On December 27, 2020, President Trump signed into law the COVID-Related Tax Relief Act of 2020, part of H.R. 133, the Consolidated Appropriations Act, 2021, (the “Act”). Although the initial political focus was whether the Act’s $600 per individual direct payment was sufficient, the 5,593-page legislation contains numerous provisions that will impact employer sponsored benefit plans for years to come. The Act follows the 2019 SECURE Act and the 2020 CARES Act in making significant changes to the Tax Code and other federal laws impacting benefit plans. Below are some of the key provisions relating to welfare plans, retirement plans and other employer provided benefits.
The Act 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 Act 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 Act 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 Act contains numerous welfare benefit plan changes designed to provide greater cost transparency and improve employee health care plan outcomes. For example, the Act contains several provisions prohibiting health plans and insurers from entering into contracts that keep cost and quality of care information from plan participants, employers or referring providers. The Act requires disclosure of direct and indirect compensation for brokers and consultants to employer-sponsored health plans and enrollees in plans on the individual market. In addition, Tax Code Section 9816 has been added which provides that for plan years beginning 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 Act provides relief 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 facts and circumstances determination made after the plan year has ended with a presumption of partial termination if a plan has suffered a 20% decline in participants. The Act 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.
The Act also enacted retirement plan disaster relief distribution, loan, and recontribution rules that had been made part of the Tax Code previously in response to prior disasters. Under this version of disaster relief, “qualified disasters” include those occurring after December 28, 2019 that are declared disasters by the President. Individuals who reside in a disaster area may take 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. The COVID-19 pandemic is not a qualified disaster for these purposes.
Student Loan Payments and Paid Family and Medical Leave
The Act 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. The Act extends the tax credit for paid family and medical leave set to expire on December 31, 2020 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 Act 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.