ARP creates a federal subsidy to cover 100% of premiums under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) for assistance eligible individuals during the period of April 1 through September 30, 2021 (the Subsidy Period). “Assistance eligible individuals” include individuals who lost coverage under a group health plan (excluding a healthcare flexible spending account) due to an involuntary termination of employment or reduction in hours and who
(i) became eligible for and elected COBRA coverage during the Subsidy Period;
(ii) became eligible for and elected COBRA coverage prior to the Subsidy Period and are still within their 18-month COBRA coverage period; or
(iii) became eligible for and either (A) did not elect COBRA coverage or (B) elected and subsequently terminated COBRA coverage, in each case prior to the Subsidy Period, and are still within their 18-month COBRA coverage period.
Assistance eligible individuals described in clause (iii), above, must be given another opportunity to elect COBRA coverage to take advantage of the ARP COBRA subsidy. The federal subsidy will terminate if, during the Subsidy Period, the assistance eligible individual becomes eligible for other group health plan coverage or Medicare.
ARP permits, but does not require, employers to allow assistance eligible individuals electing COBRA coverage to change from higher- to lower-cost plan coverage.
ARP requires distribution of two special COBRA notices — one describing the special election period applicable to assistance eligible individuals described in clause (iii) above and one notifying assistance eligible individuals of any termination of the subsidy. Model notices will be issued. Standard COBRA notices also likely will need to be updated or supplemented to reflect the subsidy provisions.
Employer COBRA Tax Credit
Employers may recover COBRA premiums not paid by assistance eligible individuals through a payroll tax credit. If the tax credit is greater than the amount of payroll taxes due for a particular period, the employer can apply for a refundable tax credit.
Dependent Care Flexible Spending Account Increase
For the 2021 tax year, ARP increases the maximum amount that may be elected through a dependent care flexible spending account (DCFSA) from $5,000 to $10,500 (or from $2,500 to $5,250 for married individuals filing separately). Employers are not required to increase their DCFSA limit, but employers who choose to do so must amend their plans accordingly by December 31, 2021.
Single-Employer Pension Plan Funding Rule Relief
ARP also modifies certain funding rules for single-employer pension plans. For plan years beginning after December 31, 2019, the current 7-year amortization period for funding shortfalls is increased to a 15-year amortization period. ARP also provided minimum funding interest rate relief by extending interest rate stabilization that otherwise would have been phased out after 2021.
Multiemployer Pension Plan Relief
ARP creates and funds a special financial assistance program to help severely underfunded multiemployer plans by providing one-time payments intended to allow the plans to continue paying all benefits through 2051. There is no requirement that plans receiving special assistance must repay the amounts received. It is anticipated that the Pension Benefit Guaranty Corporation will issue additional rules regarding the effect that such assistance will have with respect to the calculation of withdrawal liability.
Expansion of Code Section 162(m)
Under Section 162(m) of the Internal Revenue Code of 1986 (the Code), public companies may only deduct up to $1 million for a taxable year with respect to compensation paid to each covered employee. “Covered employees” include the chief executive officer (CEO), chief financial officer (CFO), and the next three highest-paid executive officers in any given taxable year plus any individual who in the past has been a covered employee for any prior taxable year beginning on or after January 1, 2017.
Effective for taxable years beginning after December 31, 2026 (January 1, 2027 for calendar-year companies), ARP expands the definition of “covered employees” to include the next five highest-paid employees — for a total of at least ten covered employees. ARP treats these additional covered employees differently than the current group of covered employees in two respects. First, the additional covered employees need not be executive officers but can include, for example, highly paid sales employees or celebrities. Second, these additional employees are considered covered employees only for the year in which they are one of the next five highest-paid employees. Only the CEO, CFO, and the next three highest-paid executive officers will continue to be covered employees in all subsequent years (if they were covered employees in a taxable year beginning on or after January 1, 2017). This second distinction will allow some planning opportunities to avoid the loss of a tax deduction, such as by deferring payment until the employee is no longer a covered employee under this new category of covered employees (subject to compliance with the deferral requirements under Section 409A of the Code).
Paid Leave Credit
ARP extends the Families First Coronavirus Response Act of 2020 tax credits for employers that voluntarily provide paid sick and family leave through September 30, 2021. ARP also expands the employer tax credits to include credits for leave paid to employees who are (i) obtaining a COVID-19 vaccination, (ii) recovering from any injury, disability, illness, or condition related to such vaccine, or (iii) awaiting the results of a diagnostic test or medical diagnosis for COVID-19. Employers may not claim a tax credit if they discriminate in favor of highly compensated employees, full-time employees, or on the basis of tenure with the employer when determining eligibility for emergency paid leave.
Employee Retention Tax Credit
ARP extends the Employee Retention Tax Credit (ERTC) through December 31, 2021. The ERTC allows certain businesses to claim a tax credit for certain qualifying wages. Eligible businesses include those that are (i) fully or partially suspended due to a governmental order limiting travel, commerce, or meetings during the applicable calendar quarter or (ii) have a significant decline in gross receipts. ARP also expands the ERTC to recovery startup businesses (i.e., businesses formed after February 15, 2020, that have annual gross receipts of $1 million or less).
ARP also changes the eligibility criteria to allow severely financially distressed employers with more than 500 employees to include all wages paid to employees as qualifying wages, not just wages paid to employees not providing services.
Next Steps for Employers and Plan Sponsors
- Plan sponsors should identify any assistance eligible individuals under their group health plans and notify such individuals of their right to the COBRA subsidy.
- Plan sponsors will need to track all assistance eligible individuals receiving the COBRA subsidy and related amounts in order to take advantage of the employer tax credit for the cost of such COBRA premiums.
- Plan sponsors who wish to increase the DCFSA limits under their plans will need to amend their plans by December 31, 2021. They will wish to implement this change as soon as possible to permit employees to take advantage of the increase and spread out the increased payroll deductions over as many paychecks as possible.
- Employers claiming paid sick leave credits should ensure that they do not discriminate in determining eligibility for such leave.
- Employers should determine whether they may be eligible for the extended and expanded ERTC.
- Single-employer pension plan sponsors should consult with their actuaries to determine the effect that the new pension funding stabilization rules will have on the sponsor’s funding obligations, including the effect on annual funding notices.
- Beginning January 1, 2027, in addition to tracking employees who are, or have been at any time since January 1, 2017, the CEO, CFO, or one of the next three highest-paid officers, employers will also need to track the next five highest-paid employees in any given year for purposes of the limits under Section 162(m) of the Code. Prior to such date, employers should assess their compensation commitments to determine whether any tax planning steps should be undertaken for individuals that may become covered employees under these new rules, which may include accelerating payments or, to the extent permitted under Section 409A of the Code, deferring payments.
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