American Rescue Plan Act: Employee Benefits Provisions

Summary of Key Employee Benefits Provisions

Increase in Dependent Care Flexible Spending Account Limit for 2021

For the 2021 calendar year only, the ARPA increases the maximum amount that can be excluded from income under Section 129 of the tax code for qualifying dependent care expenses from $5,000 to $10,500 (from $2,500 to $5,250 in the case of a separate return filed by a married individual). Employers who sponsor Section 125 plans with dependent care flexible spending accounts may amend their plans on or before the last day of the plan year to allow their eligible employees to benefit from this increased limit.  Fiscal plan year sponsors will need to consider how to implement the relief given their plan year limits, noting that the increased contribution limit ends on December 31, 2021.

Note that the Consolidated Appropriations Act of 2021 permits employers to amend their Section 125 plans to permit mid-year election changes when the same normally would not be permitted. Such relief will need to be implemented in conjunction with any increased limits allowed under the ARPA. For employers who decide not to increase the dependent care flexible spending account limit for 2021, employees still may qualify for the child and dependent care tax credit that was substantially enhanced and made refundable for 2021 under the Affordable Care Act Premium Tax Credit (“PTC”) expansion (discussed below).

Affordable Care Act Premium Tax Credit Expansion

The ARPA expands eligibility for Premium Tax Credits (“PTCs”) under Internal Revenue Code (“IRC”) Section 36B. These PTCs, which are provided pursuant to the Affordable Care Act (“ACA”), make securing coverage through the Healthcare Marketplace or other state exchange more affordable. In general, the changes temporarily eliminate the phase-out of eligibility for households over 400% of the federal poverty level, reduce the contributions eligible households must make toward the premium cost, suspend the recapture of excess credits previously provided, and consider anyone who receives unemployment compensation during any week in 2021 as eligible.

For employers, this could mean that more “full-time” employees claim PTCs, and therefore lead to greater IRS scrutiny of employers’ ACA compliance and a shift in employer group health plan enrollment. An increased pool of individuals who qualify for subsidized coverage could lead to employer-shared responsibility penalties under the ACA. Employers should review and confirm its ACA compliance and reporting in order to understand penalty risk and exposure in light of this PTC expansion.

COBRA Premium Subsidies

The ARPA includes Consolidated Omnibus Budget Reconciliation Act (“COBRA”) subsidy provisions intended to make health insurance coverage accessible and affordable. The ARPA creates a 6-month subsidy period (April 1 to September 30, 2021) during which certain “assistance eligible individuals” (“AEIs”) may qualify for a 100% subsidy for COBRA coverage.   A qualifying AEI would pay no cost for monthly COBRA premiums for medical, dental, or vision coverage if the individual is eligible for COBRA coverage during the subsidy period. The subsidy period does not extend the maximum COBRA coverage period. The ARPA simply suspends the AEI’s obligation to make COBRA premium payments for up to 6 months.

The ARPA COBRA rules are not optional for employer-sponsored group health plans. All group health plans subject to COBRA, except health flexible spending accounts, must provide this subsidized coverage.

The employer (or insurer for fully insured coverage) has an obligation to provide subsidized COBRA coverage and pay or incur the AEI’s COBRA premium cost.  Note that the employer (or insurer) may recover the cost of the coverage from the federal government by claiming a credit against its quarterly Medicare payroll tax liability.

Only those qualified beneficiaries who trigger COBRA continuation coverage because of an involuntary termination of employment or a reduction in hours and whose current COBRA continuation coverage period would cover some or all of the subsidy period are considered AEIs, and only if such individuals elect COBRA coverage. Individuals who qualify for COBRA because of voluntary termination, retirement, or death would not be considered AEIs.

The ARPA also creates an extended COBRA election period for AEIs, so even AEIs who previously declined COBRA coverage, or whose coverage was terminated because of nonpayment of premiums, may enroll and receive the subsidized coverage for the length of the subsidy period.

Finally, the ARPA imposes new notice requirements on group health plans, which provide AEIs with the information they need to enroll in subsidized coverage. There is a required notice of the availability of the subsidy, a notice of the extended election period for COBRA coverage, and a notice of the expiration of the subsidy.  The U.S. Department of Labor will issue model notices that plan administrators may use.

Group health plans may, but are not required to, allow an AEI to enroll in different coverage options available from the employer, subject to certain conditions. If offered, the notices would need to describe this option.

Pension Plan Funding Stabilization

For employers who sponsor single-employer defined benefit plans, the ARPA provides several ways to stabilize funding, including implementing 15-year (up from 7) amortization periods, fresh start rules, and an increase in interest rates used for minimum funding determinations. These changes should reduce the minimum required contribution amounts, but would also need to be weighed against the cost of obtaining an updated valuation, among other considerations.

Conclusion

For many employers, the key provisions that may warrant immediate action include the dependent care flexible spending account increases and the COBRA provisions. Please contact your employee benefits attorney to draft any desired plan changes and/or plan policies.