On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021 (the Act), which impacts employee benefits in a number of respects. The Act provides additional relief for retirement and other benefit plans, addresses “surprise billing” in employer-sponsored health plans, modifies and extends the employee retention tax credit and other employee-related credits, and temporarily makes business meals fully deductible, among other changes. In light of President Trump’s objections, the future of the Act is uncertain, but this legal alert describes its current provisions.

Retirement plan relief and changes

Temporary rule preventing partial plan terminations

The Act amends the partial plan termination rules to provide that there will not be a partial termination for an event occurring between March 13, 2020 and March 31, 2021 if the number of active participants in a qualified plan on March 31, 2021 is at least 80 percent of the number on March 13, 2020.

Special rule regarding CARES Act defined contribution plan distributions

The Act provides that money purchase pension plan assets can be included in the coronavirus-related distributions made from certain defined contribution retirement plans under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which are allowed through December 30, 2020.  This provision is retroactive to the enactment of the CARES Act.

Non-COVID retirement plan distribution provisions

There are certain provisions in the bill that are aimed at providing relief to employers or individuals impacted by a major disaster (as declared by the President under the Stafford Act), excluding COVID-19. Specifically, these relief provisions apply to disaster declarations made on or after January 1, 2020, through 60 days after the enactment of the Act.

• Qualified disaster distributions.  Participants impacted by a disaster can take otherwise prohibited distributions from defined contribution plans (including 401(k), 403(b), money purchase pension, and governmental 457(b) plans) of up to $100,000 in the aggregate per disaster (across all retirement plans in the employer’s controlled group).  These distributions are very similar to the distributions permitted under the CARES Act, with the following special treatment: 
  • The distributions are not subject to the 10% additional tax on early distributions and 20% withholding that would otherwise apply to these distributions;
  • The income tax on these distributions can be spread ratably over three years; and
  • The distributions can be recontributed to a qualified retirement plan or an IRA during the three-year period following the distribution. Upon recontribution, the distributions are treated as non-taxable transfers, similar to the treatment that would apply to plan loans.

Distributions must be made within 180 days of the enactment of the Act.

• Repayment of withdrawals for home purchases.  Certain individuals who have made a hardship withdrawal in order to purchase or construct a principal residence, but cannot use such funds on account of the disaster, have the ability to repay those funds to the plan, until 180 days from the enactment of the Act.
• Plan loan relief.  Participants impacted by a disaster can request an increased plan loan limit.  Impacted participants are eligible for an increased limit of $100,000 or 100% of their vested account balance, rather than the standard $50,000 or 50% of the vested account balance.  This relief only applies to loans taken in the 180 days following the date of enactment.

Impacted participants can also delay the repayment of certain outstanding loan payments for one year. Payments that can be delayed are those with due dates between the first day of the disaster incident period and ending on the date which is 180 days after the last day of such incident period.  Subsequent repayments must be adjusted to reflect the one-year suspension, including interest that accrues during the suspension period. In determining the maximum five-year loan repayment period and the loan’s term, the one-year suspension can be disregarded.

Relief and changes for other benefit plan arrangements

Temporary FSA relief

Generally, under health and dependent care flexible spending arrangements (FSAs), employees must make elections to contribute funds in the prior calendar year, and those elections cannot be changed mid-year absent an exception to the rule that would allow a mid-year change. Additionally, subject to limited exceptions (such as the limited carryover for health FSAs), any funds credited to the FSAs must be used by the end of the applicable calendar year (or a limited grace period).  The new bill allows employers to amend their plans to:

• Permit employees to carry over unused benefits, up to the full amount for 2020, into 2021 (or for 2021 into 2022);
• Allow a 12-month grace period for unused benefits at the end of 2020 and 2021;
• Allow employees to make a prospective mid-year election change in the 2021 plan year;
• Increases the maximum age for covered dependents from 12 to 13 for the 2021 plan year; and
• Allows post-termination reimbursements from health FSAs for individuals who cease participation in the plan during calendar years 2020 or 2021, through the end of the plan year in which their participation terminated.

Employer repayment of student loans

The CARES Act allowed an employer to provide a student loan repayment benefits to employees on a tax-free basis during 2020.  The Act extends this through 2025.  An employer may contribute up to $5,250 annually towards an employee’s student loans (either paid to the employee or directly to the lender), and such payment would be excluded from the employee’s income.  Note that the $5,250 cap also covers other qualified educational assistance (such as tuition, fees, or books) that may already be provided to an employee under current law.

Group health plan provisions

Surprise billing

Surprise billing has long been an issue for plan participants and group health plans, and the “No Surprises Act” addressing some of these issues has finally found a landing place in the Act. The No Surprises Act is intended to address the much-publicized issue of individuals receiving unexpected bills for out of network charges, particularly emergency transportation services such as medical helicopter transports. Notable items for group health plans under the No Surprises Act include:

• Participant costs for emergency and non-emergency out-of-network services would be limited to a fee that is based on in-network charges, and counted toward their in-network annual deductible. Group health plans  and health care providers would have 30 days to negotiate how amounts in excess of the in-network rate will be covered. 
• Congress removed the Medicare “benchmark” reimbursement provisions that had previously been in the bill, and the No Surprises Act requires health plans and providers to arbitrate if they cannot agree on the reimbursements.
• Patients cannot be charged out-of-network rates for air ambulance services (but can be charged out-of-network rates for ground ambulance services).
• Cost-sharing payments made by individuals for out-of-network emergency coverage would need to be applied to the out-of-pocket maximums and in-network deductibles as if the services had been provided in-network.
• Other items included in the bill include consumer protections, reporting requirements for air ambulance services, an audit program, and a state payer claims database.

Transparency

The Act also contains specific provisions on pricing transparency that will impact group health plans, including the following:

• A ban on “gag clauses” in contracts between health plans and health providers that prevent plan sponsors, plan participants, and others from seeing cost and other provider data.
• There is also a ban on “gag clauses” that prevent plan sponsors from being able to access claims data that has been de-identified in accordance with HIPAA.
• Health plan brokers and consultants would be required to disclose direct and indirect compensation to group health plan sponsors.
• Group health plans would be required to conduct comparative analyses of nonquantitative treatment limitations on mental health and substance use treatments as compared to other medical and surgical benefits, and sets up an auditing program by HHS, Labor, and Treasury.
• Group health plans would be required to maintain a price comparison tool that would allow participants to determine certain cost-sharing amounts for various services.
• Group health plans would be required to report on an annual basis their medical plan costs and prescription drug spending to the Department of Health and Human Services, the Department of Labor, and the Department of Treasury. This report would include the number of enrollees, the 50 brand prescription drugs most frequently dispensed by pharmacies for claims paid by the plan, and total spending on health care services by the group health plan, broken down into different categories.

Tax-related provisions and tax credits

Temporary allowance of full deduction for business meals

Employers will be able to deduct 100% of their business meal expenses that are incurred in 2021 and 2022, rather than the standard 50%.

Changes to employee retention tax credit

The CARES Act provided an employee retention tax credit to “eligible employers” who paid employees “qualified wages” from March 13 through the end of 2020. The credit was equal to 50 percent of qualified wages for each eligible employee, with qualified wages limited to $10,000 per-employee for all quarters (not per quarter).  The Act extends the credit through June 30, 2021 and expands the scope and amount of the credit.

From January 1, 2021 through June 30, 2021, the following new features apply to the employee retention tax credit:

• The credit rate increases from 50% to 70% of qualified wages, and the limit on qualified wages per-employee increases from $10,000 per year to $10,000 per calendar quarter.
• The Act clarifies that qualified wages include allocable health care costs even if no other wages are paid, and that qualified wages do not include any wages taken into account under the paid sick leave and paid family leave provisions of the Families First Coronavirus Relief Act (FFCRA).
•  Previously, eligible employers included those: 
  • that completely or partially suspended operations due to orders from a governmental authority limiting commerce, travel or group meetings due to COVID-19, or
  • with gross receipts in any quarter that are less than 50% of gross receipts for the same quarter in 2019. 

The Act lowers the reduction in gross receipts threshold so that employers who have less than 80% of gross receipts for the same quarter in 2019 are eligible. Additionally, employers can use the immediately preceding quarter receipts to determine eligibility. 

• Previously, for employers with more than 100 employees in 2019, the credit could be taken only with respect to employees who were not providing services due to one of the triggering events noted above.  The Act increases that threshold to 500 employees.
• Allows businesses with 500 or fewer employees in 2019 to advance the credit at any point during a quarter based on wages paid in the same quarter in a previous year.
• Provides rules to allow new employers who were not in existence for all or part of 2019 to claim the credit. 

Extension of paid leave tax credits

Under the FFCRA, employers with under 500 employees generally must provide paid leave to certain individuals impacted by COVID-19.  This requirement goes through December 31, 2020, and employers are eligible for a credit against payroll taxes to mitigate the cost of this leave.  The Act does not require employers to offer leave beyond December 31, 2020, but provides that eligible employers that do continue to offer this leave can continue to receive the payroll tax credit through March 31, 2021.

Employer tax credit for paid family and medical leave

Under sunsetting legislation, employers could claim a general business credit of up to 25% of wages paid to employees during FMLA leave (subject to certain requirements and limitations) in 2018-2020. The new bill extends this credit through 2025.

Employee retention tax credit for employers impacted by disasters

Employers in a non-COVID major disaster zone whose businesses are inoperable at any time during an applicable disaster period (as defined in the Act) may receive a tax credit equal to 40% of an employee’s qualified wages, up to maximum wages of $6,000 per employee. Certain tax-exempt organizations are provided the option to claim the credit against their payroll taxes.

Extension of repayment of deferred employee portion of social security taxes

On August 8, 2020, the President issued a memorandum allowing employers to defer withholding employees’ share of social security taxes due between September 1, 2020 through December 31, 2020.  These amounts then had to be recovered ratably from wages paid between January 1, 2021 through April 31, 2021. The Act extends the repayment period through December 31, 2021. 

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