Congress Finalizes COVID-19 Laws With Well being, Tax, And Retirement Modifications – Employment and HR

On March 10, 2021, the House of Representatives passed the
version of the American Rescue Plan Act
(H.R. 1319, the “Act”) previously passed by the
Senate on March 6. President Biden is expected to sign the
legislation on Friday. The Act is intended to, among other things,
provide financial support to families struggling because of the
pandemic, including a third round of stimulus checks for
individuals (up to certain income limits), temporary COBRA and
Affordable Care Act (“ACA”) subsidies intended to help
people maintain health insurance coverage during the pandemic, and
funding for COVID-19 vaccines and testing. The Act also includes a
number of other tax and retirement provisions, including extended
funding stabilization for single-employer pension plans, financial
assistance for certain multiemployer pension plans, and changes to
the executive compensation rules. Below, we summarize the key
health, tax, and retirement provisions in the Act.

I. Health Provisions

A. COBRA Subsidies

The Act includes a temporary 100% COBRA subsidy for COBRA
qualified beneficiaries where the qualifying event was an
involuntary termination of employment or reduction in hours. The
House had originally passed an 85% subsidy that was increased to
100% in the Senate. The subsidy applies to an “assistance
eligible individual,” which appears to include both an
employee and dependents who had elected or will elect COBRA. The
100% subsidy is based on a COBRA premium that includes the 2%
administrative fee that health plans are permitted to charge for
COBRA. The assistance eligible individual does not pay the COBRA
premium, but rather the premium initially is “advanced”
by the employer, plan, or insurer and then reimbursed by the
government through a refundable tax credit (against Medicare
hospital insurance (HI) taxes).

The Act provides that, for an insured or self-funded plan, the
employer applies for the tax credit. For a multiemployer plan, the
plan applies for the tax credit. The original legislation reported
out of the Ways and Means and Education and Labor Committees had
provided that the tax credit would be claimed by the employer for
self-insured coverage and the insurer for insured coverage. This
division could have delayed an employer with an insured plan from
receiving proceeds from the credit because the insurer was the only
entity that could claim the tax credit. A Manager’s Amendment
passed by the House and incorporated into the House-passed Rescue
Plan addressed this issue by changing the language so that the
employer is the entity that claims the tax credit for both
insured and self-funded coverage where the employer’s group
health plan is subject to COBRA under the Code, ERISA, or the PHSA
(similar to the ARRA COBRA subsidy provisions from 2009). The
Senate adopted this change as well.

The subsidy will begin for coverage periods beginning on April
1, 2021 and ending on September 30, 2021. The subsidy would end
sooner if the qualified beneficiary’s maximum COBRA coverage
period ends or if the individual is eligible for another group
health plan or Medicare.

The Act also provides additional enrollment options for
individuals who already had an involuntary termination of
employment or reduction in hours within the last 18 months and did
not timely elect COBRA or dropped COBRA. These individuals have a
new 60-day election period following the date that they receive a
new required COBRA notice. Additionally, employers are permitted to
allow assistance-eligible individuals to change elections to other
plan options that have the same or lower cost premiums (this is

The Act requires employers to update COBRA notices sent to
assistance eligible individuals to describe the subsidy and to
issue extended COBRA election notices within 60 days of the date of
applicability. Failure to do so is treated as a failure of the
COBRA notice requirements. Employers also must provide a notice of
expiration before the premium subsidy expires. The legislation sets
out content for these notices and directs the Secretary of Labor to
publish Model Notices.

B. Affordable Care Act Subsidies

The Act makes significant but temporary changes to the existing
ACA premium subsidies. For 2021 and 2022, the Act eliminates the
upper income limit for eligibility for premium tax credits, which
is currently set at 400% of the federal poverty level, and
increases the amount of the premium tax credits by decreasing the
amount that an individual must contribute to the cost of coverage.
While the income limit increase expands the availability of
subsidies to many more households, the Act contains a requirement
that individuals contribute a percentage of their income toward
coverage. Under the Act, this percentage is set at 8.5% of
household income for those with incomes of 400% of the federal
poverty level or more, meaning that the more an individual makes,
the more that individual will be expected to contribute toward the
cost of coverage. Additionally, because the amount of premium tax
credits available will vary based on the cost of coverage, there
will be a level of income at which the individual’s required
contribution will exceed the cost of coverage, and no premium tax
credit will be available.

The Act also provides special support for individuals who
receive unemployment compensation. For 2021, a taxpayer who
receives or is approved to receive unemployment compensation for a
week or more is treated as eligible for premium subsidies and any
income above 133% of the federal poverty level is disregarded for
purposes of determining the contribution percentage the taxpayer
must contribute toward coverage. Because the contribution level for
incomes up to 150% of the federal poverty level is zero under the
Act, an individual who received unemployment compensation is not be
expected to contribute toward the cost of subsidy-eligible
coverage. The Act also suspends repayment of excess subsidies for

II. FSAs & Tax Credits

A. Employee Retention Credit.

The legislation extends the availability of the CARES Act’s
employee retention credit an additional two quarters, from July 1,
2021 to December 31, 2021. After June 30, 2021, the credit applies
against an employer’s Medicare hospital insurance (HI) taxes
rather than Social Security Old Age, Survivor’s, and Disability
Insurance (OASDI) taxes. The credit continues to be refundable for
employers with insufficient tax liability. The Consolidated
Appropriations Act (“CAA”) enacted in December 2020 had
previously extended the ERTC through June 30, 2021, increased the
credit percentage from 50% to 70%, increased the per employee limit
on qualifying wages to $10,000 per quarter, and expanded the
eligibility of qualifying employers.

B. Credits for Paid Sick and Family Leave

The Act also extends the availability of the refundable paid
sick leave and family and medical leave credits through September
30, 2021. After March 31, 2021, changes to the credits include
increasing the maximum amount of wages used to calculate the
credit, increasing the maximum number of sick days an employer can
count for the credit, and allowing leave for COVID vaccinations to
count for the credit. Like the employee retention credit, after
March 31, 2021, the credit applies against an employer’s HI
taxes instead of OASDI taxes. The obligation to provide paid leave
remains voluntary, as it was under the CAA that extended the paid
sick and family leave credits – but not the employer mandate –
through March 31, 2021.

C. Dependent Care FSAs

The legislation increases the dependent care FSA limit for 2021
from $5,000 to $10,500 (from $2,500 to $5,250 for married filing
single). An employer can amend its cafeteria plan retroactively to
adopt this increased limit, as long as it amends the plan by the
end of the plan year and operates consistently with the

III. Retirement Provisions

The Act includes broadly available funding rule changes for
single-employer and multiemployer pension plans and significant
financial assistance to deeply underfunded multiemployer pension
plans. It also increases the premiums payable to the Pension
Benefit Guaranty Corporation (“PBGC”) by multiemployer
plans effective for plan years beginning after 2030. The pension
funding provisions are similar to provisions in the HEROES Act (H.R. 6800,
116th Congress) passed by the House of Representatives
on May 15, 2020. The provisions providing financial assistance to
deeply underfunded multiemployer pension plans are similar to those
in the Emergency Pension Plan Relief Act of 2021 (H.R. 409 introduced
by House Ways and Means Committee Chairman Richard Neal (D-MA), H.R. 423 introduced
by House Education and Labor Committee Chairman Bobby Scott (D-VA)
and S. 547 introduced by Senator Sherrod Brown (D-OH)).

A. Single-Employer Pension Funding Changes

The Act provides that, in the 2022 plan year, the minimum
funding requirements for single-employer pension plans will be
calculated by amortizing the entire unfunded liability over 15
years. Re-amortizing the unfunded liability in this fashion is
often referred to as a “fresh start”. A 15-year
amortization period will also apply to future changes in the
unfunded liability (as opposed to the 7-year period that applies
under current law). Plan sponsors may alternatively elect to apply
these changes beginning with their 2019, 2020, or 2021 plan

The Act extends and enhances the interest rate stabilization
provisions that were first introduced in MAP-21, and which would
start to be phased-out in 2021 under current law. This includes (1)
providing an updated corridor for the 25-year average interest rate
and (2) setting a 5% minimum for the 25-year average. These two
relief provisions are generally effective for plan years beginning
after December 31, 2019, but a plan sponsor may choose to disregard
these two aspects of the funding relief for years prior to 2022 –
either for all plan purposes or just for purposes of the benefit
restrictions under Code section 436. A plan may prefer to disregard
the relief, in whole or in part, to avoid the need to make
retroactive corrections.

The following table summarizes the stabilization corridor under
prior law and under the Act. Note that a narrower corridor has a
larger impact on the interest rate used to determine the plan

Old Corridor New Corridor
Year Minimum Maximum Minimum Maximum
2020 90% 110% 95% 105%
2021 85% 115% 95% 105%
2022 80% 120% 95% 105%
2023 75% 125% 95% 105%
2024 70% 130% 95% 105%
2025 70% 130% 95% 105%
2026 70% 130% 90% 110%
2027 70% 130% 85% 115%
2028 70% 130% 80% 120%
2029 70% 130% 75% 125%
2030+ 70% 130% 70% 130%

To illustrate the impact of these changes, if the 25-year
average of the 3rd segment rate for 2020 were to be 4%,
then under current law the lower boundary of this segment rate for
minimum funding purposes would be 90% of 4%, or 3.6%. Under the
Act, a 5% floor applies to the 25-year average rate and the lower
boundary is 95% of that rate, resulting in a rate of 4.75% for
minimum funding purposes. The Joint Committee on Taxation estimates
that the single-employer pension changes would raise nearly $23
billion in revenue over the 10-year budget period.

The Act modifies the definition of “community newspaper
employer” to allow additional plan sponsors to qualify for the
special funding rules for community newspapers enacted as part of
the Setting Every Community Up for Retirement Enhancement Act of
2019. Community newspaper employers are permitted to elect to
amortize their pension underfunding over 30 years and calculate
plan liabilities using an 8% interest rate.

B. Multiemployer Pension Provisions

For one plan year that begins on or after March 1, 2020 and
before March 1, 2022, the Act allows an election to maintain the
same zone status that was certified for the preceding plan year.
Plans are similarly not required to update their funding
improvement or rehabilitation plans for this plan year. The effect
of this provision is to allow a delay before plans must take steps
to offset losses incurred during the COVID-19 pandemic. Plans in
critical or endangered status may also elect to extend their
funding improvement or rehabilitation plans by 5 years, allowing
additional time for them to achieve their funding targets.

Under the Act, plans may amortize their investment and other
COVID-19 related losses incurred in either or both of the first two
plan years ending after February 29, 2020 over a 30-year period, as
opposed to the 15-year period that normally applies. For these two
plan years, plans may also change their asset valuation methods to
spread investment losses over 10 years and may allow the smoothed
actuarial value of assets to exceed the fair market value by 30%.
Normally the smoothed actuarial value of assets is subject to a
5-year limit on the recognition period and a 20% corridor around
the fair market value of assets. Plans electing this relief must
pass a solvency test and are subject to restrictions on improving

C. Financial Assistance for Certain Multiemployer Pension

Under the Act, the PBGC will provide special financial
assistance to highly distressed multiemployer pension plans that
meet certain criteria. Specifically, in order to be eligible for
this assistance a multiemployer plan must satisfy one or more of
the following criteria:

  • Is in critical and declining status for any plan year from 2020
    through 2022, generally indicating that the plan is expected to
    exhaust its assets in 20 years or less.
  • Has previously reduced benefits under the provisions of the
    Multiemployer Pension Reform Act of 2014 (“MPRA”).
  • Is in critical status for any plan year from 2020 through 2022,
    with a ratio of assets to liabilities (determined on a very
    conservative basis) of 40% or less, and a ratio of active to
    inactive participants of less than 2 to 3.1
  • Became insolvent after December 14, 2014 but is not terminated
    (i.e., fully frozen).

Special financial assistance is paid to plans as single lump
sums, with the amounts determined such that the plans are projected
to remain solvent through their 2051 plan years. The Act specifies
that deterministic projections should be used for this purpose. The
amount of special financial assistance is determined without regard
to whether benefits are above or below the PBGC maximum guarantee

The special financial assistance payable under the Act is
supported by the general fund of the U.S. Treasury and will be paid
through a new eighth fund within the PBGC. This differs from the
existing multiemployer financial assistance provided by PBGC, which
is entirely supported by premiums paid by the plans themselves. In
contrast with the financial assistance that PBGC pays to insolvent
multiemployer plans under current law, the special financial
assistance under the Act is not subject to any repayment

PBGC is required to publish regulations implementing the Act
within 120 days of enactment. The Act provides PBGC with the
authority to prioritize applications from multiemployer plans that
are within 5 years of failure, have unfunded liabilities eligible
for guarantee by PBGC in excess of $1 billion, or have previously
reduced participant benefits under MPRA. PBGC may restrict
applications to only priority plans during the 2-year period
following enactment of the Act and may establish additional
criteria for identifying priority plans.

In calculating the amount of financial assistance a plan will
receive in order to remain solvent until 2051, asset returns must
generally be projected using the lesser of (a) the interest rate
assumed by the plan actuary for the 2020 plan year or (b) the third
segment rate from the single-employer funding rules (without regard
to the 25-year average corridor) plus 200 basis points. The third
segment rate from the single-employer funding rules plus 200 basis
points currently results in an interest rate of 5.59%. The other
actuarial assumptions will generally be the same as those used by
the plan actuary for the 2020 plan year unless the plan proposes
the use of different assumptions and PBGC, in consultation with the
Department of Treasury, accepts the change.

The deadline for plans to apply for special financial assistance
is December 31, 2025, with an extended deadline of December 31,
2026 available to plans submitting revised applications. PBGC
generally has 120 days to review an application, after which the
application will be deemed to be approved if PBGC has not acted on

The Act provides that any plan receiving special financial
assistance must reinstate any benefits that were reduced under the
benefit suspension provisions of MPRA. This reinstatement applies
prospectively, and also includes back payments for previously
suspended benefits.

Plans must segregate the special financial assistance received
under the Act from other plan assets and may only invest the
financial assistance in investment grade bonds unless PBGC permits
other investments. Subject to certain limitations, PBGC may impose
conditions on plans that receive financial assistance, and such
plans are deemed to be in critical status through the 2051 plan
year. The financial assistance provided by the Act is disregarded
when determining plans’ minimum funding requirements.

D. Multiemployer PBGC Premiums

The Act increases the PBGC premium rate for multiemployer
pension plans to $52 per participant, effective for plan years
beginning after December 31, 2030. This premium rate is indexed for
inflation for years after 2031.

E. Executive Compensation

For taxable years beginning after 2026, the Act expands the
number of employees subject to Code section 162(m). Under current
law, publicly traded employers are prohibited from taking a
deduction for executive compensation in excess of $1 million paid
to the chief executive officer, chief financial officer, and the
next three highest compensated employees (each a “Covered
Employee”). In addition, current law provides a rule
colloquially expressed as “once a Covered Employee, always a
Covered Employee.” The Act adds five additional employees to
the list, expanding to eight the number of the highest compensated
employees beyond the CEO and CFO for whom certain compensation
cannot be deducted. However, the five additional employees added by
the Act are not subject to the “once in, always in” rule
applicable to Covered Employees under current law.


1. The
liability measurement for this purpose is called current liability,
which uses a discount rate based on 30-year Treasury securities
that is below 2.5% as of the beginning of 2021.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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