Congress has passed and the President has signed the American Rescue Plan Act of 2021 (ARPA-21). ARPA-21 contains numerous employee benefits and executive compensation provisions, including premium assistance for health plan continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), single-employer defined benefit plan funding relief, financial assistance to multiemployer pension plans, and an expansion of the definition of "covered employee" under Section 162(m) of the Internal Revenue Code.
Congress has passed and the President has signed the American Rescue Plan Act of 2021 (ARPA-21), which is the fifth major piece of legislation enacted in response to the US outbreak of COVID-19 (Pub. L. No. 117-2, H.R. 1319 (Mar. 11, 2021)). ARPA-21 is generally intended to provide relief to individuals and businesses facing economic hardship due to the outbreak. This update addresses the employee benefit and executive compensation provisions under ARPA-21, which include:
Also, premium assistance is not available to AEIs for coverage months that begin after the AEI:
Becomes eligible for other group health plan coverage (setting aside excepted benefit, FSA, or QSEHRA coverage).
If earlier, in general, expiration of the maximum period of coverage under federal COBRA.
AEIs must inform the plan of these expiration events.
Employers (or, in some cases, plans or insurers) will be reimbursed by the federal government for the amount of COBRA premiums, through a credit or refund of an overpayment of payroll taxes.
Extended Election Period
An AEI who does not have a COBRA election in effect on April 1, 2021, may elect COBRA coverage during an extended election period. This extended election period also is available to individuals who elected COBRA but discontinued it before April 1, 2021.
The extended election period:
Begins on April 1, 2021.
Ends 60 days after the date on which notice is furnished to the individual.
If an AEI elects COBRA coverage under the extended election period, the coverage:
Begins with the first period of coverage after ARPA-21's enactment date (generally April 1) (this beginning period also applies regarding premium assistance payments and any cost-sharing requirements for items and services under the plan).
Will not extend beyond the maximum period of coverage that would have been required if COBRA had been elected (or had not been discontinued).
Plan Enrollment Option
ARPA-21 also creates a "plan enrollment option," under which a plan may (but is not required to) allow AEIs to elect to enroll in different coverage. An AEI must be provided a 90-day election period, measured from the date that notice of the plan enrollment option is furnished, during which to elect different coverage. Regarding the different coverage:
Premiums for the different coverage cannot be more than the premium for the coverage in which the individual was enrolled.
The coverage also must be offered to active employees.
However, the different coverage cannot consist of excepted benefits or coverage under a QSEHRA or FSA.
ARPA-21 imposes additional notice requirements for individuals who become eligible to elect COBRA from April 1, 2021, until September 30, 2021 (see Practice Note, COBRA Overview: Election Notice and Standard Document, COBRA Election Notice). For example, COBRA election notices furnished during the period must (in addition to the existing requirements for COBRA election notices) provide individuals written notice, in clear and understandable language, of the following information:
The availability of premium assistance regarding COBRA coverage under ARPA-21.
The option to enroll in different coverage if the employer permits AEIs to elect enrollment in the different coverage (see Plan Enrollment Option).
These additional content requirements can be either:
Added to an employer's existing COBRA election notices.
Included in a separate document provided together with the employer's COBRA election notice.
ARPA-21 also includes:
Additional specific content requirements for COBRA election notices (for example, the name, address, and telephone number for contacting the plan administrator and other individuals with relevant information concerning ARPA-21 premium assistance).
A required disclosure concerning expiration of the premium assistance period.
Notice requirements involving the extended election periods.
$2,500 to $5,250, for married individuals who file separately.
Plans may adopt these changes using amendments that apply retroactively if:
The amendment is adopted by the last day of the plan year in which the amendment is effective.
The plan is operated consistent with the amendment for the time:
beginning on the amendment's effective date; and
ending on the date the amendment is adopted.
(ARPA-21, § 9632.)
Premium Tax Credits Under the ACA; Unemployment Compensation
Under the Affordable Care Act (ACA), individuals and families with incomes between 100% and 400% of the federal poverty level may receive "premium tax credits" (PTCs) for health insurance purchased on an ACA health exchange (see Practice Note, Affordable Care Act (ACA) Overview: Premium Tax Credit Under Health Insurance Exchanges). Under existing law, the amount of the tax credit is based on a percentage of income that ranges from 100% to 400% of the federal poverty line. For 2020 and 2021, ARPA-21 removes the upper end of this income qualifier, thereby expanding the range of households that are eligible for PTCs (ARPA-21, § 9661). The percentage of income that households must contribute for premiums generally increases with income, but the percentage is lower for the income bands for 2021 and 2022 (relative to the pre-ARPA-21 percentages). Households with income that is 400% of the poverty line and higher must contribute 8.5% of their income toward the coverage.
In addition, for individuals who receive or are approved to receive unemployment compensation for any week beginning in 2021, household income above a set threshold (that is, household income exceeding 133% of the federal poverty line) is not taken into account in determining the individual's contribution percentage for ACA exchange coverage (ARPA-21, § 9663).
Retirement Plan-Related Provisions
ARPA-21 provides funding relief for defined benefit plans and makes other changes, including:
Extending the amortization period for single-employer defined benefit plans.
Enhancing the stabilization of interest rates for single-employer defined benefit plans.
Allowing an election to temporarily freeze the zone status for multiemployer pension plans in endangered, critical, or critical and declining status.
Allowing an extension of multiemployer pension plan funding improvement and rehabilitation plans.
Changing the funding standard account rules.
Providing financial assistance to severely underfunded multiemployer pension plans.
Funding Relief for Single-Employer Defined Benefit Plans
Single-employer defined benefit plans must meet minimum funding requirements under Code Section 430 (26 U.S.C. § 430). When calculating minimum required contributions, single-employer plans currently amortize any funding shortfalls over a 7-year period. ARPA-21 extends that amortization period to 15 years, effective for plan years beginning after December 31, 2021 (January 1, 2022, for calendar-year plans).
Additionally, plan sponsors may elect to have the 15-year amortization period apply for plan years beginning in 2019, 2020, and 2021. An extended amortization period provides funding relief for plan sponsors because the shortfalls are spread out over a longer period of time, giving them more time to make up for funding shortfalls. (ARPA-21, § 9705.)
Code Section 430(h)(2) describes the interest rates used to calculate a single-employer defined benefit plan's minimum required contribution (26 U.S.C. § 430(h)(2)). Those interest rates are a set of three segment rates (or, alternatively, a full yield curve). The three segment rates must be adjusted to fall within a specific range that is determined based on a percentage of the corresponding segment rates over a 25-year period. These stabilization corridors were instituted with the Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21).
ARPA-21 updates these interest rates and corridors by:
Revising the corridors that are used to determine the 25-year average of segment interest rates.
Setting a minimum interest rate of 5% for determining the 25-year average.
The provisions are effective for plan years beginning after December 31, 2019 (January 1, 2020, for calendar year plans). However, plan sponsors may elect to not have the ARPA-21 amendments apply to any plan year beginning before January 1, 2022, for either:
Only for the purposes of determining the adjusting funded target attainment percentage under Code Section 436 (26 U.S.C. § 436) and ERISA Section 206(g) (29 U.S.C. § 1056) for that plan year.
ARPA-21 includes several provisions relating to multiemployer pension plans. Specifically, the ARPA-21 provides several types of relief to multiemployer plans adversely affected by the pandemic and also makes financial assistance available to severely underfunded multiemployer plans whose insolvency threatens the PBGC multiemployer plan insurance funds.
Temporary Zone Status Freeze for Multiemployer Plans in Endangered, Critical, or Critical and Declining Status
Plan sponsors of plans that are in endangered, critical, or critical and declining status may elect, for the first plan year beginning between March 1, 2020, and February 21, 2021, or the next plan year (in either case, the "designated plan year"), to maintain the zone status of the plan that was in effect before the election. Plans in endangered or critical status for the plan year before the election are not required to update their funding improvement plan, rehabilitation plan or schedules until after designated plan year. Plan sponsors must provide notice of the election to participants and beneficiaries, the unions, the PBGC and the Secretary of Labor. (ARPA-21, § 9701.)
Temporary Extension of Funding Improvement and Rehabilitation Periods for Plans in Critical and Endangered Status for 2020 or 2021
A plan sponsor of a multiemployer plan in endangered or critical status that elects to freeze the plan's zone status for 2020 or 2021 may elect to extend the plan's funding improvement period or rehabilitation period for five years. This section is effective for play years beginning after December 31, 2019. (ARPA-21, § 9702.)
Changes to Funding Standard Account Rules
Multiemployer plans that are solvent as of February 29, 2020, may elect to amortize their investment and COVID-19 related loses for the two plan years ending after February 29, 2020, over 30 years, instead of 15 years. During those two years, plans may also smooth investment losses over 10 years when determining the actuarial value of assets. Plans that make this election may not increase plan benefits. (ARPA-21, § 9703.)
Financial Assistance for Severely Underfunded Multiemployer Plans
ARPA-21 establishes an eighth fund administered by the PBGC to assist severely underfunded multiemployer plans. Plans receiving assistance from the fund are not obligated to repay any monies received.
Plans are eligible for financial assistance if one of four requirements is met:
The plan is in critical and declining status in any plan year beginning in 2020 through 2022.
A suspension of benefits has been approved for the plan as of March 11, 2021.
The plan is in critical status for any plan year beginning in 2020 through 2022, has a modified funded percentage of 40% or less, and a ratio of active to inactive participants of less than 2 to 3.
The plan became insolvent after December 16, 2014, and has not yet been terminated.
The PBGC is directed to issue regulations outlining the application requirements for financial assistance within 120 days. Applications must be filed by December 31, 2025. Timely applications are deemed approved unless the PBGC notifies the plan otherwise within 120 days.
The amount of financial assistance provided to a multiemployer plan is the amount required for the plan to pay all benefits due until the last day of the plan year ending in 2051, with no reduction in participants' benefits (except for benefits already reduced under a rehabilitation plan).
Plans receiving financial assistance are considered to be in critical status until 2051. They must reinstate previously suspended benefits and make retroactive payments to participants or beneficiaries in pay status in either:
A single lump sum within three months of the effective date of the financial assistance.
In monthly installments over five years, with interest, beginning three months within the effective date of the financial assistance.
The PBGC may impose reasonable restrictions on plans receiving financial assistance and the funds received must be segregated from other plan assets and invested in investment-grade bonds. (ARPA-21, § 9703.)
Increased PBGC Premiums
ARPA-21 increases the PBGC premiums for multiemployer plans to $52 per participant (up from $31 per participant) for plan years beginning after 2030. For plan years beginning after 2031, the premium rate is indexed for inflation. (ARPA-21, § 9704.)
Executive Compensation Provisions
Expansion of Covered Employees Subject to Section 162(m) $1 Million Deduction Limit
ARPA-21 revises the definition of "covered employee" in Code Section 162(m) (ARPA-21, § 9708). Effective for taxable years beginning after December 31, 2026, ARPA-21 adds five additional employees to the covered employee list, expanding the definition to include:
Any employee who is the principal executive officer (PEO) or principal financial officer (PFO) at any time during the taxable year, or anyone acting in that capacity.
Any employee whose total compensation for the taxable year is required to be reported to shareholders under the Securities Exchange Act of 1934 due to the employee being among the three highest compensated officers for the taxable year (other than the PEO or PFO).
For taxable years beginning after December 31, 2026, any employee who is among the five highest compensated employees for the taxable year, other than any individual described in the prior two prongs.
Significantly, while the current rule provides that once an individual is a covered employee for a taxable year they remain a covered employee for all future taxable years, this "once a covered employee, always a covered employee" rule does not apply to the five additional employees added by ARPA-21. For more on Section 162(m), see Practice Note, Section 162(m): Limit on Compensation.
Air Transportation Payroll Support Extension & Related Executive Compensation Restrictions
Places restrictions on companies receiving this payroll support, including limits on the compensation that may be paid to officers and other employees through April 1, 2023.
(ARPA-21, § 7301.)
Payroll Support Extension
Specifically, the Air Transportation Payroll Support Extension provisions of ARPA-21 direct the Department of the Treasury to provide financial grants to certain companies for wages, salaries, and benefits of aviation workers, including:
Up to $14 billion for passenger air carriers.
Up to $1 billion for airline industry contractors or subcontractors providing services including catering, loading and unloading property on airplanes, security, airport ticketing and check-in, passenger assistance, ground-handling of aircraft, or aircraft cleaning and sanitation.
Eligible air carriers or contractors can receive grants based on the amount they received under CAA-21 and on the same terms and conditions as the assistance they received under CAA-21.
No more than five days after the enactment of ARPA-21, the Secretary of the Treasury must publish streamlined and expedited procedures for air carriers and related contractors to submit requests for financial assistance. No later than ten days after ARPA-21 is enacted, the Secretary of the Treasury must make initial payments to approved air carriers and related contractors.
Eligible air carriers or contractors receiving grants under the Air Transportation Payroll Support Extension provisions are restricted from:
Furloughing employees involuntarily or reducing pay rates or benefits from March 31, 2021, until the later of September 30, 2021, and the date the financial assistance is exhausted.
Conducting share buybacks through September 30, 2022.
Paying dividends or making other capital distributions to shareholders through September 30, 2022.
Executive Compensation Restrictions
The Air Transportation Payroll Support Extension provisions place restrictions on the executive compensation air carriers and contractors receiving grants may pay during the period from April 1, 2021, through April 1, 2023 (the Grant Restriction Period). An air carrier or contractor receiving a grant must agree that:
No officer or employee whose total compensation exceeded $425,000 in 2019 (except employees whose compensation is determined under a collective bargaining agreement entered into before ARPA-21 was enacted) may receive from the air carrier or contractor:
during any 12-month period in the Grant Restriction Period, total compensation in excess of the total compensation received by the officer or employee from the air carrier or contractor in 2019; or
severance pay or benefits in excess of two times the maximum total compensation received by the officer or employee from the air carrier or contractor in 2019.
No officer or employee whose total compensation exceeded $3 million in 2019 may receive from the air carrier or contractor during any 12-month period in the Grant Restriction Period total compensation in excess of the sum of:
$3 million; plus
50 percent of the total compensation in excess of $3 million received by the officer or employee from the air carrier or contractor in 2019.
For example, if an officer of an air carrier receiving a grant was paid $5 million in total compensation in 2019, then the officer may receive total compensation of at most $4 million ($3 million plus 50 percent of the $2 million the officer received in excess of $3 million in 2019) during any 12-month period in the Grant Restriction Period.
The Air Transportation Payroll Support Extension provisions do not define total compensation, but the analogous provisions under CAA-21 defined total compensation as salary, bonuses, awards of stock, and other financial benefits provided by a passenger air carrier or contractor to an officer or employee.
Everything old is new again. Employers, health insurers, plan administrators, and COBRA service providers that were involved with administering the COBRA premium assistance provisions during the Great Recession years (2008 to 2010) under the American Recovery and Reinvestment Act of 2009 (ARRA) will recognize some of the core concepts and requirements under the new COVID-19-related COBRA premium assistance rules. However, there are also important differences between the ARRA rules and the ARPA-21 requirements—for example, regarding the amount of subsidies and notice requirements. Now, as during the Great Recession, the COBRA premium assistance requirements will need to be adopted and administered on a very condensed timetable, and we do not yet have the full set of implementing guidance and model notices called for under ARPA-21. It's possible that at least some aspects of the Departments' guidance from the Great Recession era (for example, who qualifies as an AEI and the meaning of involuntary terminations) will be the starting point for guidance in the ARPA-21 context. In other respects, however (for example, how the Departments' COVID-19 outbreak period guidance interacts with the ARPA-21 premium assistance), the current pandemic context is very different from the Great Recession situation (see Legal Update, DOL Addresses Duration of Outbreak Period Compliance Extensions Due to COVID-19).
For defined benefit plan sponsors, ARPA-21 provides funding relief. Plan sponsors of single-employer defined benefit plans should review the changes with their plan actuaries to determine the impact on the plan's funding and required minimum contributions. Underfunded multiemployer pension plans should determine if they should freeze their funding status and plans and apply to the PBGC for financial assistance.
ARPA-21 adds another layer of complexity for employers subject to Section 162(m) who must keep track of their covered employees. Depending on the criteria under which they become covered employees, some individuals will be subject to the "once a covered employee, always a covered employee" rule, while others will be covered employees only for the applicable year. Employers that are subject to Section 162(m) should carefully track their covered employees to ensure that they properly apply the $1 million deduction limit.