President Biden has signed into law the American Rescue Plan Act one day after the House of Representatives voted to pass the amended package. Several provisions directly affect tax-advantaged savings arrangements.
Following Senate passage on Saturday, the House of Representatives has passed by a vote of 220-211 the American Rescue Plan Act of 2021 to provide additional relief to address the continued impact of COVID-19. Included in the package are several items that would affect retirement and health benefits.
Defined Benefit Pension Plan Relief
- Extends the single-employer plan funding shortfall amortization period from 7 to 15 years, to be applied to all plans beginning with 2022 plan years and, by election, retroactive to 2019 plan years. The amended bill provides plan sponsors with more flexibility than earlier versions which would have required use of the 15-year amortization schedule starting with 2020 plan years.
- Extends single-employer pension plan funding stabilization percentages, as follows.
- The 10 percent interest rate corridor would be reduced to 5 percent, effective in 2020.
- The phase-out of the 5 percent corridor would be delayed until 2026, at which point the corridor would, as under current law, increase by 5 percentage points each year until it attains 30 percent in 2030, where it would remain.
- A 5-percent floor would be placed on the 25-year interest rate averages.
- The amended bill now allows plan sponsors to elect not to apply the updated percentages until 2022.
- Extends SECURE Act funding relief for certain community newspapers to additional community newspapers
- Permits a temporary delay in the designation of a multiemployer (union) plan as being in endangered, critical, or critical-and-declining status
- Permits a plan in endangered or critical status for a plan year beginning in 2020 or 2021 to extend its rehabilitation period by five years
- Permits multiemployer plans to amortize investment losses over 30, rather than 15, years, as was granted to plans for 2008 and 2009 losses (for plan years ending on or after February 29, 2020)
- Creates a financial assistance program under which cash payments would be made by the Pension Benefit Guaranty Corporation to financially troubled multiemployer plans to continue paying retiree benefits; such payments are to be made by Treasury transfer
Absent from the final bill was a provision that would have frozen cost-of-living adjustments (COLAs) for the annual additions limit and compensation cap after 2030.
Health Benefit Provisions
The American Rescue Plan Act also contains provisions to assist employees who have lost employer-provided health insurance benefits and employers that have provided benefit continuation assistance.
- Provides premium assistance to cover 100 percent of the cost of COBRA continuation coverage for eligible individuals and families from April 1, 2021, through September 30, 2021. This is an increase from prior proposals for premium assistance that would have covered 85 percent of the cost of continuation coverage. Premium assistance is available if health coverage was lost due to involuntary termination of employment or a reduction in hours. It is not available when an employee has a voluntary termination of employment.
- Extends the COBRA election period for individuals who had not currently enrolled in COBRA who are otherwise assistance-eligible individuals.
- Requires health plans to provide additional notifications on the availability of the premium assistance and extended election periods; specifies that the Department of Labor must draft and issue model notice language within 30 days following the enactment of the Act.
- Provides a refundable payroll tax credit to reimburse employers and plans that paid a premium on behalf of an assistance-eligible individual
- For the 2021 plan year, the dependent care flexible spending arrangement (FSA) contribution limit will increase from $5,000 to $10,500 (half that dollar amount per parent if married filing separately)
President Biden is expected to sign the bill Friday.
The Small Business Administration (SBA) has issued an interim final rule effective March 4, 2021, that would allow business owners who file an IRS Form 1040, Schedule C, to use gross income rather than net earnings from self-employment in determining payroll costs for Paycheck Protection Program (PPP) loans. Previously, PPP rules defined payroll costs for individuals who file an IRS Form 1040, Schedule C, as payroll costs (if there are employees) plus net profits, which is net earnings from self-employment.
This change would affect many sole proprietors who have been effectively excluded from the PPP, especially those with very little or negative net profit, many of which are located in underserved communities. Business owners with employees can use either net profit or gross income minus certain employee benefit and wage expenses.
PPP loans were initially created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to assist small employers in retaining employees on their payrolls in a time of financial stress during the coronavirus (COVID-19) pandemic. If certain conditions are met, PPP loans can be forgiven and treated as a grant. Among the conditions for full forgiveness is a requirement that 60 percent of loan proceeds be used for payroll expenses. These expenses can include not only wages and salaries, but also employer contributions to defined contribution and defined benefit retirement plans. Expenses can also include providing group healthcare coverage, including payment of insurance premiums.
To mitigate the risk of fraud or abuse, if a borrower that is Schedule C filer elects to use gross income to calculate his or her loan amount on a First Draw PPP Loan and more than $150,000 in gross income was reported on the Schedule C that was used to calculate the loan amount, the borrower will not automatically be deemed to have made the statutorily required certification concerning the necessity of the loan request in good faith. The borrower may be subject to a certification review by the SBA.
The interim final rule also removes exclusions for small business owners with prior non-fraud felony convictions and those struggling to make student loan payments from participating in the program. Unless extended, the PPP is currently set to expire on March 31, 2021.
The Departments of Labor, Health and Human Services, and Treasury (the Departments) have issued “FAQs About Families First Coronavirus Response Act and Coronavirus Aid, Relief, and Economic Security Act Implementation Part 44” (the FAQs).
The FAQs address the requirement to cover items and services related to diagnostic testing, qualifying preventive services, and recommended immunizations of COVID-19 without the imposition of cost sharing, prior authorization, or other medical management requirements. In particular, the FAQs provide that group health plans or issuers
- cannot impose medical management criteria, including medical screening, to determine coverage of a diagnostic test;
- may distinguish between an individual clinical assessment versus a test for the general workplace, health and safety, or for public health surveillance;
- must cover diagnostic tests provided through testing sites administered by a state or locality;
- must cover point of care tests without cost sharing;
- must cover immunizations with a recommendation in effect from the Advisory Committee on Immunization Practices (ACIP);
- must begin providing coverage for qualifying preventive services no later than 15 business days after the date the United States Preventive Services Task Force or ACIP make an applicable recommendation;
- cover the immunization fee even when not billed for the immunization; and
- provide immunizations in accordance with immunization specific recommendations, regardless of priority.
Additionally, the FAQs provide that the Departments will not take enforcement action against a group health plan or issuer that fails to provide an advance notice of modification to a Summary of Benefits Coverage (SBC), so long as the group health plan or issuer provides the notice as soon as practicable.
The FAQs further clarify that employers are permitted to offer benefits for COVID-19 immunizations and its administration under an Employee Assistance Program (EAP) or through an onsite medical clinic that constitute an excepted benefit.
Finally, the FAQs provide information about the reimbursement of COVID-19-related services for the uninsured from the federal government.
The House of Representatives has passed by a vote of 219-212 the American Rescue Plan Act of 2021 to provide additional relief to address the continued impact of COVID-19. Noteworthy retirement and health provisions include the following.
- Freezing of cost-of-living adjustments after 2030 for retirement plan annual additions and compensation cap limits
- Extending defined benefit single-employer plan funding shortfall amortization period from 7 to 15 years beginning with 2020 plan years
- Extending single-employer pension plan funding stabilization percentages, with the 10 percent interest rate corridor reduced to 5 percent effective in 2020 and phase-out of the 5 percent corridor delayed until 2026
- Health benefit provision granting premium assistance to cover 85 percent of the cost of COBRA continuation coverage, and extending the COBRA election period
- Refundable tax credit reimbursing employers and plans that paid a subsidized portion of the premium on behalf of an assistance-eligible individual
The Senate is likely to take up and debate later this week a version of the bill that, once passed, would need to return to the House. The Senate parliamentarian is also expected to weigh in on whether multiemployer pension bailout relief and premium subsidies for laid-off workers through COBRA can be included in the bill. While legislation created through the budget reconciliation process can be passed through the Senate with a simple majority vote—additional restrictions apply—including that provisions be predominantly fiscal in nature.
The Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) has released Disaster Relief Notice 2021-01 providing guidance on the duration of COVID-19-related relief previously provided by Disaster Relief Notice 2020-01 and the Notice of Extension of Certain Timeframes for Employee Benefit Plans, Participants, and Beneficiaries Affected by the COVID-19 Outbreak (Joint Notice) issued in 2020 by the DOL, Treasury Department, and the IRS (collectively the “Notices”).
In March 2020, the President declared a national emergency effective March 1, 2020, due to the COVID-19 outbreak. ERISA and the Internal Revenue Code permit the Secretaries of Labor and Treasury to prescribe a period of up to one year that may be disregarded in determining the date by which any action is required or permitted to be completed. The Notices provide relief until 60 days after the announced end of the COVID-19 National Emergency or such other date as announced by the relevant agency.
Therefore, the DOL, in coordination with the Treasury, IRS, and Department of Health and Human Services (HHS), announced in Notice 2021-01 that “individuals and plans with timeframes that are subject to the relief under the Notices will have the applicable periods under the Notices disregarded until the earlier of
- one year from the date they were first eligible for relief, or
- 60 days after the announced end of the National Emergency.”
Based on this, the period of time to be disregarded is not a fixed period of time that runs from March 1, 2020, until February 28, 2021. Rather, the period of time to be disregarded is calculated individually for each individual or plan action.
If a qualified beneficiary would have been required to make a COBRA election by March 1, 2020, the Joint Notice delays that requirement until February 28, 2021, which is the earlier of one year from March 1, 2020, or the end of the outbreak period (which remains ongoing).
If a qualified beneficiary would have been required to make a COBRA election by April 30, 2020, the Joint Notice delays that election requirement until one year from that date (i.e., April 30, 2021).
The Notice states “that plan fiduciaries should make reasonable accommodations to prevent the loss of or undue delay in payment of benefits … and should take steps to minimize the possibility of individuals losing benefits.” By way of example, the Notice states that plan administrators should
- affirmatively notify participants and beneficiaries who risk losing protections because of the end of the relief period;
- update or amend and reissue plan disclosures that have provided no longer accurate information as to when action is required to be taken (e.g., COBRA election notices or claims procedure notices); and
- make participants who are losing group health coverage aware of options available to them, including the Health Insurance Marketplace special enrollment period from February 15 through May 15, 2021.
The DOL recognizes that plans and service providers may not be able to fully and timely comply with ERISA disclosures and claims processing requirements. This includes disruptions due to pandemic and natural disasters to a plan or service provider’s principal place of business that makes compliance impossible. The DOL states that when fiduciaries have acted in good faith and with reasonable diligence under the circumstances, DOL enforcement will be handled with an emphasis on compliance assistance, including grace periods and other relief.
The economic impact of the COVID-19 pandemic has been felt far and wide, both in the U.S. and globally. But what has it meant for tax-advantaged savings levels in vehicles such as retirement , 529, and health savings & flexible spending accounts? Our proprietary data, tracked over the course of 2020, reveal shifts in contribution and withdrawal behaviors by business owners and individuals in response to the financial challenges posed by the pandemic. Overall, these insights suggest a continued appreciation for the importance of savings and the ability to access these savings when needed.
- After the pandemic took hold in the U.S. in March 2020, employer retirement plan contribution activity was fairly volatile. Overall, employer contribution amounts remained steadily below projections, with the most dramatic drops in March and April and a notable recovery in May through July. As of year-end, contributions appeared to have settled at a more consistent monthly amount, yet they remained 6.8% lower than projected.
- As of December, 12.6% of employers restarted their plan matching contributions after some match interruption during March through November, either due to business interruption or temporarily suspending match.
- In 2020, we saw low employer adoption of CARES Act distribution and loan options relative to early industry projections, with just 16.6% of employers adopting coronavirus-related distributions (CRDs) and 9.9% adopting CARES loans.
- Eligible savers took CRDs at a higher rate in the final quarter of the year, with 2.0% taking a CRD in Q4. However, the overall total percentage of those taking CRDs remained very low for the full year, at just 4.9%. The availability of CARES loans expired at the end of September. By that time, only 1.4% of eligible savers had takes a CARES loan.
- The vast majority of savers “stayed the course” in 2020, with only 1.8% stopping their deferrals to their retirement plan (0% savings rate) and 2.6% reducing their savings rate.
- One-time contribution amounts to 529 accounts showed a slow yet steady improvement starting in August. In the fourth quarter, the average one-time 529 contribution amount rebounded to 2019 levels, but the number of savers making one-time contributions remained below prior-year levels.
- Qualified withdrawals were significantly reduced from prior-year levels, as measured both in the amounts withdrawn from accounts (14.6% decrease from 2019) and in the number of withdrawal transactions (16.7% decrease from 2019). This trend aligns with national statistics around declines in enrollment during the pandemic and a greater percentage of students attending school from home, reducing the need for room and board payments.
Health and Benefits
- According to data from Chard Snyder, an Ascensus company, qualifying events as a percentage of eligible savers was in line with year-over-year projections at the start of 2020, but ramped up 10% in March through May. This was driven by an increased level of employer hardships and changes in employment status. We saw a temporary recovery, with qualifying events dropping below 2019 levels in July; yet that was followed by a sharp increase to above-2019 levels in August and September. In the final months of the year, the number of qualifying events leveled out, showing a 2.2% increase over 2020 projections as of the end of December.
- Debit card activity linked to healthcare accounts (including HSAs, HRAs, and FSAs) was above projected levels as of year-end, with the number of transactions 28.3% higher and the average amount per transaction 33.3% higher than expected.
View and download the complete State of Savings report here.
Legislation proposed by the House Ways and Means Committee to provide COVID-19 pandemic relief and economic stimulus includes several items that would affect retirement and health benefits. Among them are the following.
COLA Freeze for Certain Retirement Plan Limitations
The legislation would freeze cost-of-living adjustments (COLAs) for the following retirement plan limitations after 2030, to reduce federal tax expenditures in keeping with the budget reconciliation process under which this legislation is being managed. (The freeze would not apply to collectively bargained plans.)
- Annual additions limit for defined contribution plans ($58,000 for 2021)
- Annual additions limit for defined benefit pension plans ($230,000 for 2021)
- Compensation cap for determining retirement plan allocations ($290,000 for 2021
Defined Benefit Pension Plan Relief
- Extends the single-employer plan funding shortfall amortization period from 7 to 15 years, to be applied to all plans beginning with 2020 plan years and, by election, 2019 plan years
- Extends single-employer pension plan funding stabilization percentages, as follows
- The 10% interest rate corridor would be reduced to 5%, effective in 2020.
- The phase-out of the 5% corridor would be delayed until 2026, at which point the corridor would, as under current law, increase by 5 percentage points each year until it attains 30% in 2030, where it would remain.
- A 5% floor would be placed on the 25-year interest rate averages.
- Extends the SECURE Act funding relief for certain community newspapers to additional community newspapers
- Permits a temporary delay in designation of a multiemployer (union) plan as being in endangered, critical, or critical-and-declining status
- Permits a plan in endangered or critical status for a plan year beginning in 2020 or 2021 to extend its rehabilitation period by 5 years
- Permits multiemployer plans to amortize investment losses over 30 rather than 15 years, as was granted to plans for 2008 and 2009 losses (for plan years ending on or after February 29, 2020)
- Creates a financial assistance program under which cash payments would be made by the Pension Benefit Guaranty Corporation to financially troubled multiemployer plans to continue paying retiree benefits, such payments to be made by Treasury transfer
Health Benefit Provisions
The legislation also contains provisions to assist employees who have lost employer-provided health insurance benefits and employers that have provided benefit continuation assistance.
- Provides premium assistance to cover 85% of the cost of COBRA continuation coverage for eligible individuals and families, effective the first of the month after enactment, through September 31, 2021
- Extends the COBRA election period
- Provides a refundable payroll tax credit to reimburse employers and plans that paid a subsidized portion of the premium on behalf of an assistance-eligible individual
A vote by the full House of Representatives is expected by the week of February 22. If passed, the legislation would be referred to the Senate for its consideration.
On January 28, 2021, the IRS posted updated Frequently Asked Questions (FAQs) on COVID-19-related employer tax credits for paid leave that is provided by certain small- and mid-size businesses. These tax credits were initially created by the Family First Coronavirus Response Act that was signed into law in March 2020.
The FAQ update clarifies that the Emergency Paid Sick Leave Act (EPSLA) and Emergency Family and Medical Leave Expansion Act (EFMLEA) requirements that employers provide emergency leave to employees unable to work or telework applied only to periods of leave after March 31, 2020, and before January 1, 2021. However, the Consolidated Appropriations Act, 2021—enacted in December 2020—extended the employer tax credit qualifying period for such paid leave from the initial expiration of December 31, 2020, through March 31, 2021.
The updated FAQs clarify that while employers are not required to provide paid sick and family leave to employees after December 31, 2020, eligible employers that voluntarily provide such benefits that meet the emergency leave requirements may claim tax credits for leave-paid wages provided through March 31, 2021.
The Department of Treasury and Small Business Administration have jointly announced the reopening of the Paycheck Protection Program the week of January 11. Community financial institutions will begin offering First Draw PPP Loans Monday, January 11, and Second Draw PPP Loans starting Wednesday, January 13. Loans will be available to all participating lenders soon after.
Included in the announcement is new guidance that seeks to remove barriers for minority, underserved, veteran, and women-owned business, as well as interim final rules on amendments to the PPP and terms of Second Draw PPP Loans. Those available for a Second Draw PPP Loan generally include borrowers that
- previously received a first draw PPP loan and will or have used the full amount only for authorized uses;
- have no more than 300 employees; and
- can demonstrate at least a 25 percent reduction in gross receipts between comparable quarters in 2019 and 2020.