The COVID-Related Tax Relief Act of 2020 and the Taxpayer Certainty and Disaster Tax Relief Act of 2020, both part of the Consolidated Appropriations Act, 2021, (collectively the “Stimulus Bill”) contain numerous provisions related to employer sponsored benefit plans. Below are some of the key provisions relating to welfare plans, retirement plans and other employer provided benefits.
The Stimulus Bill enacts a number of temporary changes to the rules for Section 125 cafeteria plan health flexible spending arrangement (“FSAs”) and dependent care flexible spending arrangements (“DCSAs”). The Stimulus Bill codifies and expands the rules enacted in IRS Notice 2020-29 for 2020 and extends them into 2021. Employers are permitted to allow employees to carry over any unused benefits or contributions remaining in FSAs and DCSAs from 2020 to 2021 and from 2021 to 2022. Employers are also permitted to extend the grace period for a plan year ending in 2020 or 2021 to 12 months after the end of the applicable plan year, with respect to unused benefits or contributions remaining in a FSA or DCSA account. Employers are also permitted to allow employees to change FSA or DCSA elections in 2021 without a change in status and are permitted to allow former employees who stop participation in a plan during calendar year 2020 or 2021 to receive reimbursements from unused FSA benefits or contributions through the end of the plan year in which participation ceased (including any grace period). The Stimulus Bill also contains a special carry forward rule for DCSAs where the dependent aged out during the pandemic. Cafeteria plans will require retroactive amendments to adopt the FSA and DCSA changes but amendments do not have to be made until the end of the 2021 plan year at the earliest.
In addition to the changes to FSAs and DCSAs, the Stimulus Bill contains other welfare benefit plan changes designed to provide greater cost transparency and improve employee health care plan outcomes. For example, Tax Code Section 9816 has been added which provides that for plan years beginning on or after January 1, 2022, group health plans must implement procedures to prevent surprise medical bills typically occurring in connection with out-of-network medical providers when an emergency or other issue forces the use of the out-of-network provider.
The Stimulus bill also enacted retirement plan disaster relief distribution, loan, and recontribution rules that had been made part of the Tax Code previously in response to many disasters. Under this version of disaster relief, “qualified disasters” include those occurring from after December 28, 2019 that are declared disasters by the President. Individuals who reside in a disaster area make tax plan distributions up to $100,000 without being subject to the Tax Code 10% tax on early distributions and may repay the amount distributed during a three-year period. In addition, loan limit for loans from qualified plans are increased from $50,000 to $100,000 for individuals who reside in a disaster area and for new and outstanding retirement plan loans, the repayment period is also extended for one year.
Relief was also provided for employers from the partial plan termination rules of Tax Code Section 411(d)(3) which requires full vesting of retirement plan accounts if a partial plan termination occurs. Normally, whether a partial termination has occurred is a tricky facts and circumstances determination made after the plan year has ended. The Stimulus Bill provides that a plan won’t be treated as having a partial termination during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021 is at least 80% of the number of active participants covered by the plan on March 13, 2020.
Student Loan Payments and Paid Family and Medical Leave
The Stimulus Bill extends the prior CARES Act provision that allows employers to make payments of up to $5,250, tax free, toward employees’ student loans through the end of 2025. To take advantage of the provision, an employer must adopt a plan compliant with Tax Code Section 127. Under prior law, for tax years beginning before January 1, 2021, eligible employers could obtain a tax credit for paid family and medical leave. The Stimulus Bill extends the credit through 2025. The credit is equal to 12.5% of eligible wages if the rate of payment is 50% of such wages and is increased by 0.25 percentage points (but not above 25%) for each percentage point that the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account with respect to any qualifying employee is 12 weeks per tax year.
In summary, the Stimulus Bill continues Congress’ recent trend in the SECURE Act and CARES Act to adopt new rules and benefits that are beneficial to impacted employees. Employers need to examine these provisions to determine which optional provisions should be implemented for their workforce and gain an understanding of the impact of all new mandatory rules.