American Rescue Plan Act Dispatches Aid to Businesses and Individuals
On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (“ARP”) into law. This final version of the bill was significantly changed by the Senate from the original version passed by the House on February 27, 2021. Lawmakers in both the Senate and the House had expressed a goal of enacting ARP by March 14, the date when several of the relief provisions originally enacted by the CARES Act were set expire after their initial extension by the Consolidated Appropriations Act, 2021 in December, 2020 (“CAA”). Overcoming numerous iterations and procedural hurdles, the enactment of ARP comes just days ahead of that March 14 deadline. (See previous AALRR Alerts for overviews of the CARES Act and CAA.)
In its final form, ARP aligns with many of the relief objectives presented by President Biden. Some items of interest to employers addressed in ARP are extensions of the payroll tax credits for employers and extensions of enhanced unemployment relief. For individuals, ARP also includes a third round of direct stimulus payments, as well as enhancements of many tax credits intended to benefit individuals with lower incomes and children.
1. Employee Retention Tax Credit
One of the most popular relief provisions of the CARES Act relief legislation is the Employee Retention Tax Credit (“ERTC”), which provides a payroll credit based on employee retention. The primary goal of ERTC is to incentivize employers to keep their employees on payroll during the covered period, which has been challenging for many employers due to the effects of COVID-19. ERTC is a refundable payroll tax credit for “qualified wages” paid to retained full-time employees, during the covered period. In its original form, ERTC had a covered period of March 13, 2020 through December 31, 2020.
The CAA extended ERTC through June 30, 2021 and modified some of the rules for taking advantage of the credit in the 2021 tax year. ARP extends ERTC through the end of 2021. Rather than the Social Security taxes to which ERTC previously applied, ARP instead makes ERTC available to apply towards the Medicare Tax taxes after June 30, 2021.
The credit is also fully refundable. In this context, refundable means ERTC will essentially serve as an overpayment of tax and will be refunded to the employer after subtracting the employer’s share of the Medicare taxes.
ARP also further expands ERTC eligibility to new “recovery startup businesses” which were established after February 15, 2020, so long as said business has average annual gross receipts for a three year period of not more than $1 million. For these recovery startup businesses, they may not receive more than $50,000 per quarter each in ERTC.
2. Emergency Family and Medical Leave Expansion and Emergency Paid Sick Leave Credits
The Families First Coronavirus Response Act (“FFCRA”) provided for mandatory Emergency Paid Sick Leave (“EPSL”) and Emergency Family and Medical Leave Expansion (“EFMLE”), each of which expired on December 31, 2020. While the mandatory requirement for employers with fewer than 500 employees to provide additional family and sick leave under the FFCRA expired at the end of 2020, the tax credit for employers who voluntarily provided such leave was extended to March 31, 2021 by the CAA. ARP further extends the applicable period for voluntary leave to September 30, 2021 and makes additional significant changes to the tax credit structure.
Initially, ARP increases the limit on applicable wages for which the credit can be claimed up to $12,000 (previously $10,000) for those wages paid after March 31, 2021 for EFMLE. ARP also establishes rules that prevent an employer from receiving FFCRA payroll tax credits if that employer’s furnishing of FFCRA paid leave to employees discriminates in favor of highly compensated employees.
The ARP also states that employees are entitled to new bank of FFCRA EPSL and EFMLE on April 1, 2021. This means that if employers voluntarily provide FFCRA after this date, employees who took FFCRA leave before April 1, 2021, may take it again.
Under ARP, employers can claim a tax credit for time off taken to receive a COVID-19 vaccine, or to recover from a vaccine-related illness or injury. As it does with ERTC, effective March 31, 2021, ARP also makes this credit applicable to the Medicare tax, and not to Social Security taxes.
For self-employed individuals, ARP increases the number of days for which the credit can be claimed from fifty (50) days to sixty (60) days. This change is retroactive, effective after December 31, 2020.
Notably, the ARP does not reinstate the FFCRA mandate to provide additional family and sick leave. Accordingly, the provision of such additional leave remains up to employers.
3. Retirement Plan Funding Changes
In addition to the other relief provisions targeted at employers, ARP includes provisions intended to assist employers with meeting pension plan funding obligations. ARP provides single-employer plans with an extended period for amortizing funding shortfalls, which is applicable to plan years beginning after December 31, 2019. ARP extends this amortization period to fifteen (15) years, which is an increase from the current seven (7) year period. For plan years beginning after December 31, 2019, ARP also grants an extension of funding stabilization measures for single employer plans.
For multi-employer plans, ARP provides extended rehabilitation and improvement periods for plans that entered critical or endangered status in 2020 or 2021. ARP also extends deadlines for applying changes to funding plans or schedules for multi-employer plans, and extends the investment loss amortization period for multi-employer plans, with respect to plan years ending on or after February 29, 2020.
Finally, ARP also freezes the inflation-adjusted increases to the annual contribution limit to defined contribution plans, the annual defined benefit limit, and the maximum limit on compensation that that may be taken into account when determining the limit on contributions and benefits of an employee, beginning in 2030. However, the annual inflation adjustments are set to continue normally until 2030.
4. COVID-19 Relief Tax Treatment
ARP provides that Restaurant Revitalization Grants and Economic Injury Disaster Loan (“EIDL”) advances (also known as EIDL Grants) shall not be subject to income tax and that the exclusion from income will not result in a denial of increase in tax basis.
5. Loans and Grants for Small Businesses
ARP allocates additional funds for the EIDL program and the Paycheck Protection Program (“PPP”). In particular, certain funds are specifically targeted toward certain types of business such as digital news services, independent live venues, independent movie theaters and cultural institutions, as well as certain additional nonprofits which were previously ineligible. Although ARP allocates additional funds for PPP loans, ARP does not extend the deadline to apply for a first-draw or second-draw loan, which remains March 31, 2021.
ARP establishes a “Restaurant Revitalization Fund” aimed at small and mid-size restaurants. This fund allocates grants of up to $5 million per restaurant or bar (or $10 million for certain restaurant groups). Priority for these grants will be given to women-owned restaurants and restaurants that had revenue of less than $500,000 in 2019. Use of the Restaurant Revitalization Grant funds is generally more permissive than certain COVID-19 relief loan programs, such as EIDL and PPP, and can be used for a variety of purposes, including payroll, debt servicing, and operating expenses.
6. Employer COBRA Subsidy and Notice
Under ARP, individuals who have lost their employer-sponsored health insurance coverage due to an involuntary termination of employment or a reduction of work hours may continue their health insurance coverage through COBRA, which will be available to such individuals from April 1 to September 30, 2021 at no cost due to a 100% federal government subsidy.
Additionally, ARP creates changes to the new notice obligation for employers who have employees who are eligible for the COBRA subsidy. The Secretary of Labor, in consultation with the Secretary of the Treasury and the Secretary of Health and Human Services, is required to issue a model notice within 30 days of ARP’s enactment.
Per Section 6432 of ARP, the person to whom premiums for COBRA coverage are payable (generally the insurer) shall be entitled to claim a credit on their employment taxes for the amount of the COBRA premium payments not made by the assistance eligible individual due to the subsidy. ARP states that in the case of multiemployer plans, the person to whom premiums are payable shall be treated as being the plan itself. For other plans, such as single employer plans, that person is generally treated as being the employer maintaining the plan.
7. Dependent Care Assistance Program
The ARP modifies the Dependent Care Assistance Program (DCAP) by increasing the maximum exclusion of employer-provided dependent care assistance to $10,500 per employee for 2021 only, and effectively excludes rollover amounts from employees’ taxable income.
8. Individual Relief
ARP also includes a number of significant relief provisions targeted at individuals. In addition to the much discussed “Recovery Rebates,” consisting of fully refundable 2021 tax year advances of up to $1,400 per individual (and up to $1,400 for each dependent), ARP also includes relief measures such as:
- Child Tax Credit – Increases the overall credit amount and makes the credit fully refundable.
- Earned Income Tax Credit – Adjustments to income thresholds.
- Dependent Care Assistance – Increases the allowable percentage of qualified expenses.
- Expanded Unemployment – Extends the $300 weekly enhanced unemployment relief through early September 2021.
- Tax Exempt Unemployment – Up to $10,200 of unemployment compensation is tax-exempt for those individuals with adjusted gross income of $150,000 or less. This special rule is applicable for taxable years beginning in 2020.
- Student Loan Forgiveness – Expands the exclusion from income of forgiven student loan amounts for loans discharged after 2020 and before 2026.
At around 600 pages and $1.9 Trillion Dollars, ARP clocks in at roughly one-tenth the length of the CAA and over twice the cost. That being said, this latest legislation provides for a wide spectrum of much needed relief aimed at both businesses and individuals (as well as state and local governments).
As always, the attorneys on AALRR’s Business and Tax Team are available to answer your questions and help you and your business navigate these complex issues as they unfold.