On March 11, 2021, President Biden signed the American Rescue Plan Act (the Act), which includes some notable changes and relief for employers and employee benefit plans. The Act expands the section 162(m) deduction disallowance, provides funding relief for pension plans, provides 100% subsidized COBRA coverage for the next six months, and extends certain employee-related tax credits.

Section 162(m) expansion. The Act expands section 162(m), the deduction disallowance for compensation over $1 million paid to officers of publicly held companies. Section 162(m) currently disallows deductions for the CEO, CFO, and top three highest paid officers. The amended section adds the next five highest paid employees to this list.

The “once a covered employee, always a covered employee” rule does not apply to the additional five employees, such that if an employee ceases to be one of the additional five highest paid (and is not the CEO or CFO or other top three highest paid officers), the employee is no longer a covered employee.

This change is not effective until taxable years beginning after December 31, 2026.

ESsentials: It appears that the additional five employees include any company employee, not just officers. This could have a material impact on companies with highly paid non-officers, e.g., individuals on commission, entertainment talent, individuals with substantial stock option exercises or nonqualified deferred compensation distributions. Also, note that in December 2020, final regulations were issued under section 162(m). A detailed review of the final regulations can be found in a prior alert.

Pension plan relief. Several provisions provide funding relief for defined benefit pension plans, particularly for multiemployer plans in financially precarious situations.

Single employer defined benefit plans receive relief in the form of two technical funding provisions. Under current law, employers are required to amortize funding shortfalls over a seven year period. Given low interest rates and market volatility, the Act provides that, for plan years beginning after December 31, 2021 (or, at the election of the employer, for plan years beginning after December 31, 2018, December 31, 2019, or December 31 2020), all shortfalls are amortized over fifteen years. The Act also extends and enhances the interest rate smoothing provisions first introduced in MAP-21, which were scheduled to begin phasing out in 2021.

The Act provides significant relief for multiemployer plans. A multiemployer plan can retain its prior year funding zone status for the first plan year beginning during the period that starts on March 1, 2020 and ends on February 28, 2021, or the next succeeding plan year. This allows plans to temporarily delay a designation as endangered, critical, or declining, and therefore delays the actions plans must take to improve their funding status. A plan that was already in endangered or critical status does not have to update its funding improvement or rehabilitation plan for the year elected by the plan. Additionally, plans in critical or endangered status can elect to extend their current improvement or rehabilitation period by five years, giving plans additional time to make funding improvements.

Congress also created a special financial assistance program for eligible underfunded multiemployer plans. Eligible plans can apply to receive a one-time cash payment from the Pension Benefit Guaranty Corporation (PBGC) through December 31, 2025. These payments are project to allow underfunded plans to continue paying benefits through 2051. Nothing in the Act would require plans to repay this assistance, though the PBGC can impose reasonable conditions on its receipt.

ESsentials: Plan sponsors should reach out to their actuaries to better understand the effect this relief, and the related elections, will have on plan funding obligations.

Subsidized COBRA coverage. The Act mandates 100% subsidized COBRA coverage from April 1, 2021 through September 30, 2021. The subsidy is available to individuals who are eligible for COBRA between April 1, 2021 and September 30, 2021 due to involuntary termination of employment or a reduction in hours, or who would have been eligible but did not elect coverage. For example, an employee who experienced an involuntary termination in December 2020 and who did not elect COBRA coverage at that time would be eligible for 100% subsidized COBRA coverage from April 1 through September 30.

Plans must offer a 60-day special COBRA election period to certain individuals who became entitled to COBRA prior to April 1, 2021. The notice must inform individuals of their new election rights and the availability of the subsidy. The Act also provides for modifications to existing COBRA notices for individuals who become entitled to elect COBRA between April 1, 2021 and September 30, 2021.

The Act also permits, but does not require, employers to allow certain changes to existing COBRA coverage elections during this period, such as a change from higher cost coverage to lower cost coverage.

Employers that sponsor self-insured plans will receive a payroll tax credit equal to the amount of unpaid premiums. Any premium assistance credits in excess of the employer’s applicable payroll taxes will be treated as a refundable overpayment.

ESsentials: Employers that sponsor self-insured plans will need to issue new and revised COBRA notices to subsidy-eligible individuals very quickly. Clients should begin working with COBRA administrators as soon as possible to ensure compliance under these new rules. The Act directs the Department of Labor to issue certain model notices required under this provision within the next 30-45 days.

Dependent care contributions. The contribution limit to employer-provided dependent care assistance programs is more than doubled for taxable years beginning in 2021, increasing from $5,000 to $10,500. Plans will need to be amended by the end of 2021 if they choose to implement this increase for 2021.

ESsentials: Employers implementing this change in 2021 in connection with a dependent care flexible spending arrangement will likely also want to take advantage of the ability to allow mid-year dependent care election changes as enacted by the Consolidated Appropriations Act, 2021.

Credit extensions. The Act extends the employee retention tax credit, as well as tax credits for paid sick time and family leave.

The Act extends the employee retention tax credit (ERTC) through the remainder of 2021 (it was set to expire June 30, 2021) and expands eligibility to cover certain start-up businesses with average annual gross receipts under $1 million. After June 30, 2021, the ERTC will function as a refundable tax credit against the Medicare payroll tax. For further detail on the ERTC see our prior alert.

The Act also extends paid sick time and family leave credits that were originally provided in the Families First Coronavirus Response Act and were set to expire on March 31, 2021. Employers with fewer than 500 employees can claim up to $12,000 (up from the previous limit of $10,000) for eligible sick and family leave provided to each eligible employee in a tax year. Self-employed individuals are eligible to claim up to 60 days of leave, up from the previous limit of 50 days. The credit can now be claimed for time necessary to receive and recover from the COVID-19 vaccine. After March 31, 2021, the credit will be structured as a refundable tax credit against the Medicare payroll tax. The last extension of the credit is described in our prior alert.