On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (“ARPA”), a $1.9 trillion COVID-19 economic stimulus bill. ARPA contains provisions affecting employee benefits and executive compensation, including temporary fully subsidized COBRA premiums, a temporary increase in dependent care assistance dollar limits, relief for single employer and multiemployer defined benefit pension plans, and the expansion of the pool of covered employees subject to the compensation limitations under Internal Revenue Code Section 162(m).
Temporary Fully Subsidized COBRA Premiums. ARPA fully subsidizes COBRA premiums for “assistance eligible individuals”, defined as any qualified beneficiaries (that is, covered employees and their covered spouses and dependent children) who are eligible for, and who elect, federal or state COBRA coverage for any coverage period during the 6-month subsidy period beginning April 1, 2021 and ending September 30, 2021, by reason of the covered employee’s involuntary termination of employment or reduction of hours. The subsidy is not available if the covered employee voluntarily terminates employment. Assistance eligible individuals pay nothing for their fully subsidized COBRA coverage, and the premium subsidy is excluded from their federal gross income. The persons to whom the fully subsidized COBRA premiums otherwise would have been paid (that is, insurers, employers or plans) pay the full COBRA premiums and then recover their outlays through payroll tax credits. The COBRA premium subsidy applies to all COBRA-subject group health plans (for example, medical, dental and vision plans), except for health flexible spending arrangements (health FSAs) offered under Internal Revenue Code Section 125 cafeteria plans.
If any assistance eligible individual pays a COBRA premium that is eligible for the subsidy, the person to whom the premium was paid (that is, the insurer, employer or plan) must reimburse the individual within 60 days after he or she elects subsidized COBRA coverage.
The 6-month COBRA premium subsidy period begins April 1, 2021 and ends September 30, 2021. The subsidy will expire before September 30, 2021 if, before that date, an assistance eligible individual’s maximum COBRA coverage period ends or if the individual becomes eligible for coverage under another employer’s group health plan or Medicare. An assistance eligible individual must notify the group health plan under which he or she is receiving the COBRA premium subsidy when he or she becomes eligible for another employer’s group health plan or Medicare, and may be subject to a monetary penalty if he or she fails to do so.
The 6-month COBRA premium subsidy period (April 1, 2021 to September 30, 2021) does not lengthen an assistance eligible individual’s COBRA coverage period. So, for example, if the individual’s COBRA coverage period will end on June 30, 2021, the individual will get the COBRA premium subsidy for April, May and June 2021 only.
The additional information listed in 1 through 6 above may be provided either in the COBRA election notice itself or in a separate document provided along with that notice. ARPA requires the U.S. Department of Labor (DOL) to prescribe a model COBRA election notice meeting these additional notification requirements not later than April 10, 2021 (that is, not later than 30 days after ARPA’s March 11, 2021 enactment date).
The requirement to provide the notice of expiration of the period of COBRA premium subsidy is waived if the subsidy expires prior to its otherwise-applicable expiration date because the assistance eligible individual becomes eligible for coverage under another employer’s group health plan or Medicare.
The DOL is required to prescribe a model notice of expiration not later than April 25, 2021 (that is, within 45 days after ARPA’s March 11, 2021 enactment date).
Temporary Increase in Dependent Care Assistance Dollar Limits. ARPA permits (but does not require) employers to increase qualified dependent care assistance program flexible spending account (DCAP FSA) annual spending limits, but only for the 2021 taxable year. Employers who wish to make this change to their DCAP FSAs will need to act quickly. The normal DCAP FSA annual spending limits are $5,000 for unmarried individuals and for married individuals filing jointly and $2,500 for married individuals filing separately. For taxable year 2021 only, ARPA boosts those spending limits to $10,500 for unmarried individuals and for married individuals filing jointly, and to $5,250 for married individuals filing separately.
Employers who decide to implement ARPA’s higher DCAP FSA spending limits for 2021 may allow participants in their Section 125 cafeteria plans to prospectively change their DCAP FSA elections to take advantage of the higher limits for the remainder of this year. Such employers must amend their plan documents, by the last day of the plan year in which the change is effective, to reflect the higher limits, and such plan amendment can be retroactively effective as long as the employer operates its plan consistently with the terms of the amendment beginning on its effective date and ending on the date the employer adopts the amendment.
Executive Compensation Changes. For taxable years beginning after December 31, 2026, ARPA expands the number of employees covered by the $1 million deduction limit applicable to publicly held corporations under Code Section 162(m). Under current rules, the group of “covered employees” whose compensation is subject to Section 162(m) generally consists of those employees who have served as the chief executive officer, chief financial officer, or one of the three highest-compensated other officers. For taxable years beginning after December 31, 2026, ARPA expands the group of “covered employees” to include the next five highest compensated employees, regardless of whether they served as officers at any time during the taxable year. Unlike other covered employees, these additional five covered employees will not be permanently treated as covered employees and will be re-determined each taxable year beginning after December 31, 2026, based on compensation levels.
Single Employer Defined Benefit Pension Plan Relief. ARPA contains two provisions that grant some funding relief to single employer defined benefit pension plans.
Multiemployer Defined Benefit Pension Plan Relief. ARPA also contains several provisions that are intended to address the country’s financially-troubled multiemployer defined benefit pension plan system. One such provision creates a “special financial assistance fund” under the Treasury Department from which the Pension Benefit Guaranty Corporation (PBGC) would be able to make grants to severely underfunded multiemployer plans, which those plans would not have to repay. Under another provision, for plan years beginning after December 31, 2030, the multiemployer PBGC premium rate will increase from $31 to $52 per participant, and the premium amount will be subject to indexed increases for plan years beginning after December 31, 2031. ARPA does not change PBGC premium rates for single employer defined benefit pension plans.