American Rescue Plan Act: Impact on Employers and Employees
Date: March 10, 2021
The most recent COVID-19 relief bill, the American Rescue Plan Act (the Act), which was approved by the Senate on March 6, was approved by the House of Representatives today and is expected to be signed into law by President Biden very soon. The Act includes a much-anticipated COBRA premium subsidy, pension plan funding relief, and several employer and employee protections for those hit hard by COVID-19. Notably missing from the Act is an increase to the minimum wage.
COBRA Premium Subsidy
Under federal and state COBRA laws that provide for continuation of health coverage, most employers who sponsor group health plans are required to provide continuation coverage upon certain “qualifying events.” The Act creates a premium subsidy for federal and state COBRA coverage for “assistance eligible individuals,” defined generally as including any employee or dependent who loses group health plan coverage due to an involuntary termination of employment or because of a reduction of hours.
The Act also creates a special election period for any individual who did not elect federal COBRA continuation coverage but who otherwise would have been eligible for the COBRA subsidy and for any individual who elected federal COBRA continuation coverage and discontinued such coverage before April 1, 2021. These individuals are allowed an opportunity to elect COBRA coverage within 60 days of receiving the required employer notice. The resulting COBRA continuation coverage begins with the first period of COBRA continuation coverage beginning on or after April 1, 2021.
The premium subsidy applies for any period of coverage during the period April 1, 2021 through September 30, 2021 (the Period of Coverage), subject to otherwise applicable maximum periods of coverage under COBRA. Individuals who are eligible for and elect COBRA coverage for the Period of Coverage are not required to pay the otherwise applicable COBRA premium during the Period of Coverage. For self-insured plans, the COBRA premium is covered by the employer and reimbursed through a payroll tax credit. For fully insured plans, the tax credit is claimable by the insurer.
The Act tasks the Department of Labor (DOL) and Internal Revenue Service (IRS) with issuing regulations and guidance regarding the application and administration of the COBRA subsidy provisions of the Act. In addition, the Act requires the DOL to produce model COBRA election notices within 30 days of enactment and a model COBRA premium subsidy expiration notice within 45 days of enactment.
Plan Enrollment Option
The Act also provides for a “Plan Enrollment Option,” which may permit assistance eligible individuals to change coverage to a lower-cost option within 90 days of receiving the required employer notice, provided the plan sponsor determines to permit such change, the premium for such lower-cost option is less than the premium for the coverage option in which the individual was enrolled at the time the COBRA qualifying event occurred, the lower-cost option is offered to similarly situated employees, and the lower-cost option provides more than limited health coverage (coverage other than coverage providing only excepted benefits, qualified small employer health reimbursement arrangement coverage, or flexible spending arrangement coverage).
Coordination of COBRA Premium Subsidy and Extension of COBRA Deadlines
Employers must coordinate compliance with the Act’s COBRA premium subsidy provisions and the COBRA extension deadline relief provided in 2020 in response to the COVID-19 pandemic and revised at the end of February 2021. This relief provides that COBRA deadlines that otherwise would occur during the “outbreak period” (the period beginning March 1, 2020 and ending 60 days after the announced end of the presidentially declared national emergency) must be tolled until the earlier of one year from the date the deadline otherwise would have applied or the end of the outbreak period. This will undoubtedly place a substantial burden on employers to administer group health plans and to accurately communicate applicable deadlines to employees in compliance with the premium subsidy legislation and deadline extension guidance.
Single-Employer Pension Plan Relief
The Act makes changes that generally will reduce single-employer pension plan minimum required contributions. First, it extends and modifies smoothing of interest rates used to determine pension liabilities, which decreases pension liabilities, resulting in lower contribution requirements. Modified smoothing applies, at the option of the plan sponsor, to plan years starting in 2020, 2021 or 2022 and may be applied separately for purposes of benefit restrictions. In addition, the Act allows repayment of prior year shortfalls over 15 years, rather than over seven years as required under current law. This extended amortization of prior year shortfalls, using a fresh-start approach, could be implemented in any plan year starting in 2019, 2020, 2021 or 2022, at the option of the plan sponsor.
Multiemployer Pension Plan Relief
After many years of debate, Congress approved a number of multiemployer plan relief provisions that will have a significant impact on the most poorly funded multiemployer pension plans. The most significant provision is the establishment of a new financial assistance program at PBGC to support the more poorly funded plans and those that are already insolvent or have already imposed benefit cuts under a 2014 law that permitted multiemployer pension plan benefits to be cut under certain conditions. To be eligible for financial assistance, no new benefit cuts can be imposed and prior cuts must be restored. The Act also includes a temporary freeze of the current zone status for certain multiemployer pension plans, an extension of current funding improvement and rehabilitation plans, and some minor adjustments to the funding rules for these plans.
Expansion of Number of Employees Covered by 162(m)
The Act expands the number of employees covered by the $1 million compensation deduction limit for publicly held corporations under Section 162(m) of the Internal Revenue Code. Under current law, the group of covered employees whose compensation is subject to Section 162(m) generally consists of anyone who has served as CEO, CFO or one of the three highest-paid executive officers (other than a CEO or CFO) during any taxable year beginning after December 31, 2016. As expanded by the Act, starting in taxable years beginning after December 31, 2026, a publicly held corporation’s covered employees will include – in addition to any CEO, CFO or executive officer otherwise treated as a covered employee for the taxable year – the next five highest-compensated employees, regardless of whether those five additional employees served as executive officers at any time during the year. Unlike current law, this additional group of five employees will not necessarily remain covered employees in all future years; instead, the additional five covered employees may change from year to year based on compensation levels.
Increase to Dependent Care Flexible Spending Account Maximum Limit
The Act increases the maximum amount that that may be excluded from an employee’s gross income under a Section 129 dependent care assistance program from $5,000 ($2,500 married filing separately) to $10,500 ($5,250 married filing separately). While this provision is voluntary, retroactive amendments are permitted if an amendment is adopted by the last day of the 2021 plan year and the plan is administered consistently with the terms of the amendment beginning on its effective date. This relief will be welcome to employers seeking to apply the unlimited carryover or extended grace period relief enacted late last year under the Consolidated Appropriations Act, 2021, Pub. L. 116-260, 134 Stat. 1182 (Dec. 27, 2020) (CAA). Without the related increase to the Section 129(a) exclusion limits, the CAA relief may have resulted in employees receiving reimbursements in excess of the standard exclusion limit during 2021 and 2022.
Funding for COVID-19-Related Worker Protection Activities
The Act appropriates $150 million to various DOL agencies, including the Wage & Hour Division and OSHA, to “carry out COVID-19-related worker protection activities” through September 2023. At least $75 million of this appropriation is specifically allocated to OSHA. Given the Biden administration’s focus on workplace safety and enforcement, we expect an increased number of audits and inspections.
Extension of Federal Unemployment Supplements
The Act also extends federal supplemental unemployment benefits for those who have lost their jobs as a result of the COVID-19 pandemic that were initially made available through the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES). These supplements, which were slated to expire March 14, 2021, have been extended through September 6, 2021. Similar to CARES, the Act supplement provides $300 in weekly unemployment compensation in addition to the amount provided under state law.
More Funding, But Not More Time, for PPP Loans
Loans for businesses through the Payroll Protection Program (PPP) play a lesser role under the Act than in previous COVID-19 relief legislation. The Act appropriates an additional $7.25 billion in funding to the $284 billion in current PPP funding still available. However, the Act does not extend the PPP’s current application period, which is scheduled to close March 31, 2021.
Expansion of PPP to Additional Nonprofits
The Act makes more nonprofit organizations eligible for PPP funding by creating a new category called “additional covered nonprofit entity,” which are those nonprofits listed in Section 501(c) of the Internal Revenue Code other than 501(c)(3), 501(c)(4), 501(c)(6) or 501(c)(19) organizations. These additional covered nonprofit entities can receive an initial PPP loan provided that:
- the organization does not receive more than 15% of receipts from lobbying activities;
- the lobbying activities do not comprise more than 15% of activities;
- the cost of lobbying activities of the organization did not exceed $1 million during the most recent tax year that ended prior to February 15, 2020; and
- the organization employs not more than 300 employees.
In addition, the Act makes some larger nonprofits eligible for PPP funding, including 501(c)(3) organizations and veterans organizations that employ not more than 500 employees per physical location, and 501(c)(6) organizations, domestic marketing organizations and additional covered nonprofit entities that employ not more than 300 employees per physical location.
Extension of Tax Credit for FFCRA Paid Sick and Family Leave
The provisions of FFCRA requiring certain employers to provide federal paid sick leave and family leave expired on December 31, 2020. The Act does not reinstate the requirement to provide paid FFCRA sick leave. However, it does temporarily extend a tax credit to employers who voluntarily choose to provide eligible employees with Emergency Paid Sick Leave or Emergency Family Medical Leave through September 30, 2021.
Although the federal requirement to provide paid sick and family leave has expired, eligible employees may still qualify for unpaid leave under the Family Medical Leave Act. Also, some states and localities require employers to provide their employees with paid or unpaid sick or family leave for reasons related to COVID-19. Thus, employers should be careful to ensure their leave policies comply with applicable law.
Extension of Employee Retention Credit
The Act encourages businesses to retain their employees despite the challenges posed by COVID-19 by extending the Employee Retention Tax Credit, previously set to expire in June 2021, until December 31, 2021. Eligible employers who experience a full or partial shutdown due to COVID-19 or a qualifying decline in their receipts in 2021 may qualify for the Employee Retention Tax Credit.
No Minimum Wage Increase
Finally, although the House initially proposed a gradual increase of the federal minimum wage from the current hourly rate of $7.25 to $15 by 2025, that measure fell short in the Senate and was not included in the version to be signed into law by President Biden.
FOR MORE INFORMATION
For more information, please contact:
Nancy M. Barnes
Julia Ann Love
Brian L. Gaj
Nathan E. Holmes
Anthony P. McNamara
M. Scott Young
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