American Rescue Plan Act of 2021 (ARPA): Provisions for Businesses and Employers
March 24, 2021
On March 11, President Biden signed into law the American Rescue Plan Act of 2021 (“ARPA”). The new law focuses substantial benefits on individuals, government agencies and businesses. While much attention is given to the third round of stimulus payments to individuals, within the new law are several tax provisions important to businesses and employers.
COBRA Subsidy and Employer Tax Credit
ARPA includes a new provision to offer a 100 percent subsidy for COBRA continuation of health insurance coverage to eligible individuals. These individuals will not have to pay COBRA premiums during the second and third quarters of 2021. The law limits eligibility generally to former employees receiving COBRA benefits as a result of an involuntary termination of employment or a reduction in hours. The new law extends the election period to opt in to COBRA coverage to individuals who had an involuntary termination of employment or reduction in hours in the last 18 months.
This subsidy applies to coverage from April 1, 2021, until September 30, 2021, but ends earlier if the individual’s COBRA coverage period ends or the individual becomes eligible for Medicare or another group health plan. Because individuals will not be paying COBRA premiums to their former employers, ARPA offers a refundable employment tax credit to employers (or whoever normally receives the COBRA premiums). The tax credit offsets the employer’s share of Medicare payroll tax, and any excess credit may be refunded.
The new law includes requirements to provide specific notices to individuals who may be eligible for the COBRA premium subsidy.
Employer-Provided Dependent Care Assistance
For 2021 only, APRA increases the annual amount of employer-provided dependent care assistance that can be excluded from an employee’s income. ARPA raised the annual maximum to $10,500 ($5,250 for MFS filers). Employers can adopt this change to their benefit plans and make it effective for all of 2021, if the plan amendments are in place before the last day of the plan’s year.
Targeted Economic Injury Disaster Loan (“EIDL”) Advance
Businesses that received or may receive an EIDL advance from the Small Business Administration (“SBA”), do not need to include this advance in gross income. For S corporations and partnerships, the EIDL advance will be considered tax exempt income. In many cases, EIDL advances of up to $10,000 were not required to be repaid to the SBA. Similar to rules for Paycheck Protection Program (“PPP”) loans, the exclusion from taxable income does not affect any deduction or basis increase or other tax attribute resulting from expenditures of the EIDL advance.
Restaurant Revitalization Grants
Eligible restaurants, food trucks and similar businesses receiving restaurant revitalization grants from the SBA do not include these grants in taxable income. Similar to rules for PPP loans, the exclusion from taxable income does not affect any deduction or basis increase or other tax attribute resulting from expenditures of the grant. S corporations and partnerships will report the grants as tax exempt income.
Interest Expense Allocation of Multinational Companies
ARPA repeals the 2021 election option that would have allowed multinational organization to apportion interest expense on a worldwide basis among the members of the group. The election is no longer available.
Defined Benefit Plan Changes
The minimum funding requirements for single employer defined benefit plans are decreased by changing required interest rates and amortization periods for unfunded liabilities, beginning with the 2022 plan year. An employer may elect to apply the changes to certain earlier plan years.
Underfunded multiemployer plans meeting certain criteria and applying to PBGC before December 31, 2025 will be paid a lump sum anticipated to keep the plan solvent through 2051. Plans receiving these amounts are required to reinstate benefits that were statutorily reduced in 2014, making payments of previously suspended benefits.
Provisions Applying to Future Tax Years
Public Company Executive Compensation
Section 162(m) of the Internal Revenue Code disallows compensation deductions above $1 million for certain employees of publically traded companies. ARPA expands the employees covered by Section 162(m) to include the eight highest paid employees rather than the current three highest paid employees. The compensation of these additional five individuals is not subject to the rule requiring that person’s compensation to always be subject to the $1 million limit. This new rule applies to tax years beginning after December 31, 2026.
Excess Business Loss Limitation
The CARES Act suspended the loss limitation provisions of Section 461(l) through the end of tax year 2020. Beginning in 2021, this provision again reduces the amount of business losses a non-corporate taxpayer can deduct in one year. Section 461(l) was set to expire at the end of 2025. ARPA extends this provision for an extra year to the end of 2026.
Tax Reporting for Gig Workers
Beginning with the 2022 tax year, gig economy platform businesses (Uber, TaskRabbit, Thumbtack, etc.) will be required to report gross amounts paid to workers of $600 or more on Form 1099-K. Currently, the threshold for reporting payments on Form 1099-K is $20,000. This provision is a step towards improving income tax reporting and tax payments by this pool of workers.
The IRS announced on March 12 their intent to issue guidance, forms, notices, and frequently asked questions to assist taxpayers to comply with this new law. Cherry Bekaert tax professionals are consulting with clients to apply the ARPA rules efficiently and claim opportunities for tax savings. If you have questions regarding ARPA, please reach out to your Cherry Bekaert tax advisor.
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