The American Rescue Plan Act of 2021, Pub. L. No. 117-2 (the “ARPA”), signed into law on March 11, 2021, by President Biden, contains a few unexpected tax surprises. For businesses, the ARPA contains the following important tax changes, each of which is discussed in greater detail below:
- Extends amortization for single-employer pension plans and extension of pension funding stabilization percentages for single-employer plans;
- Preserves health benefits for workers;
- Repeals the one-time election to allocate interest expense on a worldwide basis;
- Adds an exclusion for targeted economic injury disaster loans (“EIDL advances”);
- Adds an exclusion for restaurant revitalization grants;
- Adopts an extension of the suspension of the limitation on current year deduction of farming losses;
- Provides for the codification of payroll tax credits for paid sick and paid family leave; and
- Extends the employee retention credit.
The full text of the ARPA is located here.
I. Extended Amortization for Single-Employer Pension Plans and Extension of Pension Funding Stabilization Percentages for Single-Employer Plans.
The ARPA contains two significant defined benefit pension plan reforms. These provisions impact single employer-defined benefit plans and multiemployer pension plans (often referred to as “union pension plans”). It is anticipated that future guidance will be issued regarding these complicated relief measures.
A. Single-Employer Defined Benefit Plans.
To counteract the immediate significant financial hurdles facing many single-employer defined benefit plan sponsors, ARPA provides immediate relief by stabilizing interest rates and controlling annual costs as follows:
- New Amortization Period. Previously, unfunded liabilities were amortized over a seven-year period. The ARPA provides that these liabilities should now be amortized over a 15-year period. Similar to a 15-year home mortgage versus a 30-year home mortgage, the additional amortization years will enable sponsors to significantly reduce their required annual contributions.
- Fresh Start Calculation. The ARPA permits single employer-defined benefit plans to apply the favorable amortization period to all unfunded liabilities.
- Interest Rates. Interest rates and fluctuations in interest rates are significant factors for single employer-defined benefit plans and meaningfully affect a sponsor’s contribution requirements. Generally, lower interest rates cause increased benefit funding obligations. The ARPA continues and enhances the “smoothing trend” to counteract volatility through 2030 and, importantly, sets a 5% interest rate floor to help maintain affordable and more predictable annual contributions.
These are all positive developments for sponsors of single employer defined benefit plans. Please contact your Dykema attorney to discuss the various optional effective dates and related financial and legal implications, as each plan sponsor may be impacted differently.
B. Multiemployer Pension Plans.
Multiemployer pension plans are funded by at least two employers pursuant to the terms of one or more union collectively-bargained agreements. Many such plans are significantly underfunded threatening the livelihood of participants and contributing employers. ARPA includes: (1) special financial assistance for the most at-risk plans through 2051 to ensure no participant benefit reductions, (2) temporary relief that enables a plan to maintain its financial zone status (endangered, critical or critical and declining status) for a limited period of time, and (3) an extension of funding improvement periods or rehabilitation periods for up to five years.
II. Reserving Health Benefits for Workers.
ARPA includes free COBRA coverage for certain individuals for a short duration. Employers generally pay for these COBRA premiums, but are able to offset this cost as a credit against their Medicare payroll taxes. Employers subject to Federal or State COBRA laws must take immediate action to comply with these new COBRA provisions, including revising administration aspects and supplementing notices where appropriate.
Any individual who is eligible for COBRA by reason of an involuntary termination of employment or reduction in hours of service is eligible for the premium subsidy. There are no income restrictions regarding eligibility, the involuntary termination or reduced hours do not need to be COVID-related, and current or former employees, spouses and their dependents may be eligible even if they previously declined or dropped COBRA coverage. The ARPA refers to these eligible individuals as assistance eligible individuals (“AEIs”).
AEIs, however, do not include qualified beneficiaries who are eligible for COBRA due to qualifying events other than involuntary terminations or reductions in hours (such as voluntary terminations of employment, death of the employee, divorce from the employee, or a child attaining age 26). Individuals experiencing a COBRA qualifying event after September 30, 2021, also will not be considered AEIs (unless future legislation extends the COBRA premium subsidy).
The subsidy period begins on April 1, 2021, and generally ends for months of coverage beginning after the earliest of (1) September 30, 2021, (2) the end of the AEI’s maximum COBRA period (e.g., expiration of the 18 months of COBRA coverage), or (3) the AEI’s eligibility, regardless of actual enrollment, for coverage under another group health plan or Medicare.
While further guidance is expected, the COBRA subsidy appears to be available to group medical, dental and vision plans, whether self-funded or fully-insured, that are subject to Federal COBRA law or subject to a state program that provides comparable continuation coverage. However, the subsidy is not available for coverage under health flexible spending account plans.
An employer, at its option and with the consent of the medical/Rx insurance carrier, may allow AEIs to elect an alternative medical/Rx option when certain conditions are met. This special election change does not apply to dental or vision coverage, qualified small employer health reimbursement arrangements or flexible spending accounts.
The COBRA subsidy is 100% of the applicable COBRA premium, including administrative fees. This means that AEIs will pay nothing for their COBRA coverage during the subsidy period.
Generally, the employer that sponsors the group health plan will pay the COBRA premiums during the subsidy period but will recoup that cost by Medicare payroll tax credits.
If the group health plan, however, is a multiemployer union welfare plan, the plan itself will pay the COBRA premiums. Also, if the group health plan is fully-insured and not subject to Federal COBRA law, such as a fully-insured small-employer group health plan subject only to state COBRA law, the insurance carrier will pay the subsidy.
The Internal Revenue Service is expected to issue additional guidance on how to claim tax credits to offset the cost of the COBRA subsidy during the subsidy period.
The prior COVID-extended deadline guidance creates administrative challenges for employers in administering the COBRA subsidy under the ARPA. The COBRA election and premium payment deadlines are extended until the earlier of (1) one year from the original effective date of COBRA coverage or (2) the end of the Outbreak Period. The Outbreak Period ends 60 days after the end of the national emergency concerning COVID-19. On February 24, 2021, President Biden extended the national emergency beyond March 1, 2021. As a result, the COBRA election and payment deadlines continue to be extended.
For the 2021 tax year only, an employer may increase the annual contribution limit for dependent care FSAs to $10,500 (up from $5,000) for single taxpayers and $5,250 (up from $2,500) for married individuals filing separately. An employer wishing to allow for this optional increased limit may need to amend (which can be retroactive to the first day of the plan year) its cafeteria and dependent care flexible spending account by the last day of the 2021 plan year, and should allow for a special election period (permitted under CAA and IRS guidance without a mid-year qualifying change in status event) for participants to increase their pre-tax salary contributions up to the increased limit. Note that this type of change may make it more difficult for the dependent care FSA to satisfy annual nondiscrimination testing when highly compensated employees (“HCEs”) increase their contributions. If the employer allows for this increased limit, it should perform a preliminary 55% average benefit test to determine if contributions by HCEs need to be further limited.
The ARPA also temporarily changes the ACA’s Advanced Premium Tax Credit methodology for Marketplace coverage resulting in a greater number of people who are now eligible for the premium tax credit. Although these changes do not directly impose requirements on employer-sponsored group health plans, the change potentially increases the risk of an assessment under the ACA’s Employer Shared Responsibility Payment (“ESRP”) for those applicable large employers who currently are not offering minimum value and affordable group medical/Rx coverage to their full-time employees. If your group coverage does not meet these ACA standards, you should contact your benefits counsel or consultant to analyze your increased risk of ESRP assessments and ways to minimize that risk.
III. Repeal of Election to Allocate Interest on Worldwide Basis.
Before, Section 864(f) of the Internal Revenue Code of 1986, as amended (“Code”), impacted multinational groups where foreign members of the group have a direct U.S. corporate parent. Under the prior Code provision, all U.S. group members were required to allocate interest expense across both U.S. and foreign affiliates. Needless to say, the manner in which interest expense was required to be allocated was exceedingly complex.
ARPA repealed Section 864(f) effective for taxable years beginning after December 31, 2020. Although the allocation is still required for 2020 tax returns, it should no longer add to the compliance burden beginning with this year.
IV. Tax Treatment of Targeted EIDL Advances.
ARPA provides that certain amounts received from the Small Business Administration in the form of a targeted EIDL advance are not included in the gross income of the person that receives the advance. The new provision clarifies that the receipt of a nontaxable EIDL advance does not disallow a deduction, reduce a tax attribute or deny a basis increase solely as a result of the exclusion. There had been some confusion about whether business expenses associated with an EIDL advance would be deductible. The ARPA makes it clear that the exclusion for an EIDL advance has no direct impact on other tax items.
For partnership and S corporation reporting purposes, an excluded EIDL advance is classified as tax-exempt income thereby allowing for corresponding basis increases. Although the ARPA does not discuss whether there is a corresponding positive impact on amounts at-risk under Code Section 465, many commenters have concluded that such an increase falls within the legislative intent.
Please note that EIDL advances are no longer available. More information on EIDL advances is available here.
V. Tax Treatment of Restaurant Revitalization Grants.
The ARPA authorizes the SBA to award grants to certain eligible businesses including restaurants, food stands, food trucks, food carts, caterers, saloons, inns, taverns, bars, lounges, brewpubs, tasting rooms, taprooms, a licensed facility or premises of a beverage alcohol producer where the public may taste, sample, or purchase products, or other similar place of business in which the public or patrons assemble for the primary purpose of being served food or drink (“Restaurant Revitalization Grants”). Please note that with certain exceptions businesses that operate more than 20 restaurants are generally not eligible for a Restaurant Revitalization Grant.
Consistent with the tax treatment of EIDL advances, the ARPA excludes all Restaurant Revitalization Grants from the income of a person receiving such a grant. Likewise, the receipt of a nontaxable Restaurant Revitalization Grant does not require a corresponding denial of a deduction, reduction of a tax attribute, or denial of a basis increase solely as a result of the exclusion.
For partnership and S corporation reporting purposes, an excluded Restaurant Revitalization Grant is classified as tax-exempt income thereby allowing for a corresponding basis increase. Although the ARPA does not discuss whether there is a corresponding positive impact on amounts at-risk under Code Section 465, many commenters have concluded that such an increase falls within the legislative intent.
VI. Extension of Limitation on Excess Farm Losses.
Section 461(j) of the Code provides that if a taxpayer other than a C corporation receives any applicable subsidy for any taxable year, any excess farm loss of the taxpayer for the taxable year is disallowed. Code Section 461(l) suspended the application of the excess farm loss limitation for taxable years beginning prior to January 1, 2026.
The ARPA adds one year to the suspension period for excess farm losses extending it to taxable years beginning prior to January 1, 2027.
VII. Preserving Health Benefits for Workers.
During 2020, Congress passed the Families First Coronavirus Response Act (Pub. L. No. 116-127) allowing a payroll tax credit for employers (including self-employed persons) providing paid sick and family leave. Previously, the credit had to be claimed by March 31, 2021. The ARPA extends the period for claiming the credit until September 30, 2021. The new law also increases the eligible wage limit on which the family leave credit may be claimed from $10,000 to $12,000, effective after March 31, 2021. It should be noted that employers are not obligated to provide paid sick and family leave during 2021, but may do so voluntarily.
VIII. Employee Retention Credit.
ARPA added new Code Section 3134. The new Code section is essentially a codification of the employee retention credit that was created by the Coronavirus Aid, Relief, and Economic Security Act (Pub. L. No. 116-136). ARPA also extends the employee retention credit through the end of 2021. Please note that the credit is now a credit against the employer’s 1.45% share of the Hospital Insurance tax (i.e., Medicare), rather than a credit against the employer’s share of the Old Age, Survivors, and Disability Insurance tax (i.e., Social Security).