[co-author: Kim Lee]
The American Rescue Plan Act of 2021 (“ARPA”), which was signed into law on March 11, 2021, includes a number of provisions relating to health and welfare plans that will be beneficial to many Americans. In addition, ARPA provides funding relief to single-employer defined benefit plans and significant financial assistance to the most underfunded multiemployer plans. However, ARPA does not rescue everyone, and actually expands the group of employees subject to the $1 million dollar limit on certain compensation deductions contained in Section 162(m) of the Internal Revenue Code (“Code”).
ARPA is not the first legislation passed in the wake of the COVID-19 crisis to contain significant benefits- and compensation-related components. For example, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) contained a number of benefits and compensation provisions, which were discussed in our March 2020 OnPoint regarding the CARES Act and our April 2020 OnPoint, concerning certain open compensation issues under the CARES Act.
COBRA Subsidy
ARPA provides for a 100% federal subsidy that will temporarily cover the cost of continuation coverage under the Consolidated Omnibus Reconciliation Act of 1985 (“COBRA”) for “assistance eligible individuals.” An employee will be an assistance eligible individual if the employee has a federal or state law right to continuation coverage triggered by an involuntary termination of employment or reduction in hours. The spouse and dependents of an assistance eligible individual who lose coverage will also be eligible for the subsidy.
The subsidy is available beginning April 1, 2021 and continues through September 30, 2021. The subsidy will cover the cost of COBRA coverage during such period regardless of whether the COBRA triggering event occurred before or after April 1, 2021.
The COBRA subsidy operates by way of a refundable tax credit to the employer. Initially, the employer pays the COBRA premium on behalf of the assistance eligible individual (or provides no-cost COBRA coverage under a self-insured plan). The employer then recovers the premium as an offset against the employer’s Medicare hospital insurance taxes. If the COBRA premium amount exceeds the employer’s Medicare tax liability, the employer may apply for a refundable tax credit.
ARPA requires employers to notify assistance eligible individuals regarding the availability of the subsidy. In addition, ARPA creates a new 60-day election window during which assistance eligible individuals who are still within their original 18-month COBRA period may make a COBRA election even if they did not do so when they were first eligible (or otherwise let their coverage lapse). Employers must provide notice of the subsidy and the new election period by May 31, 2021 and the Department of Labor is tasked with providing a model notice. In addition, employers must provide anyone receiving the subsidy with advanced notice of its expiration.
Increase to Dependent Care Assistance
ARPA permits employers to amend their cafeteria plans to increase the 2021 dependent care assistance limit from $5,000 to $10,500 (from $2,500 to $5,250 for married individuals filing separately). To allow employees to take advantage of this increase, an employer must amend its cafeteria plan before the end of 2021.
Single-Employer Pension Funding Relief
Beginning in 2022, ARPA provides a “fresh start” for calculating the minimum funding requirements for single-employer pension plans. Employers may elect to apply this change retroactively to plan years beginning in 2019. The fresh start will allow plans to amortize their unfunded liabilities over a 15-year period, rather than the 7-year period applicable under the current rules.
ARPA will also extend and enhance interest rate relief related to the calculation of pension liabilities that was originally enacted in 2012 as part of the Moving Ahead for Progress in the 21st Century Act, and was scheduled to begin phasing out during 2021. The purpose of the ARPA changes is to allow the use of higher interest rates, which results in lower plan liabilities.
Multiemployer Plan Relief
Several multiemployer plans have been in deep distress, putting at risk the pensions of many union employees. Congress has been considering this crisis for years, and ARPA now incorporates a modified version of the previously proposed Butch Lewis Emergency Pension Plan Relief Act of 2021.
ARPA provides for direct financial assistance to the most underfunded multiemployer plans, including plans that are in critical and declining status, plans that are less than 40% funded and certain plans certified to be insolvent. The Pension Benefit Guaranty Corporation is required to issue guidance regarding how to apply for such assistance within 120 days after the enactment of ARPA. Multiemployer plans may apply for such assistance until December 31, 2025.
ARPA also provides funding relief to all multiemployer plans adversely impacted by the pandemic by allowing a longer period for amortization of losses and more favorable interest rate assumptions in determining the actuarial value of plan assets.
Scope of Section 162(m) Expanded
Section 162(m) of the Code imposes an annual $1 million dollar deduction limit on the compensation which a public company pays to its Chief Executive Officer, Chief Financial Officer and next three highest paid executives (“covered employees”). Section 162(m) was substantially revised by the 2017 Tax Cuts and Jobs Act, notably to remove the exception for certain performance-based compensation and otherwise to make it more difficult to avoid the limitation. Our December 2019 OnPoint discussed a number of issues under the new Section 162(m) rules. Under the current rules, once an individual is designated a covered employee, they remain so for life.
Effective for tax years beginning after December 31, 2026, ARPA expands the group of covered employees to include the next five most highly compensated employees. However, these additional covered employees will not have permanent covered employee status, but rather will change from year to year.
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The COVID-19 pandemic continues to have ramifications for the rules governing employee benefits and executive compensation, and ARPA is the most recent example.
