On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“Act”). The Act is a $787.3 billion package that consists of $308.3 billion in appropriations spending, $267 billion in direct spending and $212 billion in tax relief. The Act also contains provisions regarding executive compensation at institutions receiving funds from the Troubled Assets Relief Program (“TARP”).
After the Act’s passage, President Obama noted that, “The goal at the heart of this plan is to create jobs. Not just any jobs, but jobs doing the work America needs done: repairing our infrastructure; modernizing our schools and hospitals; and promoting the clean, alternative energy sources that will help us finally declare independence from foreign oil.”
For your convenience, set forth below is a brief summary of several of the key terms of the Act.
The Legislation contains a myriad of tax relief provisions aimed at individuals and families as well as at businesses.
At the center of the tax relief package is a tax credit for individuals equal to the lesser of 6.2% of earned income of the taxpayer or $400 ($800 in the case of a joint return). This tax credit will be available through 2010 for individuals making $75,000 or less (or $150,000 in the case of a joint return). The Act also contains a temporary increase in the earned income tax credit. Specifically, for taxable years 2009 or 2010, in the case of a taxpayer with three or more qualifying children, the earned income tax credit has been set at 45% for the family’s first $12,570 of earned income. Also, the Alternative Minimum Tax floor has been raised to $70,950, thus preventing many middle class families from having to pay such tax.
For individuals and families, tax relief comes in a variety of other forms as well, including relief relating to home purchases, higher education tuition and expenses and car purchases. For example, a new “American Opportunity Tax Credit” has been put in place for taxable years 2009 or 2010. This new tax credit allows individuals to receive up to a 100% tax credit for the first $2,000 of higher education tuition and related expenses1. This credit is available for four years of post-secondary education expenses (an increase from two years) and is phased out for individuals with a modified adjusted gross income of $80,000 (or $160,000 in the case of a joint return). Pell Grants have also been increased by $500 to $5,350 in 2009 and $5,550 in 2010.
The Legislation also contains a tax credit for a “first time home buyer” (i.e., an individual that has not purchased a home within the past three years). The credit is available to a first time homebuyer that is purchasing a principal residence during this year. The purchaser will receive an $8,000 tax credit that does not have to be repaid, unless the home is resold within three years of purchase.
The Legislation also contains tax incentives relating to the purchase of motor vehicles. Specifically, those who buy a new car, light vehicle (i.e., a light truck with a gross vehicle rating of not more than 8,500 pounds), recreational vehicle or motorcycle in 2009 can deduct state and local taxes, as well as excise taxes imposed in connection with the purchase. The deduction is limited to the tax on up to $49,500 of the purchase price of a qualified motor vehicle and is phased out for taxpayers with modified adjusted gross income between $125,000 and $135,000 ($250,000 and $260,000 in the case of a joint return).
Certain tax relief provisions in the Act are directed at businesses. For example, prior to the passage of the Act, businesses with current losses could offset profits made in the previous two years. Under the Act, businesses with gross receipts of $15 million or less will now be able to use losses to offset profits for the previous five years.
Further, businesses will be able to write off up to $250,000 for equipment purchases, such as computers and vehicles, made in 2009. This write off is phased out for businesses that spend more than $800,000 per year in capital expenditures. Additionally, an incentive has been added for businesses to hire unemployed military veterans and high school dropouts—a $2,400 per worker tax credit. The Act also contains tax credits for businesses that use electricity generated by wind and other alternative fuel sources.
In a last minute amendment added to appease the public outcry against the perception of banks using the TARP funds to pay excessive compensation and bonuses, the Act revises the limits on executive compensation contained in the original Emergency Economic Stabilization Act of 2008 (“EESA”), including drastic prohibitions on the payment of bonuses, retention payments or severance to the most highly compensated employees of banks and other institutions that accept, or have previously accepted, TARP funds.
The EESA contained two sets of executive compensation rules: one set, contained in Section 111 of the EESA, that is to be implemented by United Stated Treasury Department (“Treasury”) through agreements with institutions that accept TARP funds, and one set, contained in Section 302, that modified the tax rules limiting the deductibility of compensation. With one exception, the Act only modified the rules in Section 111 governing limits to be imposed by the Treasury.
As with the original Section 111, the new compensation limits apply only to institutions that accept TARP funds. However, where the original EESA drew distinctions based upon the type of TARP funds accepted—preferred stock investment versus direct sale of toxic assets—the revised Section 111 generally does not distinguish between the type of funds accepted. Moreover, there is nothing in the Act to indicate any change to the rule adopted by the Treasury under the original version of Section 111 that acceptance of TARP funds by one member of an affiliated group causes all members to be subject to the restrictions.
The original EESA imposed limits only on the “senior executive officers”, defined as the five most highly compensated officers of a TARP funds recipient (i.e., the officers whose compensation must be disclosed in the proxy of a public company, and the officers holding analogous positions in a private company). The revisions made by the Act impose even more stringent limitations on the senior executive officers, but also extend certain of the limitations to a larger group of highly compensated employees.
The principal changes in the rules with respect to the five senior executive officers (“SEOs”) are:
- An absolute prohibition on any form of bonus, incentive, or retention payment. The only permitted exception is for restricted stock that has a value that doesn’t exceed 1/3 of the executive’s base compensation, and does not vest while any obligation to repay TARP funds is outstanding. If the institution has received not more than $25,000,000 in TARP funds this limit applies only to the single most highly compensated SEO and not to all five. If the institution receives between $25,000,000 and $250,000,000 the restriction applies to all of the SEOs, and above $250,000,000 it applies to other employees as well as described below. There is an exception for bonuses paid under an employment agreement in effect on February 11, 2009. The grandfather clause does not refer to retention payments, but whether this was intentional or the result of hasty drafting is not clear.
- There is also an absolute prohibition on payment of any form of severance or separation pay to the SEOs, with no grandfather rule for existing contracts and no distinction based on the amount of TARP funds received.
- Compensation paid to the SEOs of any TARP funds recipient in excess of $500,000 per year is nondeductible under the revised version of Internal Revenue Code §162(m). Under Section 302 of EESA, this rule technically applied only to institutions that sold at least $300,000,000 in toxic assets in an auction organized by the Treasury, but in practice the Treasury also required institutions that accepted preferred stock investments to agree not to deduct compensation in excess of $500,000 per year. Contrary to some news reports, and to President Obama’s original statements, compensation paid to the SEOs in excess of $500,000 is not prohibited, but merely made nondeductible.
- All public TARP recipients must submit the compensation of its SEOs to an annual nonbinding shareholder referendum.
The following limits were extended from the SEOs to other highly compensated employees
- The prohibition on bonuses and retention payments applies to the SEOs and the ten next most highly compensated employees if the institution has received at least $250,000,000 in TARP funds, and to the 20 next most highly compensated employees if the institution has received at least $500,000,000. The Treasury is authorized to cover even more employees of individual TARP recipients if it determines it to be in the public interest.
- The prohibition on severance applies to the SEOs and the next five most highly compensated employees.
- The EESA rule requiring a clawback of bonuses based on materially inaccurate information is extended from the SEOs to the next 20 most highly compensated employees.
The following provisions of the Act are not limited to a specific group of executives.
- In addition to the EESA prohibition on incentive arrangements that encourage unnecessary risks, there is a prohibition on compensation arrangements that “encourage manipulation of reported earnings.”
- All recipients of at least $25,000,000 in TARP funds are required to have a compensation committee comprised entirely of independent directors.
- All TARP recipients are required to have a company-wide policy prohibiting excessive expenditures on luxury accommodations, office décor and transportation—no more private jets or Las Vegas excursions.
- The CEO and CFO of each TARP recipient must certify compliance with all of the executive compensation limits. The certification is filed with the SEC for public companies, and with the Treasury for private companies.
The new restrictions are equally applicable to institutions that had already received TARP funds before the Act was enacted. However, any institution that previously received TARP funds is permitted to escape the new rules by repaying the funds. The Treasury is also specifically directed to examine the compensation previously received by the senior executive officers and the next 20 most highly compensated employees of all recipients of the first round of TARP financing, and to “negotiate appropriate reimbursements” of excessive payments.
Pursuant to the terms of the Act, billions of dollars have been appropriated to various Federal government agencies for a variety of programs. Significant funding has been appropriated for infrastructure, transportation, health, education, energy, public housing, environmental clean-up, and science and space. For example, $176 million has been appropriated to the Department of Agriculture for its “Agricultural Research Service, Buildings and Facilities” account. The Department of Agriculture also will be receiving significant funding for watershed and flood prevention operations, watershed rehabilitation, rural development, biorefinery assistance, and others. Similarly, $150 million has been appropriated to the Department of Commerce for its “Economic Development Assistance Programs” and such funds will be used to “leverage private investment, stimulate employment and increase incomes in economically distressed communities.” Further, $4.7 million has been appropriated to the Department of Commerce for the “Broadband Technology Opportunity Program,” and $650 million has been appropriated for further implementation and administration of the digital-to-analog converter box coupon program. The Department of Justice received an appropriation in the amount of $225 million for its “Violence Against Women Prevention and Prosecution Programs,” and $2.765 billion for State and local law enforcement assistance.
Scientific programs also will receive significant funding. For example, $400 million will be available for NASA’s exploration program, $150 million for its aeronautics program and $50 million for cross agency support. Further, billions have been appropriated to the Department of Defense for operation and maintenance of the armed forces, plus $400 million for its “Defense Health Program” which is to be used for “energy efficient projects and to improve, repair and modernize military medical facilities in the United States and its territories.” Millions have been appropriated to the Department of Energy for studies relating to river and harbor flood and storm damage reduction. $16.8 billion will be available to the Department of Energy for its “Energy Efficiency and Renewable Energy Program,” a program that includes “Advanced Battery Manufacturing” grants, a “Weatherization Assistance Program” and an “Alternative Fueled Vehicles Pilot Grant Program,” among several others.
The Department of Interior is to receive millions for the “management, development and restoration of water and related natural resources and for related activities” while the Department of Transportation will receive $27.5 billion for highway infrastructure development. $200 million has been appropriated to the Federal Aviation Administration for, among other projects, modernizing aging air traffic control centers and the installation of airport lighting, navigation and landing equipment. The Act also provides $636 million for the Small Business Administration’s “Business Loans Program Account,” $6 million of which is for the cost of direct loans to be provided under the Small Business Administration’s Microloan program2, and $600 million for fee reductions and new loan guarantees.
The Act also provides for $53.6 billion for a “State Fiscal Stabilization Fund.” Governors will be required to used 81.8 percent of their portion of such fund for elementary, secondary and higher education. The funds must be used in a way to mitigate the need to raise tuition and fees or for modernization, renovation or repairs of facilities used primarily for instruction, research or student housing.
The foregoing is a short list of just some of the types of appropriations made under the Act. Among other agencies receiving similar appropriations for a wide variety of programs include the Department of Education, the Department of Homeland Security, the State Department, the Department of Housing and Urban Development, the Labor Department and Health and Human Services. Indeed, the Act literally contains hundreds of pages that detail how billions are to be appropriated among various Federal agencies.
In an attempt to monitor the new spending, the Act creates a new Recovery Accountability and Transparency Board (“Oversight Board”) to “conduct oversight of covered funds to prevent fraud, waste, and abuse.” The President is required to designate an individual to serve as Chairperson of the Oversight Board. Other members of the Oversight Board will consist of inspectors general from certain Federal agencies as well as other individuals designated by the President.
The Oversight Board has been given broad authority to conduct hearings and investigations. Among other topics, the Oversight Board will review whether contracts and grants using covered funds meet applicable standards and whether competition requirements have been satisfied in connection with the award of such contracts and grants. The Oversight Board will be required to submit quarterly and annual reports to the President and Congress and post all such reports on a website to be established by the Oversight Board.
The Legislation also establishes a five member Recovery Independent Advisory Panel. Each of the five members will be appointed by the President. The Panel will make recommendations to the Oversight Board “on actions the Board could take to prevent fraud, waste and abuse relating to covered funds.”
Further, governors, mayors or other chief executives on the State or local level that receive funds for infrastructure improvements will be required to deliver a certification that the applicable infrastructure project has received the full review and vetting required by law, and that the project is an appropriate use of taxpayer dollars. Also, such individuals will be required to deliver reports that detail amount of funding received, project/activities for which the funding was used, the estimated number of jobs created or retained, and information regarding contracts and subcontracts awarded.
Title II of the Act is entitled the “Assistance for Unemployed Workers and Struggling Families Act.” As its title indicates, the Federal government has devoted significant resources to assist unemployed workers and others in desperate need of assistance.
For example, Title II contains provisions extending, to December 31, 2009, unemployment benefits that were set to expire on March 31, 2009. Further, $9 billion has been allocated to a program to increase current average unemployment insurance benefits by $25.00 per week. Additionally, under the new law, the first $2,400 in unemployment benefits that an individual receives in 2009 will be exempt from federal income taxes.
In addition, a new fund will be established that will be known as the “Emergency Contingency Fund for State Temporary Assistance for Needy Families Program.” $5 billion has been appropriated for such program though the end of 2010. The program will consist of grants to States that will, in turn, provide money to the most needy. Also, payments made to families under the Supplemental Nutrition Assistance Program, formerly the food stamp program, will be increased by 13.6%.
The bill also includes a one-time payment of $250 to Social Security beneficiaries, disabled individuals, railroad retirees and veterans receiving benefits from the Veterans Affairs Department.
The Legislation also includes provisions to help certain jobless workers pay for health insurance under COBRA3. Under the Act, workers that were laid off between September 1, 2008 and December 31, 2008, will only have to pay 35% of their COBRA premium, with the balance being reimbursed by means of a payroll tax credit to the employer (in the case of a self-funded plan), the plan (in the case of a multiemployer plan) or the insurer (in the case of an insured plan). Individuals who were laid off between September 1, 2008 and February 17, 2009 and who did not sign up for COBRA will get an additional 60 days to do so and will be eligible for a subsidy. The assistance is available to those who have an adjusted gross income of up to $125,000 ($250,000 in the case of a joint return). A reduced subsidy is available for those having an adjusted gross income between $125,000 and 145,000 ($250,000 and $290,000 in the case of a joint return).
Both in Congress and throughout the United States, many differing opinions on the likely the impact of the Act can be heard. However, most will agree that the Act represents one of the most sweeping pieces of legislation passed since the days of the Great Depression.
The price tag for the new legislation has been set at $787.3 billion, and the federal debt ceiling has been raised to $12,104 trillion. We will continue to keep you apprised as the provisions of the Act are implemented.