The American Rescue Plan (ARP) will have significant and immediate impacts on employee benefit plans, employers, and other plan sponsors and plan administrators.
President Biden signed the ARP stimulus bill today. We highlight the most significant employee benefits and executive compensation changes under the ARP below.
Section 9501 of the ARP requires employers to provide six months of subsidies for individuals who qualify for continued health coverage under COBRA (and state mini-COBRA rules) on account of an involuntary termination of employment. The rules also provide that: (i) an employer may determine to allow such individuals to change their medical plan elections to a less expensive option (which is not so significant to an individual who pays none of the cost); and (ii) plans need to make a new COBRA election opportunity available to certain individuals who did not elect COBRA or who terminated their COBRA coverage prior to the April 1, 2021 effective date. Employers will be able to recover the subsidies from the federal government through credits against the 1.45% employment tax they pay for hospital insurance.
The final ARP COBRA provision largely follows the bill that was originally passed by House Committees with a few notable exceptions:
- The cost of the continued health coverage for those eligible for assistance will be fully subsidized (increased from 85%).
- There will be no expedited governmental review for individuals who are denied the subsidy.
- There are certain adjustments with regard to the tax credit that employers may claim, and an extension of the period for the IRS to assess amounts for non-compliance.
The legislation imposes new notice requirements that employers will need to meet. The government is to issue a model notice within 30 days of enactment. There will hopefully be guidance addressing certain aspects of the new rules as well.
Dependent Care FSAs
Section 9632 of the ARP increases the amount that may be excluded as taxable income for dependent care flexible spending accounts (FSAs) for 2021. This relief increases the current limit of $5,000 to $10,500 for individuals filing a joint return or for unmarried individuals, and increases the limit of $2,500 to $5,250 for married individuals filing separate returns. To the extent that individuals carried over dependent care FSA funds from 2020 to 2021 or relied on the extended grace period permitted by the Consolidated Appropriations Act and recent IRS guidance, these individuals may not have been able to incur dependent care expenses that exceeded the original limit on a tax-free basis, preventing them from using all contributions from 2020 and 2021. The ARP relief will now permit these individuals to take full advantage of the extended grace period and expanded carryover provisions in 2021.
Section 9661 of the ARP revises the rules for premium subsidies for those purchasing health insurance coverage through a Marketplace exchange. These changes will increase the premium subsidy that some individuals receive and make some individuals eligible for subsidies for the first time. Employers should be mindful of these changes to the extent that an increase in eligibility for subsidies could result in an assessment or an increased assessment under the employer mandate rules of the Affordable Care Act. This will not be an issue for employers that offer minimum essential coverage to at least 95% of their full-time employees and offer all full-time employees affordable coverage that meets the standards for minimum value.
Section 9708 of the ARP expands the universe of employees of publicly-traded companies who are subject to the annual $1 million deduction limit on compensation under section 162(m) of the Internal Revenue Code. For taxable years beginning in 2027 or later, a “covered employee” subject to the section 162(m) deduction limitation includes the five highest compensated employees of the company in addition to the CEO, the CFO and the three highest compensated officers. Thus, beginning in 2027, 10 employees will be subject to the section 162(m) deduction limitation each year, plus any individual who was a covered employee in a prior year.
The ARP makes the most significant changes to the funding requirements for single-employer and multiemployer pension plans since the Pension Protection Act of 2006 (PPA).
For single-employer defined benefit pension plans, the ARP allows a plan sponsor to amortize any funding shortfalls over 15 years (as opposed to the seven-year amortization period established by the PPA). In addition, the ARP extends the interest rate stabilization period for minimum funding purposes through 2029 and establishes a minimum interest rate floor. The combination of these changes should reduce an employer’s annual minimum funding obligations to its defined benefit pension plan over the next decade. Also, the changes to the interest rate stabilization rules will necessitate changes to annual funding notices, and the U.S. Department of Labor is directed to update its model language.
For multiemployer pension plans, the ARP provides several types of funding relief:
- The sponsor of a multiemployer pension plan may elect, for the plan year beginning during the March 1, 2020 – February 28, 2021 period, and for the next plan year, to apply the same funding status (endangered, critical or critical and declining) that existed in the preceding plan year.
- The funding improvement or rehabilitation periods for multiemployer pension plans that are in endangered or critical status are extended to 15 years (from 10 years) or 20 years for seriously endangered plans (from 15 years).
- Multiemployer pension plans that meet a solvency test are permitted to amortize certain experience gains and losses over a longer period.
- A new fund, to be administered by the Pension Benefit Guaranty Corporation (PBGC), is established to provide special financial assistance to multiemployer pension plans in critical and declining status, or that satisfy certain other financial stress criteria. These plans may request financial assistance from PBGC to enable them to pay all benefits through 2051. Employer withdrawal liability continues to be calculated without regard to the financial assistance.
- PBGC premiums for multiemployer pension plans are increased from $26 to $52 per participant, for plan years beginning after December 31, 2030.
Finally, for all retirement plans, the Internal Revenue Code limits on annual compensation under section 401(a)(17) and annual additions under section 415 are frozen as of December 31, 2030, and will not be adjusted for cost-of-living increases after that date.