Key Employees?
What is the definition of a key employee? It depends on whom is asked.
According to the U.S. Internal Revenue Service (IRS), the term “key employee” serves as a classification to assess whether qualified retirement plans are disproportionately slanted to an organization’s highly remunerated employees. Per the IRS, a key employee is an employee who:
Earns over $180,000 (as at 2019), or
Owns 5% or more of the enterprise through direct ownership or family attribution rules, or
Owns 1% or more of the enterprise, generating over $150,000 for the financial year.
Employees who fail to meet the criteria above are considered to be “non-key employees.”
When constructing the Asset Purchase Agreement (APA) the seller and I defined it as employees that were critical for the operation of the business. This unfortunately led First Bank of the Lake to request that all of these Key Employees fill out an SBA form 1919. This form is a background check used by the SBA to determine eligibility for the SBA program. To comply with this request would require notifying employees before close, which was a dealbreaker for the seller.
The bank’s definition at one point was if they manage the day to day, they are a key employee. After multiple back and forth discussions with the bank, I came to the conclusion it was best to remove the key employees from the APA before it was signed. This took this point of contention out of the discussion, and frankly after learning of the IRS definition makes sense. None of my soon-to-be employees fit the IRS definition.
These employees are all critical to business, and since the APA is only getting signed less than one week before close, it’s not like there is much of a risk of them leaving.
The countdown to closing is really short, with it scheduled for two days from now. I am really excited about this opportunity, and can’t wait to get started.
Good luck closing today!