The Latest: COBRA Subsidies and New COBRA Election Rights
At Long Last......True Relief for Flexible Spending Accounts
Other Notable Benefits Provisions in ARPA
Retirement Plan Pandemic Relief: Gone (But Forget at Your Own Peril)
Retirement Plan Documents Updates
Retirement Plan Participation and Long-Term, Part-Time Employees
Updated MRD Factors Finalized
Key 2021 Benefits Related Limits
COBRA subsidy – Similar to legislation adopted in 2009 in response to the Great Recession, ARPA includes provisions that provide for a 100% subsidy of COBRA group health plan premiums (including premiums for continuation coverage under state "mini-COBRA" statutes) for "assistance eligible individuals" (AEIs). AEIs are qualified beneficiaries who experience a COBRA election right in connection with an involuntary termination of employment or a reduction in hours and who are (or will be) receiving COBRA coverage at any point from April 1, 2021 through September 30, 2021 (the Subsidy Period). The premium subsidy is available for COBRA coverage during the entire Subsidy Period or, if earlier, until the AEI (i) loses COBRA coverage, (ii) becomes eligible for Medicare or (iii) becomes eligible for other group health plan coverage (but not including for this purpose excepted benefits or coverage under a qualified small employer health reimbursement arrangement or a health care flexible spending account).
The premium subsidy is funded through a reduction in employment taxes and includes any 2% administrative fee. We expect additional guidance to be issued explaining the credit process. In the meantime, employers should stop collecting COBRA premiums for AEIs. If COBRA premiums are collected while the subsidy is available, the group health plan will need to either credit the premiums paid to future coverage or issue a refund.
Special COBRA election rights – The new law also requires group health plans to offer another COBRA election right if group health plan coverage was lost due to an involuntary termination of employment or a reduction in hours and the qualified beneficiary either did not originally elect COBRA continuation coverage or let the COBRA coverage lapse. New election notices must be provided by May 31, 2021 and each qualified beneficiary will have 60 days to make a new election.
According to recently issued Department of Labor FAQs, qualified beneficiaries may choose to begin coverage prospectively from the date of the new COBRA election or, if the qualifying event was on or before April 1, 2021, may choose to start coverage retroactively to April 1, 2021. Coverage need not, however, extend beyond the original period of coverage. The FAQs further clarify that this new COBRA election right is not subject to the COVID-19 extension rules that generally allow additional time to make COBRA elections as a result of the pandemic.
New COBRA notices – Effective immediately, plans should begin to provide an explanation of the COBRA premium subsidy. With respect to AEIs who became COBRA eligible on or before April 1, 2021 and individuals to whom the special election right is available, group health plans are required to issue notices by May 31, 2021 explaining rights under the new law. The new law also requires that group health plans provide notices apprising AEIs of the expiration of the subsidy (generally within 15 to 45 days prior to the end of the Subsidy Period or, if earlier, when the AEI’s COBRA coverage otherwise expires). The Department of Labor has issued model notices for all of these issues and we anticipate that employers and plan administrators will work with their COBRA administrators to ensure that all qualified beneficiaries and AEIs are properly notified.
Failure of a plan to provide required COBRA notices can result in a penalty of $100 a day per qualified beneficiary, up to $200 a day per family. Qualified beneficiaries in turn are required to notify the plan upon becoming eligible for other qualifying group health plan coverage or becoming eligible for Medicare. Failure to provide this notice can result in a penalty of $250 (or if the failure is fraudulent, up to 110% of the premium assistance).
As we noted in our January 2021 alert, CAA significantly loosened the use-it or lose-it rules that normally apply to health care and dependent care flexible spending accounts (FSAs). However, various questions remained unanswered with respect to who can take advantage of the new relief and how the relief is applied. Thankfully, the Internal Revenue Service issued Notice 2021-15, which answered many of these questions.
The Notice clarified, for example, that any FSA can take advantage of the CAA relief by retroactively amending the plan to allow either a grace period or a carryover feature and to allow unused amounts remaining at the end of the 2020 plan year to be used in 2021 and to allow unused amounts remaining at the end of the 2021 plan year to be used in 2022. (Amounts still cannot be mixed of course; that is, one cannot use health care FSA balances to reimburse dependent care expenses and vice versa.)
Reflecting the changes made by CAA, the Notice further provides that, in general (and assuming a calendar year plan year) –
Employers generally have a great deal of flexibility in enacting these changes and can offer some or all of them or can limit election changes in certain ways, provided applicable nondiscrimination requirements are met. Amendments adopting FSA relief must be adopted by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective. So for plans that operate on a calendar year basis, amendments for carryovers or extended grace periods from 2020 to 2021 and other changes generally must be adopted by December 31, 2021, while changes for carryovers and grace periods from 2021 to 2022 generally must be adopted by December 31, 2022.
While there is a great deal of flexibility, employers and employee-participants also need to be aware of a few traps. First, participants currently enrolled in a high deductible health plan (an HDHP) who wish to utilize carried over amounts from 2020 under a general purpose health care FSA will not be permitted to make health savings account (HSA) contributions with respect to any month in which the employee has access to the general purpose health care FSA. While employers can allow mid-year election changes out of an HDHP, doing so requires coordination with group health plan providers. As a result, it may be better to simply offer the affected employee the ability to opt out of the carryover provision.
Second, carryovers and extended grace periods are two slightly different things under the new provisions. While both allow employees to utilize prior plan year contributions for reimbursement of expenses incurred during the subsequent plan year, they have different impacts on terminated participants for plans that choose to adopt the new spend down feature available for health care FSAs. If a health care FSA offers a spend down feature for 2020 or 2021, the spend down feature allows reimbursements of claims through the end of any grace period. This will include any extended grace period, but not a carryover period. As a result, if a health care FSA adopts a spend down feature, employees who terminate in 2021 have until as long as the end of the 2022 plan year to incur expenses that can be reimbursed from 2021 account balances. But if the health care FSA adopts a carryover rather than a grace period, employees terminated in 2021 can only be reimbursed for expenses incurred during 2021.
Third, even if a health care FSA adopts a spend down feature for 2020 or 2021, terminated participants must still be offered COBRA and COBRA election materials must be provided. Failure to send COBRA election materials can result in penalties to employers, even though there are few situations where it would make sense for an employee to elect COBRA on a health care FSA that utilizes a spend down feature.
Finally, it should be noted that any carryover or grace period extension for a health care FSA will need to be coordinated with Department of Labor’s guidance extending the suspension period for filing health care FSA claims due to the COVID-19 outbreak. In general, run-out periods for filing claims for 2020 benefits are suspended for up to a one-year period or, if earlier, 60 days after the end of the presidentially-declared national emergency as a result of the COVID-19. As a result, health care FSA plan forfeitures may be delayed pending submission of additional claims. We expect administrators will likely proceed with normal year-end processes and make determinations of grace period or carryover amounts based on the original run-out period, and adjust for later claims submissions as needed. (This issue is not relevant to dependent care FSAs since those arrangements are not subject to ERISA.)
One final note. ARPA provides additional relief with respect to dependent care FSAs by increasing the amount of reimbursements that can be excluded from income in calendar year 2021 from $5,000 to $10,500. Taken together, the ARPA and CAA changes should allow employees to be reimbursed for up to $10,500 of eligible dependent care expenses incurred in 2021 on a nontaxable basis, although there are open questions as to how this latest relief will work with all of the already complicated carryover and grace period rules. Employers should keep in mind that (unlike health care FSAs) the $10,500 amount is a reimbursement limit, not a contribution limit, and applies only for 2021. So, amounts that accumulate in excess of $10,500 (whether attributable to 2020 contributions or 2021 contributions) cannot be used to reimburse 2021 dependent care expenses on a non-taxable basis. In addition, because the $10,500 limit is currently scheduled to return to $5,000 in 2022, employees with large account balances remaining at the end of 2021 that carry over into 2022 (or can be utilized under an extended grace period) will need to manage their 2022 contributions carefully to avoid forfeitures or unnecessarily tying up compensation.
ARPA also includes a number of other benefits provisions worthy of mention.
Expansion of Internal Revenue Code Section 162(m) – Internal Revenue Code Section 162(m) currently prohibits a public company from deducting compensation in excess of $1,000,000 (i) with respect to any employee who is or has been a principal executive officer or principal financial officer at any time during the taxable year, (ii) with respect to any employee (other than the principal executive officer or principal financial officer) who is among the three highest paid officers whose total compensation is required to be reported in public filings or (iii) with respect to any employee who was in one of the prior two categories with respect to any taxable year that began after December 31, 2016 (each such employee is referred to as a covered employee).
Starting with taxable years beginning after December 31, 2026, ARPA expands the definition of covered employee to add the five most highly compensated employees for the year who are not already included by virtue of (i) or (ii) of the preceding paragraph. Note that the lingering “taint” of (iii) does not apply to this new group.
2021 dependent care tax credit increase – In addition to the dependent care FSA changes discussed earlier, ARPA also increases from $3,000 to $8,000 (for one qualifying dependent) and from $6,000 to $16,000 (for two or more qualifying dependents) the amount of employment-related expenses that may be taken into account for purposes of the dependent care tax credit for 2021. ARPA also significantly increases the size and availability (to higher income taxpayers) of the credit and makes the credit refundable.
Paid FMLA and sick leave extension – As we noted in our CAA alert, CAA extended emergency Family and Medical Leave Act and Paid Sick Leave Act credits through March 31, 2021 and ARPA now extends the availability of those credits through September 30, 2021. ARPA also makes other changes to how these provisions are applied, including, for example, adding leave taken to receive or recover from vaccination.
Please reach out to a member of the Employment and Benefits Practice Group if you are interested in additional information about any of these changes.
As part of the CARES Act, Congress made four key changes that apply generally to tax-favored retirement vehicles – the creation of coronavirus-related distributions (or CRDs), an expansion of the limits available for participant loans from tax-qualified plans, a suspension of participant loan repayments (but not the accrual of interest) and 2020 minimum required distribution (MRD) relief. None of these special provisions are available in 2021. To be eligible for CRD treatment, a distribution must have occurred on or before December 30, 2020 (although the CAA made a last minute tweak to CRDs). The last day on which a participant could have originated a plan loan under the increased limits was September 22, 2020 and while loan repayments through the end of 2020 could be suspended for up to one year, as a practical matter the systems of many (but not all) third-party recordkeepers required the resumption of regular loan repayments (including the deferred payments) at the beginning of 2021. Finally, MRD relief was available only for 2020.
As a reminder, however, tax-favored retirement vehicles that adopted any of these provisions will need be amended if an amendment has not already been adopted. Qualified plans generally must be amended for CARES Act provisions by the last day of the first plan year beginning on or after January 1, 2022 (so for a plan that uses the calendar year as the plan year, the amendment must be adopted by December 31, 2022).
SECURE Act changes – Amendments to retirement plans to reflect various new rules that are part of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) are also generally required as of the last day of the first plan year beginning on or after January 1, 2022 (so again, for a plan that uses the calendar year as the plan year, the amendment must be adopted by December 31, 2022). As we noted in our earlier alert on this legislation, plan sponsors should be keeping track of the effective date of operational changes in order to ensure that amendments are accurate when the time comes.
TCJA and BBA changes – Adding a bit of confusion, any amendments to retirement plans made to reflect changes under the Tax Cuts and Jobs Act of 2017 or the Bipartisan Budget Act of 2018, as discussed in our earlier alert must be adopted by the last day of the first plan year beginning on or after January 1, 2021 (so for a plan that uses the calendar year as the plan year, the amendment must be adopted by December 31, 2021).
Welfare benefit relief – The CARES Act temporarily permitted HDHPs to provide telehealth services without cost-sharing. Fortunately, this relief applies to plan years beginning on or before December 31, 2021 (2020 and 2021 for calendar-year plans). Employers taking advantage of this relief will need to re-introduce cost sharing for telehealth services once the relief expires, absent any further legislative action.
Student loan relief – Although we covered this in an earlier alert, it is such a hot topic that we thought it made sense to mention it a second time. The CARES Act temporarily modified Internal Revenue Code Section 127, which allows for an exclusion from income for up to $5,250 in educational assistance benefits provided by an employer to its employees. As revised, employers were permitted to make (or reimburse employees for) student loan repayments of up to $5,250 annually between March 27, 2020 and December 31, 2020 with respect to qualified education loans. (A single $5,250 limit applies for all purposes under this provision.) CAA extended the availability of this student debt relief provision through December 31, 2025.
Prototype and Volume Submitter Plan Restatements – Several years ago, the IRS adopted a six-year restatement cycle for pre-approved plans (formerly known as prototype or volume submitter plans). For plan sponsors that use such an arrangement (often provided by their recordkeeper or third party administrator) the time has come to update their plan document. A two-year window in which to adopt the updated plan document opened on August 1, 2020 and will close on July 31, 2022. Depending on the degree of changes, a sponsor may also want to apply for an updated determination letter with respect to their plan’s tax qualified status.
Upon receiving drafts, clients must carefully review the updated documents. Errors are not as uncommon as one would hope, and a minor oversight or overlooked change (even if buried deep in the boilerplate) can have catastrophic effects, including resulting in operational violations and plan document errors that can be costly to fix.
SPDs – In connection with the restatement process, clients should also consider updating and redistributing the summary plan description (SPD), particularly if this has not been done recently. In general, ERISA requires – for both retirement plans and welfare benefit plans – that SPDs be provided within 90 days of enrollment. Updates through a summary of material modifications (an SMM) are generally due within 210 days of year-end (much sooner for certain group health plan related changes). In addition, an updated SPD, incorporating all SMMs, must be distributed every five years and in the unlikely event that no plan changes are made, the SPD must be redistributed every 10 years.
Feel free to reach out to a member of Sullivan’s Employment and Benefits Practice Group with any questions and/or for assistance in reviewing and updating any of your documents.
Readers may recall that one of the changes made by the SECURE Act was to broaden access to 401(k) plans for what are now known as “long-term, part-time” employees. Specifically, employees with at least 500 hours of service beginning on or after January 1, 2021 for at least three consecutive years (and who are over age 21 by the end of the three year period) will be required to be offered the opportunity to make 401(k) deferral contributions, even if they do not complete 1,000 hours of service in a given year. These long-term, part-time employees are not required to receive matching or profit sharing contributions and can be excluded from top heavy and nondiscrimination testing. Because years prior to 2021 are not counted for this purpose, it means that none of these employees will be required to be offered the opportunity to make 401(k) deferral contributions until at least 2024.
As we noted in our earlier alert, however, for vesting purposes, a long-term, part-time employee must be credited with a year of vesting service for each year in which the employee completes at least 500 hours. (A change is also made to the normal break in service rules for these employees.) In Notice 2020-68, the IRS went a step further, providing that a year of vesting service must be credited to long-term, part-time employees even for years prior to 2021, unless some other exemption applies (the plan provides that years prior to attaining age 18 are not counted for vesting purposes, for example). In light of this position, plan sponsors should be taking steps now to capture this information, even though the information itself will not be needed until at least 2024.
In our January 2020 client alert, we alerted clients to proposed regulations that had been published that update MRD life expectancy factors (the result of which is to slow down MRDs). These factors, which have not been updated since the early 2000s, were proposed to be effective beginning in 2021. In November, 2020, final regulations were issued although in response to comments received, the effective date for using the new tables has been postponed for one year, meaning that they are first applicable to distribution calendar years beginning on or after January 1, 2022.
Taxable wage base
Section 415(b) limit
Section 415(c) limit
Section 402(g)/401(k) limit
Officer (top heavy) threshold
Health flexible spending account
Health Savings Accounts
Individual contribution limit
Family contribution limit