American Rescue Plan Act: Employee benefits changes you should know

On Thursday, March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (ARPA) into law after the bill was passed by the 117th Congress of the United States. The ARPA promises $1.9 trillion in federal spending for COVID-19 relief, including significant changes to employer-provided benefit plans.  Below is an overview of these changes to COBRA, dependent care assistance, and retirement plans that employee benefit advisors, plan advisors and plan sponsors need to know.

Subsidized COBRA coverage

The pandemic has forced many companies to close their doors and reduce the size of their workforce, which naturally has led many individuals to lose their health care coverage. Following a job loss or a reduction in hours, employees are generally permitted to continue their health care coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), provided that they pay the entire costs of their premiums. Realizing such high costs may deter employees from electing COBRA coverage, Congress has provided for a 100% COBRA subsidy under the ARPA. The subsidy runs from April 1, 2021 through September 30, 2021, and applies to “assistance eligible individuals.”  Under the ARPA, an “assistance eligible individual” is a COBRA qualified employee who is eligible for COBRA coverage due to a reduction in hours or an involuntary termination of employment. For specific individuals who are not currently enrolled in COBRA, but were terminated from their job involuntarily or incurred a reduction in hours, they, too, are permitted receive this COBRA subsidy upon making a special election to enroll in COBRA.

Individuals who are eligible to receive health insurance outside of COBRA, such as through Medicare or another employer sponsored plan, are not eligible for this subsidy. To ensure that individuals comply with this provision, the ARPA requires individuals to self-report to their COBRA plan. Failure to meet this reporting requirement will result in a tax penalty.

Related: COBRA rules changes help terminated workers maintain health care coverage

The ARPA also modifies the timing requirements, along with the information that must be included within a COBRA notice. For instance, an assistance eligible individual who was involuntarily terminated or who incurred a reduction in hours prior to April 1, 2021, must receive a notice that explains the subsidy and his/her ability to make a special COBRA election. Note that these notices are due no later than by May 31, 2021, and to assist employers with this additional administrative requirement, the ARPA requires the DOL to draft and release a Model COBRA Election Notice by the middle of April to address the subsidy opportunity. Additionally, for assistance eligible individuals who are involuntary terminated or incurred a reduction in hours after April 1, 2021, each of their COBRA notices must also be modified to include a description explaining the subsidy. Additionally, a second notification will need to be furnished between 15 and 45 days prior to September 30, 2021, so to alert each assistance eligible individual of the subsidies expiration date and to explain their COBRA coverage options after September 30, 2021.

To fund these COBRA subsidies, employers will receive a 100% tax credit against their share of Medicare taxes required to be deposited each calendar quarter. The tax credit applies regardless of the amount of Medicare taxes actually deposited each quarter, but these tax credits are only applicable for employers that pay COBRA premiums for assistance eligible individuals.

Practice pointer: Advisors should be proactively working with plan sponsors on administration of the COBRA subsidy.  Plan sponsors will need to consider two key areas immediately.  First, if they have not done so yet, plan sponsors should immediately have conversations with the entity responsible for COBRA administration (whether the internal team responsible for self-administration or the third-party vendor) to get the process in place for proper communication to individuals who may be assistance eligible individuals. Second, the plan sponsor will need to do due diligence to determine who has had an involuntary termination of employment or reduction of hours over the prior 17 months, so that it knows the population of assistance eligible individuals.

Dependent care assistance plan limit

For 2021, the ARPA has increased the annual limit a taxpayer can contribute on a pre-tax basis to a dependent care assistance plan, under Internal Revenue Code Section 129, from $5,000 to $10,500 for married couples filing jointly and from $2,500 to $5,250 for married couples filing separately.  Generally, employers establish such arrangements through their cafeteria plan or dependent care program. Cafeteria plans and dependent care programs must be governed and administered in accordance with a written document to be eligible for this tax treatment. This means that if an employer intends to increase a plan’s annual limit for 2021, it must amend its governing document by the last day of the 2021 plan year (i.e., December 31, 2021 for calendar year plans).

Practice pointer: Cafeteria plans have been subject to multiple pieces of guidance during the COVID pandemic.  Advisors should take the opportunity to discuss with plan sponsors their formal cafeteria plan document to make sure it contains all the legal requirements, is drafted to reflect current plan design, and the various opportunities for plan design given the ARPA and other COVID related guidance (for example, the guidance allowing for expanded carryovers and grace periods for health FSAs).

Paid sick leave and family leave credits 

The ARPA expands tax credits enacted under the Family First Coronavirus Response Act (FFCRA) until September 30, 2021, which were set to expire by the end of this month. Generally, employers with 499 employees or less, that voluntarily offer paid sick leave or emergency family leave to its employees, are eligible for tax credits to cover the costs of providing such benefits. These tax credits will apply to an employer’s share of Medicare taxes (1.45%) on $12,000 of covered wages paid to each employee (increased from the initial limitation of $10,000). Additionally, the ARPA also broadens the eligibility requirements for paid sick leave and expanded family medical leave to allow more individuals to receive these benefits.

Practice pointer: Employers will need to decide if they will voluntarily extend these provisions and, if they choose to do so, take note of the minor changes to the program per ARPA. 

Multiemployer pension plans

ARPA provides a number of changes, as well as a significant amount of relief, to multiemployer pension plans. Briefly stated, this relief includes the following: 

• PBGC premiums – Beginning in 2031, PBGC premiums will increase by roughly 67 percent to $52.00 per participant. Currently, multi-employer pension plans pay $31.00 per participant.

• Financial assistance – The ARPA also establishes a funding program through the PBGC to assist underfunded pension programs with meeting their funding requirements. Generally, the program will offer lump sum payments to pensions that fall into one or more of the following categories: (1) the “plan is in critical and declining status … in any plan year beginning in 2020 through 2022;” (2) the plan has been approved for a suspension of benefits under the 2014 Multi-employer Pension Reform Act (MRPA); (3) From any plan year between 2020 through 2022, the plan was/is certified by an actuary to be in critical status. Additionally, the plan must also have a larger portion of inactive participants to active participants; or (4) “the plan became insolvent… after December 16, 2014, and has remained so insolvent and has not been terminated as of [March 11, 2021].”

• Funding relief – The ARPA tacks on five additional years to the funding improvement period and the rehabilitation period for plans in endangered or critical status in 2020 or 2021. This, of course, will afford some pension plans in endangered or critical status, with 15 years to meet their funding target. Additionally, the ARPA will also allow plans the option to elect to use their 2019 funding status (e.g., critical or endangered status) for plan years beginning in 2020 or 2021. Note that for a plan to make this election, it must furnish a written notification to its plan participants. Lastly, for the first and/or second plan years commencing after February 29, 2020, underfunded multiemployer plans can amortize their net investment losses within their funding standard accounts over a 30-year period, rather than the current 15-year period.

Pension plans

Similar to multi-employer pension plan guidance, the ARPA takes action to provide relief to single employer pension plans.  The key guidance includes: 

• Funding shortfalls – Following the enactment of the Pension Protection Act of 2006, plan sponsors of pension plans were required to make minimum annual contributions over a seven-year period to fund their pension’s liabilities.  Now with the passing of the ARPA, plan sponsors will have 15 years to meet their financial targets.

• Smoothing rules – Generally, low interests rates have not been favorable for underfunded pension plans, because they inflate the size of pension deficits. Appreciating this burden on pension plans, Congress created protections for pension plan sponsors, such as the so-called “smoothing rules.” However, the “smoothing rules” were set to expire this year, until the ARPA extended this relief, modified the interest corridor, and created a 5% stabilization floor.

Conclusion

In sum, the ARPA provides substantive changes to employer-sponsored employee benefit plans and plan sponsors must be educated and alerted of these changes in a short matter of time.  This provides a great opportunity for plan advisors to have conversations with plan sponsors about compliance issues, plan design, and plan strategies.

 Jason Rothman is a shareholder in the Cleveland office of Ogletree Deakins. As a member of the Employee Benefits and Executive Compensation practice group, Jason advises firm clients on all areas of employee benefits and executive compensation compliance. He advises clients on their tax-qualified plans including plan design and adoption, ERISA compliance, and day-to-day plan operation. 

Sheldon Miles is an associate in the Houston office of Ogletree Deakins and is a member of the Employee Benefits and Executive Compensation practice group. He assists clients with compliance issues involving tax-qualified retirement plans, executive compensation arrangements, and health and welfare programs.