Tax Services American Rescue Plan Act: Significant Changes to Employee Benefits
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On March 11, 2021, President Biden signed the American Rescue Plan Act (ARPA) into law. This is the largest federal COVID-19 relief bill to date, and underscores the pandemic’s continued impact on employers by altering employee benefits and requiring immediate action. In this article, we summarize key changes that employers must address.

Free and extended COBRA

The ARPA includes a 100% COBRA subsidy provisions aimed at making health insurance coverage accessible and affordable, which includes those covered by state mini-COBRA laws, such as Louisiana. Bearing a striking resemblance to the American Recovery and Reinvestment Act of 2009, ARPA creates a six-month subsidy period (April 1, 2021 to September 30, 2021) during which certain assistance eligible individuals (AEI) may qualify for a 100% subsidy for COBRA coverage. Qualifying AEI would pay no cost for monthly COBRA premiums for medical, dental, or vision coverage if the individual is eligible for COBRA coverage during the subsidy period. The subsidy period does not extend the maximum COBRA coverage period—the ARPA simply suspends the AEI’s obligation to make COBRA premium payments for up to six months.

These rules are not optional for employer-sponsored group health plans.

An AEI is an individual who:

  • Is eligible for COBRA continuation coverage due to an involuntary termination or reduction in hours;
    • There is no subsidy for a voluntary termination of employment or for other COBRA qualifying events such as divorce or a dependent “aging out.”
  • Incurs a termination of employment or reduction in hours:
    • During the subsidy period;
    • Prior to the subsidy period and has elected continuation coverage and the remaining continuation coverage period extends into the subsidy period; or
    • Prior to the subsidy period and has not elected continuation coverage (but would have remaining coverage extending into the subsidy period if the individual had elected to continue coverage), including someone who elected and subsequently dropped COBRA coverage; and
  • Elects continuation coverage for some or all of subsidy period.

These rules are not optional for employer-sponsored group health plans.

All group health plans subject to COBRA, except health flexible spending accounts (FSA), must provide this subsidized coverage. This would currently include health reimbursement arrangements (HRA).

The employer, the plan (in the case of a multi-employer plan), or the insurer (for fully-insured coverage subject to mini-COBRA), has an obligation to provide subsidized COBRA coverage and pay or incur the AEI’s COBRA premium cost. However, that entity may recover the cost of the coverage plus the 2% administrative fee from the federal government by claiming a credit against its quarterly Medicare payroll tax liability. The credit can be advanced and is refundable, meaning the entity could claim a refund if the subsidy paid exceeds the taxes due.

The ARPA also creates an extended COBRA election period for AEI, so even AEI who previously declined COBRA coverage, or whose coverage was terminated because of nonpayment of premiums, may enroll and receive the subsidized coverage for the length of the subsidy period. This provision in particular will require careful administration to maintain compliance, given the previous COBRA deadline extensions and the recent re-starting of the clock, under prior DOL guidance. Employers should review all qualifying events on or after November 1, 2019. The ARPA does not change the fact that COBRA continuation coverage can end because of other group health coverage, Medicare eligibility, and other circumstances.

Notifying assistance eligible individuals of COBRA changes

Employers are required to provide notice of the availability of the subsidy, notice of the extended election period for COBRA coverage, and notice of the expiration of the subsidy. The DOL will issue model notices by April 10, 2021. Employers who rely on a third-party administrator (TPA) for COBRA should confirm that the TPA will send the required notices to those eligible and will provide the information necessary to claim the payroll tax credit. Employers will need to advise the TPA of which individuals are eligible for the subsidy.

Group health plans may, but are not required to, allow AEI to enroll in different coverage options available from the employer, subject to certain conditions. If offered, the notices must describe this option.

Employers must send a notice to eligible individuals by May 31, 2021.

Upon receipt of the notice, eligible individuals will have a 60-day enrollment opportunity. The subsidy automatically commences on April 1, 2021 for eligible individuals who are receiving COBRA coverage on that date. If a qualified beneficiary paid for COBRA coverage during the subsidy period, they must be reimbursed for such payment within 60 days of making the payment.

Penalties apply if these notices are not provided.

In addition, the ARPA creates a new notification requirement. Specifically, qualified beneficiaries who qualify for the subsidy must be provided a “Notice of Expiration of Period of Premium Assistance” that explains the date when their subsidy will end and certain other specified information. This new notice must be provided no more than 45 days before and no less than 15 days before the date the subsidy will end. The notice does not have to be provided to qualified beneficiaries whose subsidies end because their COBRA period ends. The DOL is required to provide a model notice for this requirement by April 25, 2021.

Penalties apply if these notices are not provided, so employers should ensure that notices are updated to include all of the required information and are distributed in a timely manner.

Affordable Care Act premium tax credit expansion

Previously, premium tax credits (PTC) were only available to individuals whose household income is between 100% and 400% of the federal poverty level, and who purchase insurance coverage through the ACA Marketplace. The ARPA removes the upper limit of 400% for the 2021 and 2022 tax years. This may increase the number of taxpayers that qualify for a PTC. Since the PTC is the “trigger” for penalties under the ACA employer mandate, this may also increase the exposure of applicable large employers (generally, employers with 50 or more full-time employees) that are subject to the ACA employer mandate in 2021 and 2022, but only those applicable large employers that didn’t offer affordable, minimum value coverage to all ACA full-time employees.

In addition, the amount of the premium tax credit is increased because the amount that an individual must contribute to the cost of coverage has been decreased. Under the ARPA, individuals with incomes of 400% of the federal poverty level or more must contribute 8.5% of their household income toward coverage (instead of 9.5% before ARPA). However, this does not change the affordability percentage for the purposes of the ACA employer mandate.

The ARPA also provides special support for individuals who are eligible for unemployment compensation in 2021. A taxpayer who receives or is approved to receive unemployment compensation for a week or more in 2021 will not be required to pay any premium for coverage obtained through the ACA Marketplace in 2021.

Finally, a taxpayer’s advance PTC in 2020 that is in excess of the eligible amount (determined when filing their tax return) will not be required to be repaid.

Increase in dependent care assistance

For the 2021 calendar year only, the ARPA increases from $5,000 to $10,500 (or, from $2,500 to $5,250 in the case of a separate return filed by a married individual) the maximum amount that can be excluded from income under Section 129 of the tax code for qualifying dependent care expenses.

Employers that sponsor dependent care flexible spending arrangements may amend their plans on or before the last day of the plan year to allow their eligible employees to benefit from this increased limit. Fiscal plan year sponsors must consider how to implement the relief given their plan year limits, noting that the increased contribution limit ends on December 31, 2021.

The Consolidated Appropriations Act of 2021 (CAA) permits employers to amend their Section 125 plans to permit mid-year election changes that normally would not be permitted. That relief will need to be implemented in tandem with any increased limits allowed under the ARPA. For employers who decide not to increase the dependent care flexible spending account limit for 2021, employees still may qualify for the child and dependent care tax credit that was substantially enhanced and made refundable for 2021.

Employees should weigh the increased exclusion against the expanded child tax credit. The legislation increases the child tax credit amount for 2021 to $3,600 for children under six and to $3,000 for children ages six to 17; it also expands the definition of a "qualifying child" to include 17-year-olds. The IRS will make periodic advance payments of the child tax credit based on 2019 or 2020 tax return information, from July 2021 through December 2021. These payments comprise half of the child tax credit for which the taxpayer is otherwise entitled for 2021, with the remaining half claimed on the 2021 tax return.

This phases out the additional credit amount − $1,000 per child age six and over and $1,600 per child under age six − for joint filers with a modified adjusted gross income above $150,000 ($112,500 for head-of-household filers and $75,000 for other filers). Thus, the child tax credit is fully refundable in 2021.

Pension plan funding stabilization

For employers who sponsor single employer-defined benefit plans, the ARPA provides several avenues to stabilize funding, including implementing 15-year amortization periods, fresh start rules, and an increase in interest rates used for minimum funding determinations. These changes should reduce the minimum required contribution amounts, but would need to be weighed against the cost of obtaining an updated valuation, among other considerations. Employers with these plans should consult with their plan actuaries. 

Help is available

P&N will continue to provide coverage of the ARPA and the significant economic relief opportunities and new provisions created under the act. Please contact us or connect with your P&N advisor to discuss your organization’s questions, concerns, and unique situation.

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