a decision to enroll. Being eligible for COBRA does not limit your eligibility for coverage for a tax credit through the Marketplace. Additionally, you may qualify for a special enrollment opportunity for another group health plan for which you are eligible (such as a spouse's plan), even if the plan generally does not accept late enrollees, if you request enrollment within 30 days."

Do you have questions? Please contact Maslon's Employee Benefits Group if you have questions or would like more information about how the Affordable Care Act may impact your company.