American Rescue Plan Act (ARPA) – Top 5 Takeaways for SMBs

On March 11, 2021, the American Rescue Plan Act (ARPA or The Act) was signed into law. This sweeping $1.9 trillion package is the most recent in a series of pandemic-related relief measures aimed at helping individuals and businesses affected by COVID-19.

ARPA extends previous legislation, provides additional aid to struggling companies, and creates new employer obligations. Below are the 5 key areas that will have the largest impact on small- and medium-sized businesses.

FFCRA Paid Sick & Family Leave Extension & Expansion

The Families First Coronavirus Response Act (FFCRA), passed in March of 2020, created two emergency paid leave requirements, entitling eligible employees to up to 2 weeks of paid sick leave or up to 10 weeks of paid family & medical leave. It also gave employers the right to claim payroll tax credits against the wages paid for covered leave.

While the FFCRA’s original requirements were mandatory for employers, they expired on December 31, 2020. Subsequent legislation extended the expiration date and employer credits to March 31, 2021 and ended the mandate, allowing employers to offer the expanded paid leave voluntarily as of January 1, 2021. ARPA further extends the expiration date to September 30, 2021 and credits are now applied to Hospital Insurance Tax, instead of OASDI (social security tax).

The Act makes changes to Emergency Paid Sick Leave (EPSL), adding 3 additional reasons for leave and resetting the 10-day limit as of April 1. The new reasons include:

1. obtaining a COVID-19 vaccine,
2. recovering from an injury, disability, illness, or condition related to the COVID-19 vaccine, and
3. seeking or awaiting the result of a COVID-19 test or diagnosis after being exposed, or when the employer has requested it.

The Act also increases the cap on Emergency Family & Medical Leave (EFML) from $10,000 to $12,000, eliminates the requirement to take unpaid leave for the first 10 days (essentially extending paid leave up to 12 weeks, from the original 10), and expands the reasons for leave to include all of the reason for EPSL, including the 3 new reasons listed above.

Temporary 100% COBRA Premium Subsidy

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law that requires employers with over 20 employees to offer group health plan continuation coverage to employees and eligible dependents who experience a qualifying event resulting in a loss of coverage. Typically, COBRA coverage lasts for a maximum of 18 months and the participant is responsible for paying 100% of the group health plan premium, along with a 2% administration fee.

Under ARPA, employers must provide a full 100% premium subsidy and additional enrollment rights to “assistance eligible individuals (AEIs)” between April 1 and September 30, 2021 (the “subsidy period”). The subsidized coverage is paid by the employer, group health plan, or insurer and is reimbursed by the federal government through a refundable credit against Hospital Insurance Tax.

AEIs are individuals who have a qualifying event of “involuntary termination” or “reduction of hours” and include:

• those employees and/or dependents previously eligible for COBRA coverage, who elected and then dropped coverage, but whose coverage would have extended into the subsidy period if continued, and
• those employees and/or dependents who are or become eligible for COBRA coverage during the subsidy period.

The subsidized coverage does not extend past the AEIs original COBRA expiration date, typically 18 months from the date of the involuntary termination or reduction of hours. Coverage also ceases if the AEI becomes eligible for other group health plan coverage, regardless of whether or not they enroll.

Employers and/or plan administrators must determine who qualifies as an AEI and notify them of the subsidized coverage option and their special enrollment rights no later than May 31, 2021. AEIs will then have 60 days from the date they receive the notice to elect coverage.

Extension & Expansion of Employee Retention Tax Credits

In April 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which included the Employee Retention Tax Credit (ERTC) provision. The ERTC encouraged businesses whose operations were fully or partially suspended by the COVID-19 pandemic to keep employees on payroll by offering fully refundable credits against payroll taxes equal to 50% of qualified wages, up to $10,000 per employee.

Originally, these credits were available for wages paid between March 13, 2020 and December 31, 2020. The Consolidated Appropriations Act (CAA) extended the credit for wages paid through June 30, 2021. ARPA extends these credits for wages paid through December 31, 2021.

ARPA also expands eligible employers to include Recovery Startup Businesses (RSBs) and Severely Financially Distressed Employers (SFDEs) starting in Q3 2021. An RSB is a company who began operations on or after February 15, 2020, have gross annual receipts of up to $1M, and are otherwise ineligible under the ERTC’s eligibility test. Credits for RSBs are limited to $50,000 per quarter, or $100,000 total. An SFDE is an employer who experienced a 90% reduction in gross receipts as compared to the same quarter in 2019. SFDEs are limited to the same credit caps as other eligible businesses, but they may take all wages into account, not just those paid to employees not providing services.

As with other provisions under ARPA, the extended ERTC becomes a credit against Hospital Insurance Tax instead of OASDI (social security tax).

Increase in Dependent Care FSA Limit

Internal Revenue Code Section 129 allows employees to set aside up to $5,000 annually (or $2,500 for married individuals filing separately) for employer-provided dependent care assistance programs. These benefits are typically provided in the form of Section 125 dependent care flexible spending accounts (DCFSAs).

ARPA has increased the annual contribution limit for the 2021 tax year to $10,500, or $5,250 for those married individuals filing separately. This increase is not automatic or mandatory. Employers wishing to allow it must amend their plan documents accordingly and adopt such amendments by the end of their plan year.

Since this increase is only applicable to the 2021 tax year, those plans which aren’t aligned with a calendar year will have to prorate contributions for those months that fall within 2021 and then reset contributions to a “normal” amount for the remainder of the plan year. Employers must also keep in mind the potential impact of the increase on nondiscrimination requirements, as highly-compensated employees may have a greater ability to set aside higher amounts from their paycheck.

Extension of Temporary Unemployment Benefits

In March 2020, the passage of the FFCRA and CARES Act brought much needed flexibility and funding to state unemployment agencies overwhelmed by requests for assistance. The legislation gave states a greater ability to provide unemployment insurance for workers impacted by the COVID-19 pandemic, including those who wouldn’t ordinarily be eligible for benefits, such as self-employed individuals and independent contractors.

All of the existing programs, including Federal Pandemic Unemployment Compensation (FPUC), Pandemic Unemployment Assistance (PUA), Pandemic Emergency Unemployment Compensation (PEUC), and Mixed Earner Unemployment Compensation (MEUC), have been extended through September 4, 2021. FPUC’s extension includes a reduction of compensation to $300 per week, down from the $600 per week allowed under previous legislation.

While we have identified these five topics as most important to the majority of SMBs, ARPA contains other provisions that may be applicable to your business, including additional funding for the Paycheck Protection Program, additional funding for the Economic Injury Disaster Loan program, and the creation of the Restaurant Revitalization Fund.

We encourage readers to consult their plan administrators, tax advisors, and other appropriate parties regarding these and other ARPA provisions, especially the changes related to COBRA, as these are likely to be the most administratively burdensome to most employers. Also, of special note is the rampant unemployment fraud plaguing state agencies. Businesses and individuals should be vigilant in identifying and reporting fraudulent activity as soon as it’s discovered.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for business, tax, legal, or accounting advice. Please consult your own HR, tax, legal, and accounting advisors before making any business decisions related to the above information.