American Rescue Plan Act of 2021: COBRA Subsidy, Pension Funding, and Other Employee Benefit Changes
The American Rescue Plan Act of 2021 (ARPA) is the latest federal COVID-19 relief bill, which the President signed into law March 11, 2021. ARPA includes new COBRA continuation coverage election, notice, and subsidy requirements; pension plan funding relief; and some cost-saving benefit opportunities employees may be able to leverage. Some of these changes are required and could take effect as early as April 1, 2021, requiring immediate action by employers (or their insurers or administrators). Other provisions are optional, enabling employers to weigh the costs and benefits in considering their implementation. This is the first of a series of articles addressing the important employee benefit changes under ARPA, including employer tax credits, executive compensation changes, and multiemployer funding relief.
COBRA Premium Subsidies: Fulfilling a commitment of the Biden Administration, ARPA includes COBRA subsidy provisions aimed at making health insurance coverage accessible and affordable. Bearing a striking resemblance to the American Recovery and Reinvestment Act of 2009, ARPA creates a 6-month subsidy period (April 1 to September 30, 2021) during which certain “assistance eligible individuals” (AEI) may qualify for a 100% subsidy for COBRA coverage. 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. ARPA simply suspends the AEI’s obligation to make COBRA premium payments for up to 6 months.
These rules are not optional for employer sponsored group health plans. All group health plans subject to COBRA, except health flexible spending accounts (FSA), must provide this subsidized coverage.
The employer, plan (in the case of a multiemployer plan), or insurer (for fully insured coverage), has an obligation to provide subsidized COBRA coverage and pay or incur the AEI’s COBRA premium cost. But that entity may recover the cost of the coverage from the federal government by claiming a credit against its quarterly Medicare payroll tax liability. The credit can be advanced and is refundable, meaning the entity could claim a refund if the subsidy paid exceeds the taxes due.
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 AEI, but only if they elect COBRA coverage. Individuals who qualify for COBRA because of voluntary termination, retirement, or death would not be considered AEI.
ARPA also creates an extended COBRA election period for AEI so even AEI 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. This provision in particular will require careful administration to ensure compliance, given the previous COBRA deadline extensions and the recent re-starting of the clock, which we discuss here and here. ARPA does not change the fact that COBRA continuation coverage still can end because of other group health coverage, Medicare eligibility, and other circumstances.
ARPA imposes new notice requirements on group health plans, which provide AEI 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 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.
Affordable Care Act Premium Tax Credit Expansion: Following the coverage theme noted above, ARPA also expands eligibility for Premium Tax Credits (PTCs) under Internal Revenue Code Section 36B. These PTCs, which are part of the Affordable Care Act (ACA), make securing coverage through the Healthcare Marketplace or other state exchange more affordable. Generally, the changes temporarily eliminate the phaseout 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 may mean more “full-time” employees claim the PTCs, which correspondingly may lead to greater scrutiny of employers’ ACA compliance by the IRS and a shift in employer group health plan enrollment. This may increase the pool of individuals who qualify for subsidized coverage, a key trigger for employer shared responsibility penalties under the ACA. We recommend employers review and confirm their ACA compliance and reporting regularly to understand penalty risk and exposure, especially because of this change.
Increase in Dependent Care Assistance: For the 2021 calendar year only, ARPA increases from $5,000 to $10,500 (from $2,500 to $5,250 in the case of a separate return filed by a married individual) the maximum amount that can be excluded from income under Section 129 of the tax code for qualifying dependent care expenses. Employers who sponsor dependent care flexible spending arrangements 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. The Consolidated Appropriations Act, 2021, discussed here, permits employers to amend their Section 125 plans to permit mid-year election changes when the same normally would not be permitted. That relief will need to be implemented in tandem with any increased limits allowed under 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.
Pension Plan Funding Stabilization: For employers who sponsor single employer defined benefit plans, ARPA provides several avenues 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 need to be weighed against the cost of obtaining an updated valuation, among other considerations. Employers with these plans should consult with their plan actuaries. As previously discussed, ARPA also includes long-awaited multiemployer funding relief.
If 2020 taught us anything, it is to be flexible and prepared for change. Just three months into the 2021 calendar year, we now have the second substantial piece of legislation affecting the employee benefits area under our belts, and imminent implementation guidance. This underscores how substantially the COVID-19 pandemic continues to change the value-proposition for employer provided benefits.