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American Rescue Plan enacted

Executive Compensation|Health and Benefits|Retirement|Total Rewards|Bienestar integral
COVID 19 Coronavirus

By Ann Marie Breheny , Gary Chase , Anu Gogna , William (Bill) Kalten and Maria Sarli | March 22, 2021

Employer plan sponsors should review the provisions of the ARPA and start taking steps to implement and administer the changes.

The American Rescue Plan Act was signed into law on March 11, enacting important pension, health care, compensation and other provisions. The new law is a sweeping COVID-19 relief and economic stimulus package first proposed by President Biden before he took office. Among other provisions, the act reforms the funding rules for single-employer defined benefit (DB) pension plans, subsidizes COBRA and other continuation health care coverage, and expands the number of employees for whom an employer’s compensation deduction is limited to $1 million. Some provisions take effect quickly, so employers and plan sponsors should become familiar with the provisions of the act and prepare for implementation. 

Pension funding provisions

The act provides interest rate stabilization and longer amortization periods for single-employer DB plans.

The act generally sets the interest rate corridor at 95% to 105% of the 25-year average segment rates through 2025 and gradually widens the corridor to 70% to 130% beginning in 2030, based on the following schedule:

Extension of pension funding stabilization percentages for single employer plans

The American Rescue Plan Act amends the table in the tax code on pension funding stabilization percentages
Calendar year Minimum percentage Maximum percentage
2012 – 2019 90 110
2020 – 2025 95 105
2026 90 110
2027 85 115
2028 80 120
2029 75 125
2030 on 70 130

The act also establishes a 5% floor on the 25-year average segment rates (so that, for example, the funding interest rate will not drop below 95% of 5%, or 4.75%, through 2025).

Plan sponsors may defer this change until the 2021 or 2022 plan year, either for all purposes or only for purposes of the benefit restrictions under Internal Revenue Code section 436.

The act also provides for 15-year amortization of funding shortfalls, rather than seven-year amortization, for plan years beginning after December 31, 2021. Plan sponsors have the option to use 15-year amortization for plan years beginning in 2019, 2020 or 2021.

The act also addresses multiemployer pension funding and revises eligibility for the community newspaper funding relief provisions enacted by the Setting Every Community Up for Retirement Enhancement Act.

Health care provisions

The act fully subsidizes the cost of COBRA and other continuation health care coverage until October 1 and expands eligibility for premium tax credits for coverage through the Affordable Care Act (ACA) marketplaces.

Individuals who are eligible for COBRA (or continuation coverage offered by state programs that provide comparable coverage) as a result of involuntary termination of employment or reduction in hours will receive a 100% premium subsidy for coverage between April 1 and September 30, 2021. Individuals who are eligible for the subsidy (referred to in the act as assistance eligible individuals) but have not elected COBRA or have discontinued their COBRA coverage will have a new opportunity to elect COBRA during a special election period that begins April 1 and ends 60 days after the employer provides notice about the availability of the subsidy. This special election period does not extend an individual’s COBRA continuation period, so individuals who elect to begin or resume coverage on or after April 1 will exhaust their COBRA eligibility 18 months after their qualifying event. Plan sponsors also have the option to allow assistance-eligible individuals to elect different coverage if such coverage is otherwise available to similarly situated active employees and the premium does not exceed the premium for the coverage they had on the date of their COBRA-qualifying event. Subsidy eligibility will end on September 30 or when an individual becomes eligible for Medicare or another group health plan, whichever is earliest. Individuals who become eligible for other coverage and fail to notify their former employer will be subject to penalties.

During the period the subsidy is in effect, COBRA notices will have to include information about the availability of the subsidy, the individual’s obligation to notify the employer upon eligibility for Medicare or other group health coverage, and the individual’s ability to enroll in different coverage (if the employer is offering the option). The notice must be offered to those who would be eligible for the subsidy but do not have a COBRA election in effect or who have discontinued their COBRA coverage. Employers will also be required to notify individuals about the expiration of the COBRA subsidy.

In addition to subsidizing COBRA coverage, the act expands eligibility for tax credits that help individuals purchase coverage through the ACA marketplaces. For 2021 and 2022, premium tax credits will be calculated based on the following table:

Temporary premium tax credits for 2021 and 2022

The American Rescue Plan Act expands eligibility for tax credits based on household income
Household income (% federal poverty line) Initial premium percentage Final premium percentage
Up to 150% 0 0
150% – 200% 0 2
200% – 250% 2 4
250% – 300% 4 6
300% – 400% 6 8.5
400% and higher 8.5 8.5

The act does not modify the eligibility threshold under the ACA employer mandate provisions of the ACA, which remains 9.83% of household income for 2021. As a result, employers will not necessarily be subject to ACA employer mandate penalties as a result of premium tax credit expansion.

Expansion of section 162(m)

After 2026, the $1 million deduction limit for “covered employees” under Internal Revenue Code section 162(m) will apply to an additional five highest paid employees, other than the CEO, CFO and three highest paid officers under existing rules. “Covered employees” in any year would continue to be subject to the deduction limits for payments received in subsequent years; however, the newly covered five highest paid employees are only subject to the rule for the year they are in this group.

Other provisions

The annual limit for dependent care flexible spending accounts will increase to $10,500 (from $5,000) for 2021.

Payroll tax credits for paid sick leave and paid family leave — which were enacted by the Families First Coronavirus Response Act of 2020 and extended until March 31, 2021, by the Consolidated Appropriations Act, 2021 — will be further extended and expanded. Among other changes, the credits will be available until September 30, 2021; state and local governmental employers will be eligible to claim credits; and credit will be available for wages paid to employees who are unable to work or telework because they are receiving a COVID-19 vaccine or recovering from illness, injury, condition or disability related to vaccination.

The act also includes a range of additional tax, public health, and economic stimulus and assistance provisions, such as economic stimulus payments, extended unemployment assistance, relief for airlines and other industries, and more.

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Director, Retirement and Executive Compensation

Senior Regulatory Advisor, Health and Benefits

Senior Director, Retirement and Executive Compensation

U.S. Retirement Resource Actuary

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