On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (the “ARPA”) into law. Many of the provisions in this sweeping legislation bring changes to the employee benefits world of which employers should take note and which are summarized below.
The ARPA contains several new rules which impact COBRA benefits. These changes will allow workers and their dependents who lost group health coverage during the COVID-19 pandemic to temporarily receive fully subsidized COBRA coverage. The ARPA also allows the employer, insurer, or multiemployer plan sponsor who subsided the premiums to offset the cost by claiming a new federal tax credit. Below is a summary of the ARPA’s COBRA subsidy provisions.
Individuals Eligible to Receive Subsidy
The following individuals are eligible to receive the COBRA premium subsidy and are considered “Eligible Individuals”:
- Individuals who have lost medical coverage under a group health plan because the individual (or the individual’s family member) has been involuntarily terminated for reasons other than gross misconduct or a reduction of hours that would result in COBRA coverage between April 1, 2021 and September 30, 2021; and
- The individual is a qualifying individual and already enrolled in COBRA coverage on April 1, 2021, or enrolls in COBRA coverage during the “special enrollment period” described below.
Plans Subject to the ARPA Rules
All group health plans that provide major medical benefits subject to federal COBRA rules are subject to the ARPA COBRA rules. This includes self-funded and fully-insured plans, multi-employer plans, and governmental employer plans. Health care flexible spending accounts are not subject to the ARPA provisions.
Amount and Length of Subsidy
Eligible Individuals are entitled to receive a subsidy equal to 100% of the cost of COBRA premiums, and such subsidy is available from April 1, 2021 through September 30, 2021, if they are enrolled in COBRA coverage during that time. This also includes individuals who enroll during the “special enrollment period” as described below. The subsidy is tax-free to the individual receiving the subsidy. The subsidy expires prior to the September 30, 2021 deadline, if, before the date, the Eligible Individual’s maximum COBRA coverage period ends or if the Eligible Individual becomes eligible for coverage under another employer’s group insurance plan or Medicare.
Special Enrollment Period
Eligible Individuals who are not enrolled in COBRA as of April 1, 2021, including those who have made an election and later dropped COBRA and those who never made a COBRA election, are allowed a second window of time to enroll in coverage and obtain the subsidy. This window runs for 60 days after the Eligible Individual receives the appropriate notice.
While not required, the employer is also permitted under the ARPA to allow Eligible Individuals 90 days from the date of the notice to enroll in a different type of medical coverage option.
The ARPA imposes new notice requirements on group health plans so that Eligible Individuals are provided the information needed to enroll in the subsidized coverage. The ARPA requires that the following notices be sent (1) notice of availability of the subsidy, (2) notice of the extended election period for COBRA coverage; and (3) notice of the expiration of the subsidy. The federal government is required to issue a model notice within 30 days for the first two notices, and within 45 days for the notice of expiration of the subsidy. It is recommended that notices are not updated until the model notices are issued.
While employers (for self-insured plans and multi-employer plans) or insurance carriers (for fully insured plans) are responsible for the COBRA subsidy, the paying entity is entitled to take a federal tax credit against payroll taxes. The credit is fully deductible and, in anticipation of the credit, the credit may also be advanced, according to forms and instructions provided by federal agencies, through the end of the most recent payroll period in the quarter. The credits are provided each quarter in an amount equal to premiums not paid by the Eligible Individuals.
Temporarily Increased Dollar Limits for Contributions to Dependent Care FSAs
The ARPA increases the cap on dependent care assistance benefits. For the 2021 tax year, employers are permitted to increase the annual limit on contributions to Dependent Care FSAs from $5,000 to $10,500 (from $2,500 to $5,250 for married participants filing separate tax returns). Employers can adopt the increased limits through a retroactive plan amendment so long as the amendment is adopted before the end of the plan year in which it is effective (December 31, 2021 for calendar year plans).
Single Employer Pension Plan Provisions
The ARPA contains two funding relief items that benefit single employer pension plans. First, for plan years beginning in 2022, the amortization period for underfunded plans is extended to 15 years, rather than seven as previous allowed. Plan sponsors can make a retroactive election to amortize over the extended period for plan years beginning after December 31, 2018, 2019, and 2020. Amortization bases and shortfall amortization installments are also reduced to zero, allowing a “fresh start” for plans. These changes will result in a lower annual required contribution for plan sponsors.
Second, the ARPA extends the funding stabilization percentages that were scheduled to begin phasing out in 2021. Under the ARPA, the 10% interest rate corridor is reduced to 5% for plan years beginning in 2020 through 2025, the 5% per year expansion will be delayed to the 2026 plan year (and, accordingly, the 30% corridor is reached in the 2030 plan year), and a permanent 5% interest floor is established for the twenty-five year averages. The effect of these changes is that plans will be able to calculate the present value of benefits using a higher interest rate, and thereby improving its funding status. Plan sponsors may elect to defer the changes until 2022.
Multiemployer Plan Provisions
Arguably the most significant provision of the ARPA from an employee benefits perspective is the creation of the financial assistance program under the PBGC for troubled multiemployer pension plans. Eligible plans that apply for assistance will receive a lump sum payment sufficient to cover all benefits due through December 31, 2051, with no repayment obligation. Plans that receive the funds would be required to restore any previously cut or suspended benefits. There is no cap on the amount of financial assistance available. The PBGC is authorized to impose additional conditions on plans that receive the financial assistance, such as conditions on future accrual rates and retroactive benefit improvements.
In order to qualify for the financial assistance, the multiemployer plan must meet any of the following criteria:
- The plan is certified to be in critical and declining status in any plan year beginning in 2020 through 2022.
- The plan has previously been approved for a suspension of benefits under the MPRA.
- The plan is certified to be in critical status in any plan year beginning in 2020 through 2022, has a modified funding percentage of less than 40%, and the ratio of active to inactive participants is less than 2:3.
- The plan has become insolvent after December 16, 2014 and has not been terminated as of the enactment of the ARPA.
At this point, it is unclear what impact the financial assistance will have on a participating employer’s withdrawal liability. The bill originally included a provision stating that any participating employer that withdraws within 15 calendar years from the date the plan receives the financial assistance would not have any reduction in their withdrawal liability as a result of the financial assistance. This provision was removed from the final bill. There is a concern among practitioners that absent such a provision, there could be a race to the door from the struggling pension funds. It is expected that the PBGC will issue additional guidance this summer that will address withdrawal liability.
The financial assistance program will be funded out of the Department of Treasury’s general assets. In addition, the ARPA increases the PBGC premiums from $31 per participant in 2021 to $52 per participant beginning in plan years starting after December 31, 2030. The PBGC premium will be adjusted annually for inflation.
In addition to the creation of the financial assistance program, the ARPA also offers the following temporary funding relief for multiemployer plans without regard to whether the plan is eligible for the financial assistance:
- The plan may elect to retain the same funding zone status for plan years 2020 or 2021 that applied for the previous year. The plans are also not required to update their funding improvement or rehabilitation plan until the year following the designated year.
- If the plan is already in endangered or critical status, the plan may extend its funding improvement or rehabilitation plan for five additional years.
- The plan is allowed to amortize the investment and COVID-related losses for the first two plan years ending after February 29, 2020 over a 30-year period.
Changes to Code Section 162(m)
Just four years after making significant changes to Code Section 162(m) as part of the 2017 Tax Cuts and Jobs Act (the “TCJA”), Congress has again modified this provision of the Internal Revenue Code again in the ARPA. While the amendments to Code Section 162(m) in the ARPA are not nearly as extensive as those made by the TCJA, the changes are still significant for those companies subject to Code Section 162(m).
Code Section 162(m), as amended by the TCJA, generally bars public companies from deducting compensation in excess of $1 million paid to “covered employees” in a year. Currently, only a company’s chief executive officer, chief financial officer, and the next three most highly compensated employees are “covered employees” for a given year. In addition, once an individual becomes a covered employee, that individual remains a covered employee for all future years. Consequently, at least five employees of a company subject to Code Section 162(m) are covered employees each year.
The ARPA expands the definition of “covered employee” under Code Section 162(m) such that for tax years beginning after December 31, 2026, the next five mostly highly compensated employees of a company (after the CEO, CFO, and top three mostly highly compensated employees besides the CEO and CFO) will also be “covered employees.” As a result, beginning in 2027 for calendar year companies, at least ten employees will be covered employees for purposes of Code Section 162(m) each year. However, unlike individuals who become “covered employees” because they are a company’s CEO, CFO, or other top three mostly highly compensated employees, individuals who are “covered employees” because they are in the next five most highly compensated employees will only be “covered employees” for that year (i.e., who is a “covered employee” as a result of being in the next five most highly compensated employees will be re-determined with respect to each year and these “covered employees” do not retain their status from one year to tax year).
When the ARPA changes to Code Section 162(m) become effective, companies will have to be ready to separately track those individuals who become “covered employees” and remain “covered employees” in perpetuity and those individuals whose status can change from year to year. This may require companies subject to Code Section 162(m) to retool the mechanisms they use to identify and track “covered employees.”
Payroll Tax Credits
Voluntary Paid Leave Tax Credits
The ARPA extends tax credits available to employers who voluntarily provide paid sick and family leave to emloyees unable to work due to certain COVID-19 related reasons from March 31, 2021 to September 31, 2021. Please see Stinson’s previous Alert, The American Rescue Plan: Update for Employers Providing FFCRA Leave in 2021 for more information.
Employee Retention Credit
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) created the employee retention credit to help eligible employers keep employees on their payroll by providing a refundable credit against qualified wages and certain health plan expenses. The ARPA extends the employee retention credit until December 31, 2021. The credit cap rate remains at 70% of qualified wages up to $10,000, allowing employers to claim up to $7,000 in credits per employee per quarter. The ARPA also expands eligibility for the credit to recovery startup businesses, which are business that began operation after February 15, 2020 with annual gross receipts of less than $1 million. Recovery startup businesses are eligible to receive a maximum credit of $50,000 per quarter.