On March 11, 2021, President Joe Biden signed the American Rescue Plan Act of 2021 (ARPA). The ARPA is the latest installment of COVID-19–related stimulus packages passed by Congress in the last 12 months. Similar to the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, the ARPA contains a number of employee benefit plan and executive compensation provisions, which are highlighted below.

Health and Welfare Benefits

The ARPA provides two significant health and welfare plan opportunities to individuals who have been impacted by COVID-19. First, the ARPA provides for an employer-administered COBRA subsidy opportunity for certain individuals. Second, the dependent care flexible spending account (FSA) limit has been given a one-year increase for 2021.

1. COBRA premiums

The ARPA provides a 100 percent COBRA health benefits premium subsidy for certain “assistance eligible individuals.” An assistance eligible individual is a COBRA-qualified beneficiary who is eligible for COBRA coverage due to an involuntary termination of employment or a reduction in hours. Assistance eligible individuals (and their dependents) on COBRA benefits coverage from April 1, 2021, through September 30, 2021, are eligible for this subsidy. In addition, a special election period is provided for those individuals who elected but terminated their COBRA coverage prior to April 1, 2021, and who would otherwise be entitled to COBRA coverage during this period.

To assist employers with covering the costs of such premiums, Congress will offer a payroll tax credit to be used against an employer’s quarterly taxes for Medicare. Please note that employers will need to notify assistance eligible individuals of their COBRA premium subsidy opportunity. Generally, this can be accomplished by either creating a stand-alone document or by amending COBRA election notices to describe the subsidy. The ARPA requires the U.S. Department of Labor (DOL) to issue model COBRA election notices with the COBRA subsidy language within 30 days of enactment.

2. Dependent care FSAs

The ARPA increases the dollar limit for dependent care FSA contributions in 2021 (and only in 2021) from $5,000 to $10,500. Please note this is a discretionary change that employers may make to their plans and, if they so choose to increase the maximum contribution amount, the ARPA provides that the amendment may be made by the last day of the 2021 plan year.

Executive Compensation—Increase in Number of Employees Covered by Code § 162(m)

Internal Revenue Code Section 162(m) limits the federal tax deduction that a public company may take for compensation paid to a “covered employee” in a tax year to $1 million. A “covered employee” generally includes the chief executive officer (CEO), chief financial officer (CFO), and the three highest paid executive officers (other than the CEO and CFO) for each tax year as determined under U.S. securities laws—together known as the “named executive officers.” Notably, once an individual is designated as a covered employee the individual remains a covered employee until death.

The ARPA amends the definition of covered employees to include an additional five highest paid employees in addition to the named executive officers. Notably, it appears these additional five employees are determined annually and will not always be covered employees like the named executive officers. This group of five is tied solely to their annual compensation (meaning, they do not have to be executive officers and the group may change from year to year based on compensation levels). This amendment is effective for tax years beginning after December 31, 2026.

Pension Plans

1. Funding changes

The ARPA makes a few changes that impact minimum required contributions to pension plans. First, the 7-year amortization period for funding shortfalls will increase to 15 years. Second, the ARPA extends previously enacted pension smoothing rules that were set for a phaseout starting in 2021 and modifies the pension funding stabilization floor and interest rate corridor.

2. Community newspaper pension plans

Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, certain “community newspapers” that sponsor pension plans are eligible for relaxed funding requirements if certain rules are satisfied. The ARPA has expanded the eligibility for this relief to any plan maintained for the benefit of participants and beneficiaries employed by an employer that published one or more newspapers at any time from December 20, 2008, to December 20, 2019.

Multiemployer Pension Plans

Given the number of underfunded multiemployer pension plans, Congress established several measures to assist the stabilization of these plans.

1. Pension Benefit Guaranty Corporation (PBGC) premiums

The ARPA increases PBGC premiums to $52 per participant starting in 2031, with the amount to be adjusted for inflation. Currently (for plan years beginning in 2021), PBGC premiums for multiemployer plans are $31 per participant.

2. Funding status

Internal Revenue Code Section 432 provides funding rules for multiemployer pension plans in endangered, critical, or critical and declining status. Generally speaking, multiemployer pension plans that are less than 65 percent funded are referred to as in critical status (aka “red zone”) and plans that are more than 65 percent but less than 80 percent funded are referred to as in endangered status (aka “yellow zone”). The ARPA provides that plans may elect to use their 2019 funding status for plan years beginning in 2020 or 2021, subject to certain participant notification requirements.

3. Funding standing account

To provide relief for underfunded multiemployer pension plans, the APRA allows plan sponsors to amortize the costs of net investment losses within their funding standard account over a 30-year period as opposed to a 15-year period. This election to change the amortization schedule can be made for either or both of the first two plan years that begin after February 29, 2020.

4. Expansion of funding improvement or rehabilitation plan period

Multiemployer plans in endangered or critical status must adopt a funding improvement plan or rehabilitation plan, as applicable. Currently, the time period for these plans is 10 years. The ARPA allows for plans in endangered or critical status for plan years 2020 and 2021 to extend this time period for their “funding improvement period or rehabilitation period” by an additional five years.

5. Financial assistance

The ARPA establishes a special financial assistance program that allows for certain underfunded multiemployer pension plans to receive funding from the PBGC in the form of lump-sum payments. However, this relief only applies to the following plans that meet one or more of the following criteria:

• “the plan is in critical and declining status … in any plan year beginning in 2020 through 2022”;

• under the Multiemployer Pension Reform Act of 2014 (MPRA), the plan has been previously approved for “a suspension of benefits”;

• the plan is in critical status, as certified by an actuary, for “any plan year beginning in 2020 through 2022,” with the plan having more inactive plan participants than active plan participants; and/or

• “the plan became insolvent … after December 16, 2014, and has remained so insolvent and has not been terminated as of [March 11, 2021].”

Payroll Tax Credits

1. Retention credit

In an effort to keep individuals employed, the CARES Act offered refundable tax credits against an employer’s share of employment taxes (Social Security and Railroad Retirement), up to 50 percent (increased to 70 percent under the Consolidated Appropriations Act, 2021) of an employee’s qualified wages. The ARPA extended this so-called retention credit until December 31, 2021, but the retention credit will only apply to an employer’s share of Medicare taxes, not Social Security taxes, after

2. Paid sick leave and family leave credits

Tax credits available to employers under the FFCRA for providing paid sick leave and family leave are extended from March 31, 2021, through September 30, 2021, under the ARPA, subject to certain changes such as the employer’s ability to receive credits (as a refundable tax credit solely against Medicare) and the maximum amount of wages per employee that are creditable (increased from $10,000 to $12,000).