The American Rescue Plan: What You Need to Know
On March 11, 2021, President Biden signed into law the American Rescue Plan Act (“ARPA”), a 660-page appropriations bill designed to address the COVID-19 pandemic. However, the law contains much more than funding for vaccines and COVID-19 pandemic relief. This alert provides an overview of several key aspects of the new law.
I. Families First Coronavirus Response Act Changes
Almost one year after the first COVID-19 response legislation, which contained the Families First Coronavirus Response Act (“FFCRA”) employee leave provisions, the American Rescue Plan includes four key changes to FFCRA leave. Employee leave under the FFCRA falls into two categories: up to two weeks of Emergency Paid Sick Leave (“Paid Sick Leave”) for certain COVID-19-related reasons, and up to 12 weeks Expanded Family and Medical Leave (“Family Leave”) for child-care needs related to COVID-19. These paid leave provisions generally applied to employers with fewer than 500 employees, and, depending on the type of leave, could be at 2/3 the employee’s regular rate of pay, or at the employee’s full rate of pay, subject to certain limitations. See our earlier alerts regarding the FFCRA here for more information.
First, after ARPA, the Paid Sick Leave and Family Leave under the FFCRA, which was only mandated through December 31, 2020, remains entirely voluntary for employers. Employers are not required to provide these leaves. However, private employers that choose to do so are eligible to receive a dollar-for-dollar tax credit reimbursing them for any wages paid for Paid Sick Leave or Family Leave for its employees. Employers who elect to continue this leave will be eligible for the tax credit through September 30, 2021.
Second, the Paid Sick Leave includes additional qualifying reasons for the Paid Sick Leave. In the original FFCRA, there were six (6) qualifying reasons. Congress has now added three new reasons below (in bold):
- The employee is subject to a governmental isolation or quarantine order related to COVID-19;
- The employee has been advised by a healthcare provider to self-quarantine due to concerns related to COVID-19;
- The employee is experiencing symptoms consistent with COVID-19 and is seeking a medical diagnosis;
- The employee is caring for an individual who is subject to a federal, state, or local isolation or quarantine order (at 2/3 the regular rate of pay);
- The employee is caring for a child for whom the school or childcare has been closed or is unavailable due to COVID-19 precautions (at 2/3 the regular rate of pay);
- The employee is experiencing a substantially similar condition specified by the Department of Health and Human Services Secretary (at 2/3 the regular rate of pay);
- The employee is obtaining immunization relating to COVID-19;
- The employee is recovering from any injury, disability, illness, or condition related to immunization after “medical diagnosis” as described in reason (3); and
- The employee is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of COVID-19, and either
- Such employee has been exposed to COVID-19; or
- The Employer has requested such test or diagnosis.
Qualifying reasons for Family Leave also have been expanded. Although the FFCRA only allowed for paid Family Leave when employees were unable to work or telework due to a need for leave to care for a child whose school or daycare was closed due to COVID-19, employees may now take Family Leave for any of the nine (9) Paid Sick Leave qualifying reasons listed above as well.
Third, for those employers who wish to continue offering Paid Sick Leave, if your employees have exhausted their 10 days, they may be eligible for additional leave under ARPA. ARPA allows employees to receive a new bank of up to ten (10) days of Paid Sick Leave on April 1, 2021. We await additional federal guidance on whether employees will be eligible to use more than the 10 days of Paid Sick Leave if they did not exhaust all of the Paid Sick Leave they were initially eligible for prior to March 31.
With respect to the Family Leave, although the FFCRA provided that the first ten (10) days of that Leave were unpaid (or employees were required to use the Paid Sick Leave during that time period), that requirement has been eliminated. Under ARPA, all twelve (12) weeks of Family Leave will be paid. The new measure is unclear about whether there is a new bank of Family Leave. Employers should note that Family Leave under the FFCRA was part of the employee’s regular Family and Medical Leave Act (“FMLA”) leave, so whether employees are entitled to a new bank of Family Leave also would depend on your policy (e.g., whether you have a rolling or calendar-year period when measuring FMLA leave) and how much FMLA leave the employee has used. If new guidance provides for a clear answer on whether there is a new bank of Family Leave, we will provide an update.
Finally, ARPA contains a nondiscrimination provision that prohibits employers from availing themselves of a tax credit if they apply the FFCRA leave provisions in a manner that discriminates in favor of highly compensated employees or on the basis of tenure with the employer.
ARPA continues the increased federal spending for unemployment compensation through September 6, 2021, with the increased weekly supplement of $300 per week over the Maine and New Hampshire maximum unemployment benefits of $445 and $427 per week respectively. The new law also continues the popular CARES Act program for independent contractors and self-employed individuals to seek unemployment through Pandemic Unemployment Assistance. Congress has also clarified that the first $10,200 in state or federal unemployment compensation in 2020 is not taxable for households with an annual gross income of less than $150,000.
II. Tax Changes
Taxation of PPP Loan Proceeds
In December 2020, Congress clarified that loans that are forgiven under the Paycheck Protection Program (PPP) are not taxable. Previously, the IRS effectively made the forgiven PPP loans taxable by taking the position that ordinary and necessary business expenses paid with loan proceeds were not deductible. However, Congress overrode the IRS by excluding the proceeds of forgiven PPP loans from a taxpayer’s gross income and by mandating that the IRS may not deny a deduction, reduce a tax attribute, or deny a basis increase related to a forgiven loan. On March 12, 2020, Maine followed suit and enacted a law to exclude the forgiven PPP loans from income for Maine state income tax purposes. In New Hampshire legislation is pending to similarly exclude PPP proceeds from that state’s Business Profits Tax.
Additionally, Congress has also clarified that Emergency Injury Disaster Loan (EIDL) may be forgiven, and if the loan recipient also received a PPP loan, the recipient’s PPP loan forgiveness would not be reduced by the amount of the EIDL. Furthermore, the EIDL forgiveness will not be included with the recipient’s taxable income, and the recipients will not be denied tax deductions resulting from the loan forgiveness.
Extension of the PPP
ARPA did not extend the PPP beyond its current expiration of March 31, 2021, but it added $7.25 billion to the program and expanded eligibility to participate in it. Under the expanded PPP, additional not-for-profit organizations are eligible for the program in a new category called an “additional covered nonprofit entity.” These additional organizations include any nonprofit under Internal Revenue Code section 501(c), such as social clubs and employee benefit associations, among others, that;
- Receive more than 15% of receipts from lobbying activities;
- Do not have lobbying activities comprising more than 15% of their activities;
- Do not have lobbying costs exceeding $1 million in the most recent tax year that ended prior to February 15, 2020; and
- Do not employ more than 300 employees.
The expanded program also includes internet-only news and periodical publishers with no more than 500 employees per physical location that certify the loan will support locally focused or emergency information.
Employee Retention Tax Credit
As originally enacted in the CARES Act in 2020, the employee retention tax credit (ERTC) permitted employers a fully refundable tax credit equal to 50% of qualified wages paid after March 12, 2020, and before January 1, 2021. Employers that took a PPP loan, however, could not claim the ERTC. The maximum amount of qualified wages for each employee that qualified for the ERTC for all calendar quarters was $10,000, so that the maximum credit was $5,000. In December 2020, Congress extended the ERTC for 6 months through to June 30, 2021, permitted employers to claim the ERTC for 70% of qualified wages paid in the first two quarters of 2021 up to $10,000 per employee per quarter, and permitted employers who took PPP loans to claim the ERTC for wages not paid with the PPP loan. ARPA extends the ERTC and permits employers to take the tax credit for the third and fourth quarters of 2021.
Repeal of Worldwide Interest Allocation Rules
The worldwide interest allocation rules in Internal Revenue Code section 864(f) were scheduled to come into effect in 2021. These rules would have allowed taxpayers to elect to allocate and apportion interest expense on a worldwide basis among domestic and foreign entities in a corporate group. The result would have been to allocate more interest expense to foreign entities and result in larger foreign tax credit. The rules were originally effective in 2004 but have been repeatedly delayed. ARPA permanently repeals these rules.
Increase the Limitation on Deductions for Executive Compensation
ARPA further limits the deductions that taxpayers can take with respect to executive compensation. Internal Revenue Code section 162(m) generally prohibits tax deductions for salaries over $1 million paid to the CEO, the CFO and the 3 highest paid employees of publicly traded corporations (or 5 employees in total). Beginning in 2027, the 5 next highly compensated employees are included in the limitation, which brings to 10 the number of employees subject to the limitation.
Extension of Limitation on Excess Business Losses of Noncorporate Taxpayers
ARPA extends the limitation on deducting business losses over $250,000 (called excess business losses) by noncorporate taxpayers. The Tax Cuts and Jobs Act of 2017 limited the deduction for excess business losses to 80% of the taxpayer’s adjusted taxable income for the tax years 2018 through 2025. ARPA extends the limitation of the deduction to the end of 2026. However, ARPA does not change or remove the provisions of the CARES Act that permitted a deduction up to 100% of excess business losses for tax years 2018, 2019, and 2020.
Exclusion of Unemployment Payments from Taxable Income
Under ARPA, the first $10,200 in unemployment compensation benefits will not be taxable for taxpayers with adjusted gross income equaling less than $150,000.
Child Tax Credit
For the year 2021, the Child Tax Credit has been increased to $3,600 for children under the age of 6 and to $3,000 for each child from age 6 to 17. There will be a separate phase-out for the increased credit for joint filers with modified adjusted gross income of $150,000 and over, $112,500 for heads of household, and $75,000 for separate filers.
Student Loan Forgiveness
While ARPA does not provide for student loan forgiveness, it does include a provision that if a student loan is forgiven under existing forgiveness programs, the forgiven amount is not subject to income tax if forgiven between December 30, 2020 and January 1, 2026.
The Department of the Treasury will make $1,400 payments to taxpayers, which is an advance on a credit that is to be calculated on the 2021 income tax return. A taxpayer is entitled to the credit for himself/herself and for any dependent, but the credit phases out depending on the taxpayer’s filing status and income level.
Child and Dependent Care Credit Care Assistance
For 2021, the amount of the eligible expense for the Child and Dependent Care Assistance credit will increase to $8,000 for one dependent and to $16,000 for two or more dependents. The initial percentage of the credit will be increased from 35% to 50%, and the phase-out level has increased to $125,000.
III. COBRA Changes
COBRA Premiums Paid for through September
Employees or beneficiaries who elect to continue health insurance coverage through their employer under the Consolidated Omnibus Budget Reform Act (“COBRA”) after an involuntary termination (unrelated to misconduct) or a reduction in hours will not be required to pay COBRA premiums between April 1, 2021 and September 30, 2021.
Qualifying beneficiaries who either did not elect COBRA or who elected and discontinued COBRA are now able to elect COBRA prospectively to take advantage of the subsidy. The Act also allows plans to permit beneficiaries to choose a less expensive health insurance plan for COBRA as part of the election process.
Plan Administrators must notify newly qualifying COBRA beneficiaries about the subsidy and the option to enroll in different coverage (if permitted by the employer), and Plan Administrators must send previously eligible COBRA beneficiaries notice of the subsidy and extended election period. Plan Administrators will also be obligated to send notices when premiums are about to expire.
Eligibility for the subsidy ends if a participant becomes eligible for certain other coverage or if the individuals’ maximum coverage period ends (usually 18 months).
The Act does not require payments on behalf of beneficiaries, but instead allows a payroll tax credit for employers (in the case of self-insured plans) and insurers (in the case of insured plans) to offset the unpaid premium payments. The mechanics of how the tax credit will work remain somewhat unclear, but it is anticipated that this will be addressed by regulatory guidance.
We are monitoring these changes closely, so stay tuned for further updates on how the recent changes will be implemented, which we expect from various agencies including the Department of Labor, the Internal Revenue Service, and others. We will update you as further guidance and details on how these changes will be administered becomes available.