American Rescue Plan Act : A Simple Breakdown For Employers

The Act authorizes the Internal Revenue Service (IRS) to pay $1,400 to individuals and an additional $1,400 for each dependent of the taxpayer up to specified income limits. These payments are fully phased out for single filers earning $80,000, head of household filers with $120,000 in income, and joint filers making $160,000. Nonresident aliens and those who are a dependent of another taxpayer are not eligible.

This has proved to be a disadvantage to employers but the federal unemployment supplement, which was scheduled to expire on March 14th, is renewed with a federal supplement of $300/week through September 6th. The first $10,200 in Unemployment Insurance benefits received in 2020 is now nontaxable for households with under $150,000 in taxable earnings. In the case of a joint return, up to $10,200 in unemployment insurance benefits received by each spouse would be nontaxable. This may affect income tax returns already filed for 2020. The IRS will need to advise taxpayers whether it will be necessary to amend 2020 income tax returns.

The Act provides a 100% COBRA Subsidy for qualified employees and dependents who lose coverage as a result of involuntary terminations or reductions in hours (qualified individuals). In addition to new qualified employees and dependents, qualified individuals who are still within their COBRA maximum period but who had not previously elected will be given the opportunity to now elect COBRA as well. Employers would pay the COBRA premium and be reimbursed, including the 2% administrative fee that health plans are permitted to charge, via a refundable payroll tax credit. This credit may also be advanced — i.e., paid by the IRS to the employer — although guidance will be necessary to implement this feature. The subsidy would be effective for coverage periods beginning in April through September 2021. The subsidy is only available for so long as the qualified individual is not eligible for other group health plan coverage, is within their COBRA maximum period (typically 18 months from the date of the qualifying event) and/or the end of the subsidy period.

As with other tax credit programs, a “double benefit” is avoided by increasing the taxable income of any organization by the amount of such credit. (The income would be offset by deductible health premium expenses.) Also, no credit is allowed based on the same wages as were used to qualify for the Employee Retention Tax credit or Families First Coronavirus Relief Act (FFCRA) paid leave tax credit.

New notices will be required to advise potential qualified individuals of the availability of COBRA premium assistance for health coverage and the option to enroll in coverage. The Department of Labor, in consultation with the Treasury and Health and Human Services Departments, will publish model notices by April 10, 2021.

The Employee Retention Credit (ERC), which was scheduled to expire on June 30, 2021, is extended through December 2021. The credit percentage remains 70 percent of up to $10,000 in qualified wages per employee per quarter; i.e., a $28,000 maximum credit per employee for 2021. Employers may qualify if their operation is fully or partially suspended due to orders from a governmental authority related to COVID-19, or if the organization can demonstrate that gross receipts for a calendar quarter are less than 80 percent of the gross receipts of the employer for the same calendar quarter in 2019. The credit is increased by the proportionate share of an employer’s health costs related to such wages.

The Employee Retention Credit is also extended to new businesses which started after February 15, 2020, with average annual receipts of under $1,000,000. For such businesses, the amount of the credit may not exceed $50,000 per quarter.

The Act relaxes restrictions on “Severely Financially Distressed Employers,” defined as those that can demonstrate that gross receipts are less than 10 percent of the gross receipts of the corresponding base period (generally the same calendar quarter in 2019). These organizations may apply the ERC to all wages paid to employees (up to the applicable $10,000 per employee per quarter limit), notwithstanding that they have over 500 employees. Normally employers with more than 500 full-time employees can only take the credit for wages paid to employees for time that the employee is not providing services (i.e., paid time off).

The FFCRA Paid Sick and Family Leave tax credit is extended beginning April 1, 2021 through September 30, 2021, and remains refundable and advanceable via IRS Form 7200. The requirement for covered employers to offer paid FFCRA leave expired in 2020, but for covered employers that offer it, such leave is funded by the federal government up to applicable limits. The original FFCRA 10-day limitation for paid sick leave applied from March 2020 through March 2021. The Act resets this limit for qualifying sick leave taken between April 1, 2021 and September 30, 2021.

The Act also adds new reasons for which employees may take paid sick or family leave for which employers are entitled to the tax credit, including leave for time awaiting the results of a test to diagnose COVID-19, to obtain immunization for it, or to recover from any adverse health impacts arising from the immunization. The Act also increases the wage limit for paid family leave payments from $10,000 per employee to $12,000 per employee.

Finally, the Act provides that employers cannot “double dip” by taking credit for payroll costs that have been subject to PPP loan forgiveness.

Eligibility for Paycheck Protection Program (PPP) loans is expanded to nonprofit 501(c) entities, other than 501(c)(4) lobbying organizations. Recipients remain subject to the limit of $1,000,000 or 15 percent of receipts and activities related to lobbying. Consistent with the Consolidated Appropriations Act, P. L. 116-260, qualifying organizations generally must employ 300 or fewer employees, but affiliation rules are relaxed for nonprofits and veterans’ organizations, which may be eligible if they employ 500 or fewer employees per physical location. Other nonprofit organizations are still subject to the 300-employee limit per physical location.

Because COBRA premium assistance payments (discussed above) are eligible for 100 percent reimbursement via a payroll tax credit, such costs may not be included in PPP forgivable payroll costs.

Affordable Care Act (ACA) premium subsidies are increased through 2022, in effect decreasing the required individual contribution. The Act provides a 100 percent subsidy for ACA coverage for unemployed persons and people earning up to 150 percent of the federal poverty level for two years. Individuals earning below 150 percent of the poverty level must currently pay up to four percent of their income.

The Act expands ACA subsidies for people with income over 400 percent of the federal poverty level, who were previously ineligible. Premium costs are now capped at 8.5 percent of income. Individuals who receive unemployment insurance at any time in 2021 will be able to obtain ACA coverage at no cost.