COVID-19: A New Relief for EMI Option Holders

Late on Friday, 26 June 2020, with little fanfare, the Chancellor of the Exchequer tabled a new clause for inclusion in the Finance Bill 2020 (FB 2020) during its Report stage in the House of Commons. It addresses a key concern around furloughed employees who hold enterprise management incentive (EMI) options (as discussed previously on this blog), and confirms that EMI optionholders will not lose the beneficial tax status of their options as a result of being furloughed or working reduced hours because of coronavirus (COVID-19).

The new clause is very welcome as many EMI optionholders and their employers have been waiting anxiously for the government to confirm its position in this area. EMI options are widely used – according to HMRC figures, outlined in the Tax Information and Impact Note (TIIN) accompanying the new clause, in 2018-19 alone, more than 34,000 individuals were granted EMI options and approximately 12,000 companies were operating EMI schemes. However, there is a potential sting in the tail lingering as the impact of the concession on the state aid approval for the EMI scheme is not yet clear – unfortunately it is not quite time to breathe a total sigh of relief as a result.

The CJRS and furlough

The government’s economic response to the COVID-19 pandemic has focused on helping businesses ‘bridge’ the crisis by protecting cash flow and liquidity. That is the policy logic that sits at the heart of the Coronavirus Job Retention Scheme (CJRS). Very broadly, the CJRS allows businesses that would otherwise be unable to maintain their workforce (because of the effect of COVID-19) to ‘furlough’ their employees, and apply to the government for a grant to cover 80% of monthly wage costs (up to £2,500). As of 28 June 2020, the government was paying the wages of more than 9.3m furloughed employees at a total cost of more than £25.5bn.

EMI working time test

While the CJRS is clearly designed to protect jobs, it has had unexpected and unintended implications. Paradoxically, one of the most concerning side-effects is on employee share schemes, and EMI in particular, also designed to incentivise and retain employees in a business. Under EMI schemes, provided the individual optionholder ultimately buys the relevant shares for an amount equal to at least the market value they had when the option was granted, no income tax or National Insurance contributions liability should arise.

However, one of the core qualifying conditions for EMI is that optionholders are required to meet an ongoing ‘working time requirement’. In effect, this requires an employee to commit at least 25 hours per week (or if less, 75% of their total working time) to the employer company. Failure to satisfy the working time requirement is a ‘disqualifying event’ for EMI purposes meaning that the full tax benefits attaching to options can be lost.

The problem is obvious: CJRS furlough requires that an employee must not undertake any work for or on behalf of their employer, meaning that, without intervention, furlough will be a EMI disqualifying event.

A new concession

The EMI rules already contain some concessions where an employee would have been able to satisfy the working time requirement but for certain specified circumstances, including, for example, injury, ill health, disability, pregnancy or parental leave. Under the new clause, HMRC will accept that, with effect from 19 March 2020 and until 5 April 2021, “if an employee with share options granted before that date would otherwise have met the scheme requirements but did not do so for reasons connected to the coronavirus pandemic, the time which they would have spent on the business of the company will count towards their working time”.

Subject to any issues that arise in connection with the concession in the context of EU State Aid, this welcome change should protect the valuable tax reliefs afforded under EMI for furloughed employees and those working reduced hours, meaning participants do not need to exercise options earlier than planned. Employers should check their EMI scheme rules to ensure that the change is effective for options they have granted and also to ensure that the lapse provisions attaching to options have not inadvertently been triggered (unfortunately in the latter case, the new concession will be unlikely to help depending on how the rules are drafted). They will no doubt also want to pass on the good news to optionholders.

Flexibility Act Makes Key Change to CARES Act Payroll Tax Deferral Incentive and Other Key Changes

Following up on our prior post (here), regarding the Paycheck Protection Program loans (“PPP Loans”), President Trump signed the Paycheck Protection Program Flexibility Act of 2020 into law (the “Flexibility Act”) on June 5, 2020. The Flexibility Act relaxes and modifies certain requirements to obtain PPP Loan forgiveness. Specifically, the Flexibility Act makes five main changes:

Payroll Tax Deferral. The CARES Act allows employers to defer the employer’s portion of social security tax deposits that are due between March 27, 2020 and December 31, 2020. However, the CARES Act originally specified that this deferral option ends when an employer obtains PPP Loan forgiveness. The Flexibility Act modified the CARES Act to provide employers the option to continue deferring these taxes, regardless of whether the employer individual obtains PPP Loan forgiveness. This modification also applies to self-employed individual who are eligible to defer their self-employment taxes.

Extended Forgiveness Period. Under the CARES Act and guidance issued thereunder, only expenditures made during the eight-week period beginning on the date that the PPP Loan proceeds were dispersed are eligible for forgiveness. The Flexibility Act modified the 8-week timeframe, providing that expenditures made up to 24 weeks after dispersal are eligible for forgiveness.

PPP Loan Term. Under the CARES Act, the non-forgiven portion of a PPP loan had a two-year term. The Flexibility Act provides that PPP Loan terms shall now be five years, instead of two. Notwithstanding, PPP Loans made prior to June 5, 2020 will still have a two-year term, unless the borrower and lender mutually agree to extend the term. In addition, the Flexibility Act now provides that interest on PPP Loans shall be deferred until the amount of loan forgiveness is determined. Continue Reading

The Geometry and Trigonometry of the Corporate Insolvency and Governance Bill – What’s the Next Pensions Angle?

Geometric ImagePart Two

Yesterday, we looked at the proposed new moratorium process and the implications for pension schemes. Today we consider the new restructuring plan process.


The Corporate Insolvency and Governance Bill (the Bill) is passing through parliament at the moment. Some of the measures included in the Bill are in response to the current pandemic and will provide temporary easements for company directors from an acute economic downturn. Other measures have been under consideration for a while, and will be permanent. Continue Reading

The Geometry and Trigonometry of the Corporate Insolvency and Governance Bill – What’s the Pensions Angle?

Stacked TrianglesPart One

The Corporate Insolvency and Governance Bill (the Bill) is passing through parliament at the moment. Some of the measures included in the Bill are in response to the current pandemic and will provide temporary easements for company directors from an acute economic downturn. Other measures have been under consideration for a while, and will be permanent.

Our restructuring colleagues provide some insights into the proposed new measures on their blog page.

The pensions/insolvency nexus has long been a complex interface. The key areas where the pensions and insolvency worlds collide in statutory terms are the employer debt regime under section 75 of the Pensions Act 1995 and the trigger events for entry to the Pension Protection Fund (PPF) under the Pensions Act 2004. Many readers will be familiar with these and may initially derive some comfort from the fact that, as currently drafted, the Bill makes no changes to either regime. However, appearances can be deceiving and the proposals contained in the Bill throw up some interesting pensions angles. Today and tomorrow, we will consider two of the new permanent measures, which could affect pension schemes. We start with a look at the new “moratorium” process proposed by the Bill. Continue Reading

New Electronic Delivery Option for ERISA Retirement Plan Information

Businessman workingThere is a new electronic delivery option for retirement plan sponsors who are looking for an easier and more efficient means of providing required plan information disclosures to plan participants and beneficiaries. Retirement plan administrators can now electronically notify participants and beneficiaries that certain disclosures are available on a specified website. In addition, retirement plan administrators can more easily directly deliver the disclosures by email. Participants and beneficiaries must be able to opt out of electronic delivery and to request paper copies of disclosures without cost. Notably, the new option is not approved for delivery of health and welfare plan disclosures at this time.

Background. Current rules for electronic delivery of documents date back to 2002, and many employers have found them difficult to utilize.

The 2002 rules allow employers to use electronic delivery only for employees who (a) are “wired at work” (i.e., those who could access electronic disclosures at their job sites and who utilized their employers’ electronic information systems as an integral part of their jobs), or (b) affirmatively consent to receive documents electronically. The consent requirements are difficult because they require advance disclosure and identification of all documents and identification of necessary hardware and software requirements. In addition, the consent must be updated if hardware and software requirements change. Continue Reading

Member Communications: Radio Ga Ga or Radio Silence?

Talk Radio Computer On Air Microphone Talker

On 29 April 2020, the Pensions Regulator (TPR) published guidance on communicating to members during the Coronavirus Disease (COVID-19) outbreak. TPR is placing the burden on pension plan trustees to discourage members from making rash decisions in relation to their pension savings that could have long-term effects. It will be interesting to see how The Pensions Ombudsman interprets the extent of this duty in due course.

The guidance highlights the importance of members being able to access member services and contact the scheme if they have any queries. TPR also stresses that where there are any delays or disruptions to services, members should be kept informed. Clearly trustees need to respond to member requests – however, it does not necessarily follow that a general mailing is appropriate at this time. There is a widespread concern that communicating with members during a financial crisis may actually encourage them to think about their pension options, when they might otherwise have left their savings well alone. We urge trustees to consider the best approach for their scheme – this could be a general broadcast or radio silence.  Continue Reading

COVID-19 Relief for Employee Benefit Plan Deadlines

The U.S. Department of Labor (DOL) recently announced deadline relief for employee benefit plan notices, disclosures or document deadlines that must be furnished between March 1, 2020 and 60 days after the announced end of the COVID-19 National Emergency (“Outbreak Period”), if the employee benefit plan and responsible fiduciary act in good faith and furnish the notice, disclosure, or document as soon as administratively practicable under the circumstances.  In addition, the relief set forth a guiding principle for plan fiduciaries: plans “should make reasonable accommodations to prevent the loss of benefits or undue delay in benefit payments and should attempt to minimize the possibility of losing benefits because of a failure to comply with pre-established timeframes.”

The guidance, Disaster Relief Notice 2020-21, issued by DOL’s Employee Benefits Security Administration (“EBSA”) on April 28, 2020, was closely followed by a final regulation, issued jointly by DOL and the Internal Revenue Service (“IRS”), extending timeframes a variety of requirements under the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “Code”).  The Final Rule, for Extension of Timeframes, was published in the Federal Register on May 4, 2020.

Forwarding Participant Contributions and Wage Withholding to Retirement Plans.  During the Outbreak Period, employers will be relieved of the obligation to transfer participant contributions and wage withholdings within the existing timeframes (by the earliest date that they can be segregated from general assets but in no later than the 15th day of the month following the month in which the amounts withheld from the participant wages) as long as they act in good faith and forward these amounts as soon as administratively practicable under the circumstances.

COBRA.  COBRA premium payments, generally required to be paid within 30 days of their due date, will be treated as timely if made within 30 days following the end of the Outbreak Period.  The Outbreak Period also will be disregarded with respect to the 60-day period that individuals who have lost health care coverage are given to elect continuation coverage under COBRA, the deadline for individuals to notify their plans of a determination of disability or COBRA qualifying event, and the date by which health plans, sponsors or administrators must provide COBRA election notices.

The extended deadlines for electing COBRA coverage and paying COBRA premiums appear to give individuals the flexibility to evaluate whether COBRA coverage is desirable (and affordable) after the end of the National Emergency and to elect and pay for coverage retroactively at that time.  The package of COBRA deadline relief may reduce – or complicate – the tide of COBRA litigation that some expect to result from the enormous number of coronavirus-related layoffs.

Special Enrollment Rights. The same flexibility applies to individuals who have lost health care eligibility or have become a dependent of an employee based on birth, marriage or adoption.  These individuals generally are permitted to enroll in health care coverage for which they are otherwise eligible outside of the regular enrollment period if they elect to do so within 30 days (or in some cases 60 days) of losing coverage.  With the relief provided, this decision (and, in theory, the accompanying payment) need not be made until after 30 (or 60) days after the Outbreak Period.

Benefit Claims.  Deadlines for benefit claims, appeals of adverse decisions, and requests for external reviews of decisions will be delayed so that they need not be filed until the end of the Outbreak Period.

Notices and Disclosures Delays in furnishing notices, disclosures or other documents required under Title I of ERISA or blackout period notices due during the Outbreak Period will not be treated as ERISA violations if they are furnished as soon as administratively practicable under the circumstances.

DOL Conformity with CARES Act and Other GuidanceNotice 2020-21 provides ERISA relief with respect to the plan loans and Form 5500 filings to conform to the measures under the Internal Revenue Code enacted by the CARES Act. It also extends relief to Form M-1 filing deadlines for multiple employer welfare arrangements.

IRS Guidance Provides Employers with the ability to offer A Second Open Enrollment Period for the 2020 Plan Year and Provides Greater Flexibility for Making Mid-Year Cafeteria Plan Elections

Providing much needed assistance to employees’ who were blindsided by COVID-19 and who were incapable of making health care coverage elections with COVID-19 in mind, the IRS on May 12, 2020, provided temporary relief that allows employers, during 2020, to expand the permissible reasons for employees to make prospective mid-year election changes to their health care coverage, and contributions to health flexible spending accounts (FSA) and dependent care assistance programs (DCAP), beyond what is currently permitted under the law.

Additionally, in separate guidance, beginning in the 2021, the IRS increased the maximum health FSA year-end carryover amount from $500 to $550 relating to any unused health FSA balance remaining at the end of a plan year. Continue Reading

IRS Reverses Course on the application of Qualified Healthcare Expenses to the Employee Retention Tax Credit, and Clarifies Credit Eligibility in the event of a PPP Loan Repayment

Email concept with laptop and girl handsIn our blog post dated May 7, 2020, we noted that the IRS Question and Answers regarding the Employee Retention Tax Credit (the “ERTC” & the “Q&As”) stated that an employer cannot claim an ERTC for qualified health care expenses, unless it also pays the employee other wages during the relevant time period. We further noted that, in our view, this interpretation may not be consistent with congressional intent.

Within hours of publishing our post the IRS reversed course and revised Q&As 64 and 65. Q&As 64 and 65 now state that employers can claim the ERTC for qualified healthcare expenses, regardless of whether the employee is paid qualified wages. In general, we believe that the IRS’s new interpretation of how qualified healthcare expenses are treated for purposes of the ERTC is more consistent with congressional intent than its previous interpretation. Continue Reading

Employee Retention Tax Credits – Q&As

Question marks lit upNew guidance issued by the US Internal Revenue Service in the form of Q&As posted on its website, clarify the Employee Retention Tax Credit (ERTC) provisions contained in the CARES Act. The guidance is more restrictive than anticipated, and employers may face difficult decisions about claiming the tax credits. Our latest publication explores this issue in more detail.