AMERICAN RESCUE PLAN ACT OF 2021
Benefits Related Provisions other than COBRA
March 19, 2021
COBRA was not the only benefits area addressed under the American Rescue Plan Act of 2021 (ARPA) (see our other article on COBRA: https://www.hitesmanlaw.com/client-alerts/arpa-of-2021-cobra-premium-subsidy-and-other-cobra-rights/). ARPA also made changes impacting dependent care reimbursement arrangements and increased the premium tax credit available through an Exchange.
Dependent Care Reimbursement Arrangements. Although temporary, ARPA provides welcome relief for those needing daycare services in order to work. The maximum amount of dependent care benefits that can be paid on a pre-tax basis through an employer-sponsored dependent care reimbursement arrangement (often provided through a cafeteria plan) is temporarily increased to $10,500 ($5,250 for married taxpayers filing separately). The increase applies for taxable years beginning after December 31, 2020 and before January 1, 2022. For most situations (dependent care reimbursement arrangements operating on a calendar year), this means the 2021 calendar year. If the employer wants to use the temporary increased maximums, the plan will need to be amended. The plan amendment incorporating the temporary increase can be adopted and applied retroactively provided the amendment is ultimately adopted by the end of the plan year in which it was effective. During the interim, as required for many other relief provisions, the plan must be operated in accordance with the plan amendment ultimately adopted.
Note: A dependent care reimbursement arrangement is not required to use the increased maximum. If the employer wants to take advantage of the temporary increased maximums, the employer can do so by amending the plan document.
Caution: Other normal limitations still apply, including the nondiscrimination requirements under Sections 129 and 125 of the Code. The 55% average benefits test under Code Section 129 is often a problem with the normal maximums. In general, the non-highly compensated employees can benefit from the temporary increase; but the highly compensated employees may be very limited. In addition, the key employee concentration test for the Section 125 plan that includes the dependent care reimbursement arrangement may be negatively impacted by the temporary increase for the dependent care reimbursement arrangement. If the temporary increase is adopted, consideration should be given to pre-testing during the plan year with time to make adjustments prior to the plan year end to maximize the benefits available to highly compensated employees and key employees.
Of significance to potential dependent care reimbursement participants are the temporary increases made to child-related Code provisions that influence whether, and to what extent, an employee should participate in an employer-sponsored dependent care reimbursement arrangement instead of using other available tax credits (e.g., dependent care tax credit (DCTC), child tax credit, earned income tax credit). As always, the plan should not provide tax advice.
If adopted, plan sponsors should communicate to participants and potential participants the new temporary maximums and the need for election changes to take advantage of the new temporary maximums. Summary materials previously provided should be updated or suspended. This should be done as soon as possible to minimize confusion.
Enhanced Premium Tax Credit & Employer Shared Responsibility. Under the Affordable Care Act (ACA), applicable large employers (ALEs) are potentially subject to penalties for not offering enough full-time employees minimum essential coverage (MEC) and for not offering MEC that provides at least 60% minimum value (MV) at an affordable cost. In order to trigger penalties, there must be a full-time employee that actually goes to an Exchange and qualifies for a subsidy (e.g., qualifies for a premium tax credit). ARPA expands the premium tax credit for taxable years 2021 and 2022. No household income ceiling applies. In prior years, household incomes at 400% of the federal poverty level and above were not eligible for a premium tax credit. This expansion should allow more individuals to qualify for a premium tax credit if they purchase individual health coverage through an Exchange. In addition, the amount of the available premium tax credit itself is increased which in turn reduces the amount the individual must pay for the individual coverage purchased through an Exchange. ALEs should carefully review their strategy in avoiding and managing potential penalties under the shared responsibility portions of the ACA.
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