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Benefits Provisions of the American Rescue Plan Act

Added by Fernando Aceves in Employment Law, Tax Law on April 2, 2021

The American Rescue Plan Act of 2021 (“Act”) was signed into law by President Biden on March 11, 2021. The $1.9 trillion legislative package provides additional pandemic-related relief. This short client alert addresses the COBRA continuation coverage relief and increased limits for dependent care flexible spending accounts provided by the Act.

COBRA Provisions Under the Act

Certain individuals will have government subsidized COBRA coverage for a period of time. Under the Act, individuals that have been involuntarily terminated are eligible to have 100% of their COBRA continuation coverage premiums covered. This means that eligible individuals will not be required to pay their own premiums as they might under normal circumstances, where an employer may require the terminated individual to pay up to 102% of their health premiums.

The COBRA coverage will be available to “Assistance Eligible Individuals,” which includes employees and their eligible dependents, who:

  • have lost group health plan coverage as a result of an involuntary termination of employment or reduction in hours,
  • have elected, or soon elect, COBRA coverage, and
  • are eligible for COBRA coverage and the subsidy during all or part of the period of April 1, 2021 through September 30, 2021.

Individuals who have voluntarily terminated their employment are ineligible for the subsidy. Also, individuals who have lost coverage due to death, divorce or loss of dependent status are ineligible for the subsidy – the Act is meant to provide individuals who have lost their job due to the pandemic with a stopgap measure to ensure they have medical coverage and to cover their premium costs.

The Act also provides an opportunity for subsidy eligibility under the Act for individuals who are COBRA-eligible but have failed to make an election and/or for individuals who have made an election, but have since dropped their coverage (meaning that they have probably stopped paying their premiums). Either of these individuals will have an opportunity to take advantage of the subsidy under the Act.

Individuals will have 60 days to make their COBRA election from the date they have received notice of the extended election period under the Act. The terminated individual will then have the normal 18-month maximum COBRA period of coverage (unless their COBRA period of coverages started earlier).

Important considerations:

  • The subsidy is only provided from April 1, 2021 through September 30, 2021 – meaning that individuals who receive the subsidy will be responsible for their COBRA premiums after September 30, 2021.
  • The requirement that the individuals termination be involuntary indicates that an individual’s subsidy may end sooner (i.e., before September 30, 2021) if the individual becomes eligible for other group health plan coverage or Medicare.
  • The individual’s subsidy may be cut short if their 18-month maximum coverage period ends before September 30, 2021.

Employer COBRA Notices Under the Act

The Act places new COBRA notice obligations on employers. COBRA election notices must be updated to include several requirements, including but not limited to:

  • A description of the extended COBRA election period;
  • Notice of a qualified beneficiary’s obligation to notify the plan if they become ineligible for the subsidy (including penalties if notification is not provided);
  • An extended election notice, for individuals who have a second opportunity to elect COBRA coverage (sent no later than May 31, 2021);
  • Notice of ending of subsidy period; and
  • That the individual may be eligible for continued COBRA coverage after September 30, 2021 (this notice must be sent during the period August 16, 2021 through September 15, 2021).

Importantly, plan administrators will be required to send notices to individuals covered by the subsidy to notify them that their COBRA subsidy will end. The Department of Labor has indicated that it will issue model notices to meet all of these

Tax Credits for Employer Coverage of Premium Amounts

The subsidy will be made through an employer tax credit. The tax credits will be equal to the amounts paid for the COBRA premiums and made through a reduction of Medicare payroll taxes. The information above is obligatory for all employers who provide COBRA notices.

Increased limits for Dependent Care Flexible Spending Accounts

For the 2021 tax year, an employer may increase dependent care flexible spending account limits for any taxable year beginning after December 31, 2020 and before January 1, 2022, as follows:

  • For individuals who are married and filing jointly – increased from $5,000 to $10,500; and
  • For individuals who are married but filing separately – increased from $2,500 to $5,250.

The change will require a plan amendment by the last day of the plan year in which the amendment will take effect (e.g., December 31, 2021 for a calendar year plan).

Plan sponsors should be sure that making these changes will not violate nondiscrimination testing when highly compensated employees (“HCEs”) increase their contributions – employers who choose to permit the increased limits should perform a preliminary 55% average benefit tests to determine if contributions by HCEs need to be limited.

For employers who have adopted the flexible spending account relief provisions under IRS Notice 2021-15, which permit individuals to make mid-year election changes, those individuals will be allowed to make mid-year changes to increase their dependent care FSA amounts. For employers who have not made this amendment, the amendment can still be made to permit those changes, since plan amendments to incorporate changes under IRS Notice 2021-15 may be retroactive as long as they are adopted no later than the last day of the first calendar year beginning after the end of the plan year in which relief is effective. For example, for changes effective for the 2021 calendar plan year (such as a change permitting mid-year election changes during 2021), amendments must be adopted by December 31, 2022.

Employer action items under this alert:

  • COBRA Subsidy
    • Identifying who is eligibile for the COBRA subsidy.
    • Preparing COBRA notices that follow the Act’s instructions.
    • Reaching out to COBRA vendors to organize administration of the new COBRA requirements.
    • Ensure payroll is prepare to timely dispatch COBRA premiums to insurance carriers and claim the payroll tax credits to recoup the cost of the subsidy.
    • Reaching out to counsel to understand the relationship between provisions of the Act and the previous COVID-relief guidance that extends COBRA election and payment deadlines.
  • Dependent Care Flexible Spending Accounts
    • Reaching out to cafeteria plan vendor to coordinate administration of the increased dependent care FSA limits.
    • Provide notice of opportunities to make a mid-year election changes to increase dependent care flexible spending account limits.
    • Provide notice of increased dependent care flexible spending account limit to participants.
    • Provide notice of opportunities to make a mid-year election changes to increase dependent care flexible spending account limits.
    • Amend plans for the increased dependent care FSA limits.

If you have any questions surrounding any of the information provided in this client alert, please contact Fernando Aceves at faceves@hawleytroxell.com or (208) 388-4858.