SECURE 2.0: New Distribution Options

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As part of our ongoing exploration of the change to retirement plans under SECURE 2.0, this advisory takes a closer look at the new distribution options. Beyond required distributions, plan sponsors have had several choices for when to allow distributions from defined contribution retirement plans. Common distribution options include at separation from service, death, disability, once the participant reaches age 59 1/2 or normal retirement age (often 65), as well as hardship distributions and loans. SECURE 2.0 creates several more distribution options, most of which are optional. As there are several changes and many are optional, it is important that plan sponsors take time now to decide which will be added to a retirement plan. Even though plan amendments are not immediately required, coordination with administrators, legal counsel and other service providers will help minimize the compliance risks.

New Options

The following chart provides some of the most important information about each distribution option, including whether adding the distribution option is voluntary and when it goes into effect.

Distribution OptionSummaryAmountIs Repayment Permitted?Is the Provision Optional?Effective Date
Federally Declared Disasters  For presidentially declared disasters, there is no longer a need to wait for IRS to issue guidance. Instead, once the disaster is declared, a distribution is permitted.  Up to the lesser of (a) $22,000; (b) the amount needed because of the disaster; and (c) account balance.  Yes, over three years following distribution date.No1/26/20
Emergency Personal Expenses  The distribution must be for a necessary personal or family emergency expense. Participants must wait three years between distributions.  Up to the lesser of (a) $1,000 and (b) the account balance, if less than $1,000.Yes, over three years following distribution date.Yes1/1/24
Domestic Abuse and Violence  Participants who self-certify to having experienced domestic abuse or violence.  Up to the lesser of (a) $10,000 and (b) 50% of account balance.  Yes, over three years following distribution date.  Yes1/1/24
Terminal Illness  Those diagnosed with a condition expected to result in death within 84 months may take a distribution. The plan is permitted to rely on certification from a physician.  No additional restrictions beyond the plan’s existing restrictions on distributions.SometimesYes1/1/24
Long Term Care Insurance Policy  For participants who obtain long term care insurance, some or all of the premium can be paid with their retirement plan account balance.Up to the lesser of (a) the amount of the long-term care; (b) $2,500 (adjusted annually); and (c) 10% of vested account balance.  NoYes12/29/25

SECURE 2.0 also creates the option for emergency accounts, beginning January 1, 2024. These emergency accounts are effectively non-retirement savings accounts within defined contribution plans that allow for pre-tax savings that are more readily available in an emergency. Participants in the retirement plan must be eligible to make contributions to the plan and cannot be a highly compensated employee. Contributions are treated as Roth contributions and subject to matching contributions from the employer. The amount a participant can contribute each year will depend on the amount already in the emergency account. Generally, contributions can be in an amount equal to 3% or less of compensation each year. However, the account balance cannot exceed $2,500, unless the plan sponsor sets a lower maximum. Plan sponsors who allow emergency accounts can also choose to automatically enroll eligible participants in an emergency account. Once contributions are made, the investment of the emergency fund is more limited than other assets of the plan. Each year participants can take up to four distributions without fees and additional distributions can be subject to reasonable fees.

Next Steps

With many of these options first available in the coming plan year, now is a prudent time to start the decision-making process on whether to incorporate the optional provisions. These new options are technical, and this summary covers only the most prominent aspects of the distribution provisions. A discussion with your recordkeepers, administrators and legal counsel now can help you make an informed decision that enables compliant administration of the new options.

DOL Proposes to Increase Salary Threshold Required for Most White-Collar Exemptions

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Update: On April 23, 2024 the U.S. Department of Labor issued a final rule raising the salary threshold for exempt employees starting July 1, 2024. Read more about the potential impact to businesses in our latest update.

On August 30, 2023, the U.S. Department of Labor issued a new proposed rule that would change the required salary threshold for many salaried exempt employees. Under the proposal, the guaranteed salary that most employees must receive to qualify as exempt from the overtime rules will increase dramatically, to over $55,000 annually.

Under the Fair Labor Standards Act, employees who work in executive, administrative, professional, and certain computer positions must generally meet both the salary basis test and the job duty requirements to be classified as exempt from the overtime rules. In addition to being paid on a salary basis (which means there can be no deductions from salary, subject to certain limited exceptions), the threshold salary is currently $684 a week, amounting to $35,568 annually. The proposed rule seeks to raise the threshold for salaried employees significantly to $1,059 per week, or $55,068 annually—an increase of approximately $20,000 per year.

In addition, the new proposal would increase the total annual compensation threshold for exempt highly compensated employees from $107,432 to $143,988 annually—an increase of more than $36,000 per year. With these changes, the Department of Labor also proposes to add an automatic updating mechanism to increase these salary thresholds every three years based on available earnings data. No changes are proposed to the duties tests necessary to qualify for one of these exemptions.

After the proposal is published, the public will have 60 days to comment on the proposed rule. If the proposal is accepted as currently written, it will mean significant changes for employers in compensation structure, as more employees nationwide will qualify for overtime pay unless their salaries are increased over the new threshold.

Employers should immediately review their workforces to determine what changes, if any, may be necessary if the proposal is adopted as currently written. Possible considerations include:

  • raising the salary of employees who meet the duties test to at least $55,068 annually to retain their exempt status;
  • converting employees to non-exempt status and paying the overtime premium of one-and-one half times the employees’ regular pay rates for all overtime hours worked; or
  • converting employees to non-exempt status and eliminating or reducing the amount of overtime hours worked by such employees.

Similar considerations should be undertaken with highly compensated employees. While it is wise to review pay practices proactively and identify potential changes that may become necessary, employers may wish to continue to monitor developments prior to actually implementing changes. As employers may recall from the most previous instance in which a major overhaul of the salary basis regulations was proposed, in 2016, significant changes can occur between the announcement of a proposed rule and the ultimate adoption of the final regulation.

Employers are encouraged to consult with legal counsel to discuss their options and strategies for implementing these changes, if necessary. Varnum’s Labor and Employment Practice Team stands ready to assist employers with any questions or concerns they may have about this proposed rule.

Preparing Automotive Parts Suppliers for a Potential UAW Strike

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Members of the United Auto Workers (UAW) union recently voted overwhelmingly to authorize a strike against General Motors, Ford, or Stellantis if the ongoing negotiations regarding a new labor contract fails. If your company is a parts supplier for any of these three automobile manufacturers, you should be aware that a UAW strike may lead these manufacturers to attempt to avoid or delay performance under their supplier contracts. A strike could therefore present issues that significantly effect contractual relationships in the automotive industry, including contracts through which your company supplies parts to the automobile manufacturers and contracts with your company’s suppliers.

With the potential of a UAW strike looming, it is essential for automobile parts suppliers to prepare to navigate this situation. If you are a supplier, the most important action that you should take is to ensure you fully understand the contractual rights between your company and both your customers and your suppliers. With a full understanding of how the strike affects your contractual rights, you can position your business to effectively manage the potential implications a UAW strike may have on the industry.

If you supply parts to one of the three Detroit automakers involved in the UAW negotiations – General Motors, Ford or Stellantis – your contract with that company may have provisions that alter each parties’ rights in the event of a strike. These provisions could include, but are not limited to, force majeure clauses, termination clauses, indemnification agreements, and limitation of liability clauses. You should ensure that you understand all rights and obligations under each agreement that you have with these three companies. An analysis of how those rights and obligations could be impacted can help your company analyze its options and the associated risks if the current UAW negotiations result in a strike.

In the same way that the three Detroit Automakers may attempt to leverage provisions of their supplier agreements to cancel, delay, or reduce orders, your company may be entitled to invoke contractual provisions that are contained in your contracts with your suppliers in order to reduce your exposure or prevent losses. You should be aware of your options under each supplier agreement and be prepared to analyze the impact that enforcing those provisions may have on both the immediate and long-term future of your company.

Given the uncertainty surrounding the immediate future of the automotive industry, strategic preparation is critical to ensuring your business is able to navigate this situation. If you have any questions or concerns regarding the impact the impending strikes may have on your contractual rights or obligations, Varnum’s experienced automotive supply chain attorneys are available to assist with contractual analysis and provide tailored guidance and support to protect your interests.

Streamlining M&A Transactions: New Broker-Dealer Exemption Empowers Intermediaries

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As a part of the Consolidated Appropriations Act of 2023, President Biden signed into law several provisions aimed at promoting private mergers and acquisitions (M&A) activity by easing the regulatory burden faced by M&A intermediaries. The new law grants additional broker-dealer registration exemptions for M&A intermediaries engaging in M&A transactions involving certain qualified privately held companies. This new exemption took effect on March 29, 2023 and represents a significant change from previous M&A intermediary qualifications in the M&A space.

For background, an M&A intermediary (or M&A advisor) is a professional or firm that facilitates and acts on behalf of companies in the process of buying, selling, merging, or acquiring other companies. M&A intermediaries can undertake a wide range of services in order to help clients navigate the various stages and strategic decisions involved in a potential M&A transaction. M&A intermediaries can take several different forms, including investment banks, boutique advisory firms, business brokers, and legal or financial consulting firms, and provide a wide range of services at various levels that can include business valuation, deal identification, deal structuring, negotiation, due diligence, regulatory compliance, and integration planning.

Before enacting the new exemption, M&A intermediaries facilitating the sale or purchase of businesses were subject to a more rigorous regulatory framework enforced by the Securities and Exchange Commission (SEC). The prior framework required M&A intermediaries to register as broker-dealers with the SEC, imposing various registration requirements, as well as various licensing and disclosure obligations. These requirements often proved to be significant impediments to engaging in M&A transactions for potential parties.

This summary explores the details, implications, and potential benefits to M&A intermediaries.

The New Exemption

In recent years, the SEC has recognized the need to streamline onerous obligations and make the regulatory environment for M&A intermediaries more accessible and efficient. As a result, these newly adopted exemptions provide significant relief to M&A intermediaries from a large portion of the previous registration and compliance requirements. In order to qualify for the new exemption, M&A intermediaries must meet a specific set of conditions, including, but not limited to:

  1. Deal Size: The exemption applies to transactions involving privately held companies with (i) an enterprise value of $250 million or less or (ii) a prior-year EBITDA of $25 million or less.
  1. Transaction Structure: The exemption covers various transaction structures, including equity purchases, asset purchases, mergers, and similar business combinations.
  1. Active Control: The buyer or group of buyers involved in the proposed transaction must have the ability to actively manage and operate the target company or the assets acquired through the transaction.
  1. Limited Compensation: M&A intermediaries must receive transaction-based compensation, which cannot be in the form of payment in securities of the buyer or the target company. Typically, this means a standard success fee or commission.

Additional Exemption Limitations

In addition to the limitations and requirements mentioned above, there are several activities that M&A intermediaries must refrain from engaging in to qualify for the exemption. An M&A intermediary cannot:

  1. Have control/custody of a buyer or target company’s funds or securities;
  1. Form a consortium of potential buyers;
  1. Hold or provide financing for a transaction;
  1. Obtain or facilitate financing for a transaction without full disclosure to all parties involved, including the lender;
  1. Facilitate a transaction involving a shell company;
  1. Engage in a public offering of securities as part of the transaction;
  1. Acquire authority to legally bind either the buyer or the target company;
  1. Represent both the buyer and seller without written consent from each party.

Participating in any of the aforementioned activities will disqualify an M&A intermediary from qualifying for the new exemption. Some of these areas fall into gray areas, and specific activities should be discussed with an attorney on a case-by-case basis.

Implications and Benefits

The new exemption for M&A intermediaries provides several benefits and potential implications for all participants in a proposed M&A transaction:

  1. Regulatory Relief and Transaction Efficiency: M&A intermediaries who qualify for the exemption will no longer be required to formally register as broker-dealers with the SEC. Removing this regulatory burden and its associated costs allows M&A intermediaries to focus more on executing potential transactions without the distraction of burdensome regulatory requirements. This is expected to lead to more flexible and expeditious operations by M&A intermediaries, resulting in smoother deal negotiations and closures. 
  1. Access to Broader Markets: The exemption provides breathing room for smaller M&A intermediaries who may have found it challenging to comply with extensive broker-dealer registration requirements. Additionally, this should lead to broader market access, encourage competition, and enhance deal flow across various sectors.
  1. Market Liquidity: Simplifying the regulatory landscape is expected to increase market liquidity. This should enable private companies to explore more strategic options and capital formation, contributing to more widespread economic growth across many market sectors. 

The new exemption for M&A intermediaries from federal broker-dealer registration signifies a meaningful step toward market efficiency by streamlining the transaction process, fostering competition, and enhancing market liquidity. This does not, however, imply that the exemption opens the floodgates to a new “wild west” of M&A intermediary activity. As mentioned earlier, several disqualifying activities and narrow requirements must still be met to qualify for this exemption, and state-level requirements should always be considered. 

The above is a high-level summary of the new exemption, and there are several details and excluded activities that may result in a registration requirement. For further discussion and answers to any questions, please reach out to any member of Varnum’s M&A Team.

Good Cap Table Hygiene: How to Avoid Dooming Your Startup Before It Ever Gets Off the Ground

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You’re a startup company founder with a great idea or product. After bootstrapping through the early days, and perhaps early funding from friends and family, you’re ready for more significant investment. Before you even get to discuss term sheets with your potential investors, the investors ask for the company’s capitalization (or cap) table—and after getting it, the investors suddenly lose interest. Discussion doesn’t even get to negotiation, and the investors move on. What just happened? Well, maybe your company’s cap table was the problem—was it in good shape and did it make sense? There are some common mistakes founders make with respect to cap tables. Here’s how to avoid them with good cap table hygiene.

A cap table is a record providing details on who has what ownership in a company, including the number and types of securities. At the most basic level, the cap table shows how much equity has been issued, how much is still available and who owns what portion of the company. At a more strategic level, the cap table can and should reflect who the company owners are, how the owners relate to one another and the business of the company, how control by the owners is achieved, maintained or protected, how value of the company is now and in the future shared by the owners, how much room for additional owners there is, and more. In short, while a cap table is just a record of company ownership, it is much more than just an exercise in paperwork and administration: it is a framework for the story of what company ownership means now and in the future. Founders would do well to pay attention to what story their company’s cap table communicates.

A cap table may be simple to begin with when a company has a single owner holding all of the securities of the company. But a cap table can become complicated quickly as a company grows and securities are used more broadly for different purposes – like securing talent, incentivizing performance, and raising capital. While this complexity is easily identifiable when investors come on board, even so-called simple cap tables present unappreciated nuances. The cost of not thoughtfully managing your company’s cap table is not just confusion about your ownership or the value of your investment. It may also include scaring off potential investors who translate a confused, muddled, or incomplete cap table as a “risky” or, worse yet, “bad” investment opportunity. Without a purposeful understanding of the strategy underlying your cap table and a clear and accurate presentation of that, your potential investor may just decide to move along to the next promising company.

Here are three common mistakes company founders sometimes make with regard to cap tables:

1. Failure to document and track your company’s capitalization.

Founders are busy people on whom falls most if not all of the tasks of owning and operating a startup company. In the midst of all the competition for a founder’s attention, creating and maintaining the cap table can easily be dismissed as a mere administrative task that can be done later. Even those who appreciate the importance of tracking issuances or promises to issue securities may not be doing so in a format that helps them substantively understand the current and future value or strategic future of the company. If you don’t track it, especially in a form where you can see the big picture, you might give away more securities than you should, or to the wrong people, or for the wrong reasons.

2. Commitments for securities without documenting.

A cap table provides detail on company ownership, but company ownership is not created by a cap table. The issuance of securities to owners reflected on a cap table should be based on documentation of the issued securities. Have you been promising someone options or shares, maybe even included them on your cap table? You better have the paperwork evidencing the actual issuance of those options or shares. If there is no evidence as to what securities have actually been issued, it’s a red flag for investors who can’t trust what the cap table says about who else owns part of the company—and what that means for their prospective investment.

3. Not appropriately valuing the equity.

This is a common and costly mistake. A new startup company doesn’t have any cash flow, so the founders pay with what they have readily and “freely” available: securities of the company. It can be very easy to give away 100 shares (the value of which is speculative) rather than give someone $1,000 in cash. It is a simple matter of paperwork to generate 100 shares—just print it out a piece of paper with some fancy doilies! But $1,000 in cash? If you fail to maintain a clear understanding of what the value of those shares is, not just now but in the future, you could be betting against your own company. Those recipients could end up owning a disproportionate share of the company, a problem which may prevent future investment.

Even though these and other cap table problems are often fixable, you can end up wasting valuable time (and money) getting your cap table back on track. Why not avoid them instead? Your company doesn’t need to be doomed from the start. Get serious about your company’s cap table—create it, maintain it, track it, and thoughtfully and critically use it.

Legal Rights When EGLE Requests Removal of Sandbags on the Great Lakes Shorelines

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Just a few years ago, property owners on the shorelines of the Great Lakes took measures to protect their property from high water levels. Many people installed sandbags, usually at significant cost. The sandbags were often permitted under Part 353, Sand Dunes Protection and Management, or Part 325, Great Lakes Submerged Lands, of Michigan’s Natural Resources and Environmental Protection Act. The Michigan Department of Environment, Great Lakes, and Energy (EGLE) is now requiring the removal of those sandbags, including sending some property owners a compliance communication if they have not yet removed the sandbags.

EGLE’s actions in requiring the removal of sandbags has drawn criticism from many property owners. One obvious concern is that the removal of the sandbags may cause more damage to dunes and the environment than simply leaving them in place. Some property owners question the feasibility of removing sandbags, especially those that have been buried by sand or that have sunk below the surface. In some situations, structures (such as steps) have been built over sandbags. Others have concerns that water levels may rise again or that the sandbags are still actively protecting their property from eroding due to the unique geographic features of their property.  

What makes the situation particularly ironic (and bothersome) for some property owners is that they did not want the sandbags in the first place. Some property owners sought permits for structures such as sea walls that would have permanently protected their property, even though such structures are far more expensive than sandbags. But EGLE denied some of those requests and instead told the property owners to install the purportedly less intrusive sandbags. Now EGLE is requiring the removal of the very solution it preferred, even though removal will certainly require disruption to the dunes while property owners with sea walls are allowed to keep their structures.

Throughout the years, Varnum has represented many property owners to help them protect their property on the shoreline of the Great Lakes and to assist them in navigating their legal rights with EGLE. If you need guidance navigating your legal rights when EGLE sends you a compliance communication, requests removal of your sandbags or issues you a Notice of Violation (NOV), please contact one of our environmental attorneys and we would be glad to help.

Is Collaborative Divorce Right for You?

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Divorce is often associated with feelings of animosity, bitterness and lengthy, expensive courtroom battles. However, there is an alternative, less adversarial approach to ending a marriage – collaborative divorce. In collaborative divorces couples work together with their professionals to reach a settlement in a team approach. Unlike traditional divorce proceedings, collaborative divorce encourages a problem-solving mindset rather than an adversarial one.

The key features of a collaborative divorce include the following:

A Collaborative Team

Each spouse hires a collaborative attorney, who is specially trained in this approach, and assembles a team that may include financial experts, child specialists and/or therapists. This multidisciplinary team provides guidance and support throughout the process.

The Collaborative Agreement

At the start of the process, all team members sign a Collaborative Agreement in which both sides commit that neither will file anything in court until a final agreement is reached. If at any time the negotiations break down or either party abandons the process, all members of the team must withdraw from the case. This can be a harsh consequence, which often motivates people to stay committed to the collaborative process.

Transparent Communication and Disclosure of Assets

In collaborative divorce, all parties commit to open and honest communication along with efficient and full disclosure of financial information. This fosters an environment of trust, where concerns and interests can be expressed freely without fear of judgment or retaliation.

Interest-Based Negotiation

Instead of focusing on positional bargaining, where each party advocates for their demands, collaborative divorce focuses on identifying and addressing the underlying interests and needs of both spouses. This approach allows for creative solutions that may not be possible in a courtroom setting.

Out-of-Court Settlement

Through a series of negotiation sessions, the collaborative team helps the couple work towards a comprehensive and mutually satisfactory settlement agreement. This agreement covers all aspects of the divorce, such as property division, child custody and parenting time, child support, spousal support and other relevant issues.

Preservation of Relationships

Collaborative divorce prioritizes maintaining a respectful relationship between divorcing spouses, which is particularly crucial when co-parenting children. By fostering cooperation this process reduces the likelihood of long-lasting animosity and allows for healthier future interactions.

Privacy and Confidentiality

Unlike traditional divorce proceedings that take place in a public courtroom, collaborative divorce proceedings are private and confidential. This confidentiality provides a safe space for open communication and reduces the potential for public exposure of sensitive information. Though couples going through a traditional divorce may also get the benefits of privacy and confidentiality in a mediation, they will likely not have the transparency and interest-based negotiations utilized in a collaborative divorce. The mediation process in a traditional divorce may be less effective as well, if it is scheduled within the constraints of a court’s scheduling order before all financial disclosures are complete or conducted with shuttle-style diplomacy rather than a facilitative approach.

Emotional Support

Collaborative divorce recognizes that the emotional well-being of the parties involved is as important as the legal aspects of the process. All divorces involve some emotional trauma – whether or not there are diagnosable mental health issues. With the help of therapists or divorce coaches, individuals receive the emotional support needed to navigate the challenging emotions associated with divorce.

Cost-Effective

By avoiding lengthy and contentious court battles, collaborative divorce can often be a more cost-effective option. The process typically requires fewer hours of legal representation, resulting in lower attorney fees and overall expenses. In addition, couples learn problem-solving skills which often helps reduce post-judgment legal interactions.

Collaborative divorce offers a peaceful and constructive path to ending a marriage, allowing couples to move forward with their lives while minimizing conflict and stress. This approach can be beneficial to divorcing spouses, their children and extended families. However, not all cases may be suited for the collaborative process and may require court intervention.

Varnum’s Family Law Team can help guide you through the various options to help determine what may be best for your particular circumstances.

NLRB Sets the Stage for Increased Scrutiny of Work Rules and Employee Handbooks

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In a troubling decision released yesterday, the National Labor Relations Board (the Board) issued a new standard for reviewing workplace rules that do not expressly prohibit activity protected under the National Labor Relations Act (the Act) and reversed the frameworks set forth in the 2017 Boeing case. The new standard evaluates whether a reasonable worker who is “economically dependent on the employer” would interpret the rule to prohibit organizing or engaging in concerted activities. This new standard applies to all work rules and employee handbooks in both unionized and non-unionized workplaces.

A work rule is unlawful under the Act when the rule has a reasonable tendency to chill employees’ exercise of their rights under the Act. Under the new Stericycle standard, an administrative law judge (ALJ) or the Board will interpret the rule from the perspective of an employee who is economically dependent on the employer. Any ambiguity in the rule will be construed against the employer. If an economically dependent employee could reasonably interpret the rule to restrict or prohibit concerted activity under Section 7 of the Act—even if a different, reasonable and lawful interpretation is possible—the rule is presumptively unlawful and invalid. The employer’s business reason for adopting the rule, for example, safety or protection of confidential information, does not matter. If the rule is found to be presumptively unlawful, the employer’s only defense would be to establish that that the its “legitimate and substantial business interest” could not be accomplished by a more narrowly tailored rule.

In light of the decision in Stericycle, employers should review their employee handbooks, policies, procedures, employment agreements and other workplace rules to ensure that such documents are narrowly tailored to effectuate the purpose of the intended rules without creating an opportunity for argument that the rule has a chilling effect on concerted activity. 

Please contact your Varnum attorney if you have any questions or for assistance with reviewing employee handbooks, policies, procedures, employment agreements and other workplace rules.