April 12, 2021 | Covid-19 | Posted by Bob Greene, Senior HR Industry Analyst at Ascentis
The American Rescue Plan Act: The Rest of the Story
In a recently published a blog post, "COBRA Subsidy Provisions of the American Rescue Plan Act of 2021 (ARPA): What Employers Must Know!' with twenty questions and answers surrounding the new COBRA subsidy provisions of The American Rescue Plan Act of 2021 (HR 1319; P.L. 117-2, signed into law March 11, 2021).
In this blog post, we review the other employer and human capital management impacting provisions of this $1.9 trillion COVID relief bill. It should be noted that, with the exception of model COBRA notices and some Q&A DOL guidelines released last week – mostly directed at COBRA beneficiaries rather than employers – we still await guidance from both DOL and IRS for various other aspects of the new law.
Paycheck Protection Program – Modifications and ExtensionThe original PPP funding from the CARES Act in March, 2020, was $349 billion, and was exhausted very quickly. A series of legislative re-allocations have become law since then, with the life-to-date cumulative funding of the program now standing at $813.5 billion, with approximately $67 billion remaining to lend as of April 4, 2021. The deadline for loan applications has similarly been extended multiple times, most recently through May 31, 2021.
There were relatively few major modifications to the PPP under the American Rescue Plan Act (“ARPA”). Eligibility for loans was extended to “additional covered nonprofit entities,” including those not-for-profits listed in §501(c) of the Internal Revenue Code other than §501(c)(3), §501(c)(4), §501(c)(6), or §501(c)(19) organizations. However, to qualify for PPP loans, these newly included organizations must be able to prove that they do not receive more than 15 percent of their revenue from lobbying activities, that the cost of any lobbying activities in which they do engage did not exceed $1 million during the most recent tax year ending prior to Feb. 15, 2020, and that the organization employs 300 or fewer employees.
As a reminder, the most compelling advantages of receiving PPP money still apply through the ARPA continuation of the program:
- The ability, via the “forgiveness process,” to convert loan proceeds to grant money with no repayment, subject to certain restrictions.
- The reduction of the required direct payroll spend proportion of the loan proceeds from the original 75 percent (original CARES Act) to 60 percent (PPP Flexibility Act).
- The significant expansion of eligible expenses included within the up-to-40 percent non-payroll spend to include covered worker protection expenditures (related to COVID prevention measures, such as ventilation systems, physical barriers, drive through facilities, employee screening equipment), covered property damage costs from public disturbances in 2020 not covered by insurance, and covered operational expenses (including costs for processing payroll, HR, sales/billing software).
- The extremely rare tax advantage of “double-dipping” granted to covered PPP expenditures: employers can treat as deductible business expenses actual expenditures which are made with PPP loan proceeds and then forgiven.
- The loosening of the covered period to account for PPP loan expense payout, from date of receipt of loan proceeds for anywhere from 8 weeks to 24 weeks with the length of time being the loan recipient’s choice.
- A new streamlined, one-page forgiveness application which can be used by any borrower of $150,000 or less.
Employee Retention Tax Credit – Modifications and ExtensionThe ERTC, also originated in the CARES Act and modified multiple times since, was extended and enhanced by ARPA as well. The original credit was 50 percent of the first $10,000 of eligible wages for the nine-month period from April 1 through December 31, 2020, and the “dividing line” between those employers who could take the credit against ANY wages paid, vs. those who could take it only against wages paid for employees retained in lieu of layoff (not actively on the job) or those working a reduced hours schedule imposed by the employer, was 100 employees. The Consolidated Appropriations Act signed into law December 27, 2020, had moved the credit to 70 percent of the first $10,000 of wages per quarter from January 1 through June 30, 2021, and moved the employer size dividing line between all wages and only wages paid for inactive employees from 100 to 500 employees. ARPA extended the period for claiming the credit through the third and fourth quarters as well, now expiring December 31, 2021.
Additionally, beginning in the third quarter (July 1, 2021), the following modifications apply to the ERTC:
- “Recovery startup businesses” that began operating after February 15, 2020 are now considered qualified employers under the ERTC, if they meet certain gross receipts requirements. A recovery startup business will be eligible for an increased maximum credit of $50,000 per quarter, even if the business has not experienced a significant decline in gross receipts or been subject to a full or partial suspension under government order.
- A ‘‘severely financially distressed employer” (defined as having suffered a decline in quarterly gross receipts of 90% or more compared to the same calendar quarter in 2019) will be able to treat all wages (up to the $10,000 limitation) paid during those quarters as qualified wages. This rule will allow a large employer (i.e., an employer with 501 or more employees) under severe financial distress to treat those wages as qualified wages whether or not its employees actually provide services – a privilege otherwise reserved only for employers of 500 or fewer employees.
- The statute of limitations for assessments relating to the ERTC is extended until five years after the date that the original return claiming the credit is filed or treated as filed. (Example: the form 941 for fourth quarter of 2021 is filed timely on April 30, 2022; this return can be audited vis-à-vis the amount of the ERTC claimed, until April 29, 2027.)
Paid Leave Under the Families First Coronavirus Response Act – Modifications and ExtensionThe FFCRA introduced us to mandated federal paid leave, for all public employers and for private employers of fewer than 500 employees (as measured on the date that an employee’s requested leave was to begin). These FFCRA paid leave provisions were of three types:
- Paid Health Emergency Leave (“PHEL,” sometimes referred to as Extended Family and Medical Leave) of up to $200 per day for up to 10 weeks, for designated reasons, and with a two-week waiting period that was unpaid but job-protected.
- Emergency Paid Sick Leave (“EPSL”) of up to $511 per day for up to 10 days (80 hours) for an employee’s own illness, again for designated reasons.
- Emergency Paid Sick Leave of up to $200 per day for up to 10 days, to care for a specified family member, again for designated reasons.
ARPA renewed the available tax credits from April 1 through September 30, 2021 (i.e., the second and third quarters only) and made several important changes to these paid leave provisions. It is important to remember that these revisions are mandatory if, and only if, an eligible employer chooses to extend the paid leave provisions to their employees and seek the tax credit offset:
- ARPA expands the qualifying reasons for which leave can be taken (and tax credit claimed) under EPSL, to include leave (a.) to obtain COVID-19 immunization(s); (b.) to recover from an injury, disability, illness or condition related to the COVID-19 immunization; and (c.) to seek or await the results of a diagnostic test for, or medical diagnosis of COVID-19, where the employee has been exposed to COVID-19 or the employer has requested such a test or diagnosis from the employee.
- ARPA strikes the provision in the FFCRA requiring the first two weeks of Paid Health Emergency Leave to be unpaid. For this reason, the maximum allotment of PHEL per employee has risen from $10,000 to $12,000.
- ARPA “resets” the 10-day (or 80 hour) allotment limit on Emergency Paid Sick Leave (EPSL) effective April 1, 2021. Employees are entitled to an entire new allotment of 80 hours of EPSL for 2021 if the employer wishes to take advantage of the tax credit offsets.
- ARPA also imposes important new non-discrimination restrictions on the tax credits: if employers choose to extend FFCRA leave benefits, they may only take the available tax credits if, in awarding the paid EPSL/PHEL, they do not discriminate in favor of highly compensated employees (as defined under IRC §414(q)), in favor of full-time employees, or on the basis of an employee’s tenure with the employer.
- Employers should be vigilant to avoid tax credit “double-dipping.” EPSL and/or PHEL wages for which an employer seeks a tax credit may not also be claimed under: PPP loan expense offsets for which forgiveness is sought, ERTC amounts (§2301 of the CARES Act), grants under §324 of the Economic Aid to Hard-Hit Small Businesses, Non-profits, and Venues Act, or restaurant revitalization grants under §5003 of ARPA.
“Under the Radar:” The Impact on Employers of Liberalized Exchange-Based Health Premium Tax CreditsGiven the “drinking from a (regulatory) firehose” nature of COVID legislation and the impact this unprecedented succession of new laws has had on HR professionals around the country, it is tempting for us to ignore the more “consumer-oriented” provisions of ARPA, like a third round of stimulus payments, extended unemployment benefits, and sweetened Earned Income and Dependent Children Tax Credits. Employees will learn of all these provisions from the mainstream press, the “six o’clock news,” and in some cases from their tax preparers, right?
However, another provision of ARPA represents one of the biggest modifications to the Affordable Care Act since its inception 11 years ago: a huge liberalization of the tax credit provisions designed to make exchange coverage more affordable. Kaiser Family Foundation (kff.org) estimates that these new provisions will increase the number of individuals eligible for a healthcare marketplace subsidy (a.k.a. an Advanced Premium Tax Credit, or “APTC”) by 20 percent, from about 18.1 million to about 21.8 million taxpayers.
Why would employers care about that change to healthcare exchange coverage costs? The explanation relates back to the Employer Shared Responsibility (“ESR”) penalties assessed under the ACA, and for which some employers have been receiving Letter 226-J from the IRS over the last two years – proposing penalties automatically calculated by the IRS. Sometimes referred to as “pay or play” penalties, §4980H(a) (aka the “pay penalty”) and §4980H(b) (aka the “play penalty”) impose monthly fines for past plan years where the IRS discovers they are due. They do this on a very automated basis by matching forms 1095-a, 1095-b, and 1095-c for the same taxpayer (by SSN) for a given period of time.
The source of concern going forward from the effective date of ARPA will be the §4980H(b) penalty. Unlike the so-called “a penalty” which applies to an applicable large employer member’s entire full-time population (less a small exclusion), the “b penalty” applies only to those employees who have not been offered affordable coverage by the employer for one or more months of a tax year when they were entitled to it. But the “b penalty” further only triggers when the impacted individual goes to the healthcare exchange and enrolls, and receives a premium tax credit (the PTC). Prior to ARPA, higher paid employees who did this would not qualify for a tax credit, and therefore would not trigger an employer ESRP penalty. With 3.7 million more Americans suddenly qualifying for the PTC under ARPA, the number of assessments is bound to go up. Unfortunately, since experience so far tells us that the IRS performs this type of automated audit 12 - 24 months after the tax year in question, this impact of the new law is something of a delayed “penalty bomb.”
It is worthwhile for employers to review with their insurers, brokers or benefits advisers, the circumstances that might be most applicable to their plan provisions, that could trigger a “b penalty”. These include:
- Use of the W-2 Box 1 affordability safe harbor. This is the only safe harbor affordability test where the results of testing can change month by month “in real-time” (sometimes triggering an unpleasant “holiday surprise” at year-end).
- Use of the Federal Poverty Limit or Monthly Rate of Pay affordability safe harbors where the employer fails to enforce minimum pay policies that ensure plan compliance throughout the year.
- Failure to recognize when a part-time or variable hour employee qualifies for an offer of coverage, even for just one or two months.
- Failure to include in qualifying hours counted during the lookback period certain protected unpaid hours, including jury duty, FMLA time, and certain types of military leave.
PLEASE NOTE: The materials available at this web site are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.
Bob Greene currently serves as Senior HR Industry Analyst at Ascentis. Bob’s 40 years in the human capital management industry have been spent in practitioner, consultant and vendor/partner roles. As practitioner, he managed payroll for a 5,000-person bank in New Jersey. As consultant, he spent 8 years advising customers in HRMS, and payroll and benefits system design as well as acquisition strategies. Bob also built a strategic HCM advisory practice for Xcelicor (later acquired by Deloitte Consulting.)