The American Rescue Plan Act (ARPA) extended federal pandemic unemployment assistance (PUA) benefits that provided taxpayers with a supplemental weekly unemployment benefit payment (in addition to state-level benefits). Under the ARPA, taxpayers can continue to receive an additional $300 weekly benefit through September 6, 2021. The federal assistance has also been extended to self-employed taxpayers who would not normally be entitled to state-level unemployment benefits.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about continuing to extend the federal supplemental benefit into 2021, as states focus on reopening their economies.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: This weekly benefit has kept countless hardworking Americans out of poverty during the pandemic. It’s helped them keep food on the table and prevented the widespread economic collapse that many predicted was inevitable last Spring, when the pandemic first struck. In reality, most families can’t get by on standard weekly unemployment benefits for a long period of time–and we still don’t really know when things will return to normal. Extending this benefit makes complete sense in light of the continued uncertainty that many families continue to face.

Byrnes: This extra benefit might have been useful in the spring of 2020, when we didn’t know what we were dealing with. We now have a firm enough grasp on the issues. All this across-the-board benefit does is discourage people from returning to work when they’re fully capable of gaining employment. The new reality is that it’s time to get people back to work. The vaccine is working. Sure, not everyone has access yet–but we shouldn’t be expanding unemployment benefits at the exact time when we need to be encouraging a return to work.

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Bloink: The economy cannot recover if Americans are unable to sustain even their basic cost of living needs. Job opportunities that existed prior to the pandemic simply have not returned across the board—and we don’t know when they will, as uncertainty over the vaccine continues. Business owners who are able to reopen are operating at reduced capacity. Many have no choice but to bring back only a shell workforce—and many workers have a legitimate reason to stay home even as their employers choose to reopen.

Byrnes: The federal supplement made sense during a time when most businesses were shut down and we were encouraging all Americans to stay home as much as possible. That point has passed, and it’s time to begin directing federal dollars toward return-to-work incentives.

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Bloink: Return-to-work incentives have their place, but hardworking Americans continue to struggle as unemployment remains at record-high levels. A return-to-work benefit does very little to help when there’s no work to return to—and employees shouldn’t have to choose between protecting their health and earning a living. We also have to remember that some states struggled in implementing this across-the-board supplemental benefit. Asking them to switch over to a new system is not a viable option while a record number of Americans remain out of work.

Byrnes: We need to give Americans an incentive to return to the workplace, not support financial gain for those who choose to stay home. I’m not suggesting that the federal aid be removed from the picture entirely—just that it be administered on a more selective basis. One solution might be to calculate the unemployment benefit on a case-by-case basis, based upon the employee’s average pay prior to being laid off.

Under normal circumstances, taxpayers who are eligible for the ACA premium tax credit have two options: (1) they can receive the tax credit when they file their federal income tax for the year or (2) they can receive the payment in advance, paid directly to the insurer, based on anticipated household income for the year in question. Unsurprisingly, most Americans tend to choose option two. When household income turns out to be higher than expected, taxpayers are typically required to repay the amount of any excess premium tax credits. However, for 2020, the American Rescue Plan Act (ARPA) suspended the requirement that taxpayers repay any excess advance premium tax credits for the 2020 tax year. The IRS has announced that it will simply reduce the excess amount to zero and reimburse taxpayers who have already repaid any excess advance premium tax credit on their 2020 tax return.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about suspending repayment obligations for excess premium tax credits for 2020.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: Taxpayers have been struggling through an unanticipated economic climate in the past year. We have enough to worry about without requiring taxpayers to recalculate and repay amounts that they were given to purchase health insurance during that time. The ARPA expanded the availability of the premium tax credit greatly—but that came too late for taxpayers who purchased exchange coverage in 2020. This essentially applies the relief retroactively to offer assistance during the peak of the pandemic.

Byrnes: By suspending the requirement that taxpayers repay advance premium tax credits, we’re rewarding a group of taxpayers who have actually ended up earning more than anticipated during the pandemic. Excess advance premium tax credits only have to be repaid when a taxpayer earned too much to qualify for the amount they took throughout the year. This “free gift” makes very little sense when you think about it logically—because we’re technically rewarding a group of taxpayers who have demonstrated an ability to pay for health insurance under the terms of the ACA itself.

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Bloink: We should be encouraging taxpayers to be proactive and use any available government help so that they can get the comprehensive health coverage they deserve. When we do that, we help the struggling insurance system as a whole, which has disproportionately felt the weight of the pandemic.

Byrnes: If we want to provide targeted relief to Americans who are struggling financially in the wake of the pandemic, this suspension isn’t the way to do it. Instead of helping the families who have seen their income slashed during 2020, we’re helping those who actually managed to thrive financially.

____

Bloink: Some taxpayers prioritized maintaining health coverage during 2020. We don’t know the situation of every single taxpayer who had an excess premium tax credit—and we’re talking about 2020, when the 100% COBRA assistance subsidy had yet to be passed. It makes absolute sense that we would apply that relief retroactively and help those taxpayers who may have sacrificed other needs in order to keep their families covered.

Byrnes: The ACA system is flawed as a whole. Despite this, it’s the Democrats who developed and continue to support that flawed system. I’m all for providing quality health coverage to Americans—but this specific provision rewards those taxpayers who were fortunate enough to see their income increase during the pandemic, while we should be focused on offering aid to those struggling to put food on the table.

by Prof. Robert Bloink and Prof. William H. Byrnes

President Biden signed the fifth major piece of COVID-19-related legislation into law late last week. The American Rescue Plan Act (ARPA) added two new payroll tax credit provisions to the IRC, which essentially extend the credits for paid leave enacted in March 2020 under the FFCRA, as extended by the CAA. The law does, however, make significant changes that could impact the value of the tax credits beginning April 1, 2021. Small business clients should remember that offering paid leave is no longer mandatory. However, those who continue to offer paid leave to their employees do remain eligible for valuable tax benefits—and need to know the facts as the law governing these credits continues to change over time.

FFCRA Tax Credits: Background

The Families First Coronavirus Response Act (FFCRA) paid leave requirements were technically allowed to expire after 2020. However, employers who opted to continue paying wages to employees who missed work for eligible reasons remained entitled to a tax credit for the qualifying wages paid during the first months of 2021.

The basic provisions of the FFCRA paid leave credits remain unchanged under the ARPA—of course, with the notable exception that paid leave is no longer mandatory. In other words, the credit for paid sick leave is capped at $511 per day (with an overall per-employee cap of $5,110) for employees who cannot go to work or telecommute because they (1) are experiencing COVID-19 symptoms and seeking a diagnosis, or (2) are subject to government-mandated quarantine or a recommendation to self-quarantine.

The additional paid sick leave is capped at 2/3 of the employee’s pay rate, subject to a maximum $200 cap per day (or $2,000 total) if the employee (1) is caring for or assisting someone subject to quarantine, (2) caring for a child whose school or care provider is unavailable or (3) experiencing “substantially similar conditions” specified by the Secretary of Health and Human Services (HHS).

Under the original FFCRA rules, the additional paid family leave provisions offered up to 12 weeks of leave (with the first two unpaid, and the remaining paid at 2/3 of the employee’s regular rate, capped at $200 per day or $10,000 total).

The amount of the credit can also be increased by the amount of the employee’s qualified health expenses paid for by the employer.

ARPA Changes

The modifications made by the ARPA apply to wages paid for leave taken between April 1, 2021 and September 30, 2021. As under prior law, they are available to employers with fewer than 500 employees. In other words, the new credit rules take effect after the existing FFCRA credit rules expire.

However, the ARPA also modifies existing law so that the credits will now be available in additional situations. The definitions of qualified family leave wages and qualified sick leave wages are expanded to include wages paid to (1) employees waiting for the results of a COVID-19 test or medical diagnosis of COVID-19 if the employee was exposed to COVID-19 or the employer requested the test and (2) employees who are obtaining COVID-19 vaccines or recovering from any injury, disability, illness or other condition related to the immunization.

Under the ARPA rules, the credits can be increased by the employer’s portion of the Social Security tax (6.2%) and the employer’s Medicare tax obligations (1.5%) paid on qualified leave wages. The wages, however, are not excluded from employer Social Security tax obligations.

The ARPA also removes the 10-day unpaid exclusion period for family leave, meaning that employers may provide paid family leave immediately and still claim the credit. The cumulative cap on employee wages eligible for the credit was increased to $12,000 in recognition of this new rule.

Treasury can also waive penalties on failure to make employment tax deposits if the failure was in anticipation of claiming the credit.

Employers can claim the credits even if they’ve received a Paycheck Protection Program (PPP) loan, but cannot claim the credit with respect to wages paid with forgiven PPP funds. The same is true if the business used funds forgiven under another recovery relief provision, such as a restaurant revitalization grant.

Under the ARPA, employers cannot claim the credit if they make paid leave time available in a discriminatory manner—in other words, one that favors highly-compensated employees under IRC Section 414(q), full-time employees or those who have worked for the employer for a certain length of time.

The law also “resets” the 10-day limitation period for the maximum number of days for which the employer can claim the paid sick leave credit for wages paid to an employee (the reset happens after March 31, 2021 for employees and January 1, 2021 for self-employed taxpayers).

Conclusion

The modifications to the paid leave credits are detailed. Small business clients should be advised to consult with tax advisors to maximize the available value of the credit moving through 2021.

by Prof. Robert Bloink and Prof. William H. Byrnes

The American Rescue Plan Act of 2021 (ARPA) offered across-the-board relief for many individuals and small business owners. One of the most significant parts of the law is the expansion and extension of the employee retention tax credit (ERTC) through the end of 2021. The law makes important changes that will apply beginning in July 2021, when the existing ERTC provisions were set to expire. That might mean some business clients will become eligible to claim the credit for the first time later this year—and all clients should pay attention to the changes that have the potential to make the tax credit more valuable, as well as technical changes that could become important down the road.

Extension of ERTC Provisions

Under the ARPA, the employee retention tax credit provides a refundable tax credit of up to 70% of qualified wages in 2021 and 50% of qualified wages in 2020 (up to a $10,000 per-employee, per-quarter cap). Employers who have experienced a 20% year-over-year decline in per-quarter gross receipts (or qualifying suspension of business) remain eligible.

Employers can continue to claim the credit even if they’ve received a Paycheck Protection Program (PPP) loan, but cannot claim the credit with respect to wages paid with forgiven PPP funds. The same is true if the business used funds forgiven under another recovery relief provision, such as a restaurant revitalization grant.

As under prior law, employers with up to 500 employees can continue to claim the credit with respect to wages paid even if employees provide no services during the relevant time periods. In 2020, the threshold for determining whether an employer could claim credit for wages paid while an employee was not providing services was 100 employees.

Modifications to the Existing ERTC Rules

The ARPA codified the employee retention tax credit into new IRC Section 3134. Most of the modifications will apply, at least initially, for the third and fourth quarters of 2021—when existing ERTC rules were set to expire. That means eligible employers will be entitled to claim the credit for all four quarters of 2021, rather than only the first two quarters—making the credit worth up to $28,000 per employee for 2021.

Beginning June 30, 2021, certain small businesses that began operations after February 15, 2020 will be eligible for a maximum $50,000 per-quarter credit. These businesses, called “recovery startup businesses” under the new law, must satisfy a gross receipts test—meaning that the business’ average annual gross receipts for the three-taxable-year period ending with the taxable year that precedes the quarter cannot exceed $1 million. These businesses can qualify to claim the expanded ERTC even if they do not otherwise meet the eligibility requirements for claiming the credit.

Beginning in the third quarter of 2021, severely distressed employers who have suffered a decline of 90% or more in gross receipts compared to the same quarter in 2019 can treat all wages paid as qualified wages (up to the $10,000 cap). That means employers who are under severe financial distress may be eligible for the ERTC even if the business has more than 500 employees and regardless of whether the employees provide services while receiving wages. As under existing law, the business can use the prior calendar quarter to determine eligibility based on a decline in gross receipts.

The new ERTC will be allowed against the Medicare tax only in the third and fourth quarters of 2021. While procedural shift does not impact the available value of the ERTC, it could be important for business owners who had relied upon taking the credit in advance. Because the Medicare tax is only 1.45%, more clients might be required to file a Form 7200 to receive advance payment of the credit.

The ARPA also extends the statute of limitations on assessments with respect to the ERTC from three years to five years from the date the tax return claiming the credit is filed (or treated as filed).

Conclusion

As always, it is expected that the IRS and agencies will continue to provide guidance on implementation of the new law—which, as we’ve seen, could be applied retroactively. Both small and larger business clients should pay close attention to the new changes to the ERTC created by the latest stimulus relief legislation, as well as releases from the IRS, DOL and related agencies.

by Prof. Robert Bloink and Prof. William H. Byrnes

In response to the ongoing COVID-19 pandemic, the American Rescue Plan Act of 2021 (ARPA) reinstated the federal COBRA subsidies that were last seen during the great recession under the American Recovery and Reinvestment Act of 2009. The relief will provide free COBRA continuation coverage to millions of Americans who lost coverage during the pandemic. It also provides a second chance election period for those who failed to elect coverage in past months. Although the government will technically finance the subsidy, employers will be required to cover any COBRA premiums upfront—and will be reimbursed in the form of a refundable tax credit.

It’s important that both individual and small business clients understand the new COBRA rules for 2021, which offer substantial benefits to out-of-work Americans and also impose an immediate administrative burden on the employers responsible for administering employer-sponsored health plans.

ARPA COBRA Premiums: The Basics

The ARPA provides free COBRA coverage for a six-month period beginning April 1, 2021 through September 30, 2021 (the “subsidy period”) for employees and their family members who have lost or lose group health coverage because of involuntary termination or reduced work hours. The new 100% COBRA subsidy generally applies to all employees who lost employer-sponsored health care due to an involuntary loss of work since the COVID-19 pandemic began.

More specifically, assistance eligible individuals (AEIs) include those who (1) are eligible for COBRA coverage during all or part of the subsidy period because of an involuntary termination of employment (other than for gross misconduct) or a reduction in hours or (2) elected COBRA coverage during the subsidy period or were already enrolled in COBRA coverage as of April 1, 2021.

Note also that employees who lost coverage as of April 2020 are potentially eligible for the entire six-month subsidy because those employees’ 18-month COBRA period includes the period from April 1 through September 30, 2021.

However, individuals who are eligible for other group health coverage or Medicare are not eligible.

The subsidy is available to both employees who did not elect COBRA coverage during the original election period and those who initially elected COBRA, but allowed their coverage to lapse. These individuals must be offered an additional 60-day window to elect COBRA coverage and will not be required to pay retroactive premiums to the original loss-of-coverage date.

Ultimately, these subsidies will be funded by a refundable tax credit available in the form of quarterly payroll tax credits. The agencies are expected to provide rules outlining the procedure for having the credits advanced if the amount of the credit exceeds the employer’s Medicare payroll tax obligations.

New Notice Requirements for Employers

The ARPA creates a number of new notice requirements for plan administrators. Within 60 days of April 1, 2021, an election notice must be provided to AEIs who previously failed to elect COBRA coverage, AEIs who discontinued COBRA coverage and AEIs who remain eligible to elect COBRA coverage under the traditional rules, but have yet to make an election. That notice must provide information about the premium subsidies and whether the employer will offer the participant an option to elect a less-expensive coverage option.

A separate notice must be sent to individuals who become eligible to elect COBRA coverage during the subsidy period (the DOL is directed to provide a model notice within 30 days of enactment of the ARPA).

Administrators will also be required to provide a subsidy termination notice if the termination is for a reason other than the individual’s eligibility for alternative coverage. These notices must be provided no more than 45 days, but no less than 15 days, before the date coverage will terminate. The DOL is also directed to provide a model notice of the subsidy termination notice within 45 days of enactment of the ARPA.

Conclusion

The new law directs the IRS, DOL and Department of Health and Human Services (HHS) to release guidance and regulations on how the new subsidy will be implemented. Clients who are impacted by the new rules should pay close attention to these rules, which are expected to apply retroactively, as well as prospectively.

Beginning in 2021, employers are no longer obligated to offer paid leave to employees for COVID-19-related reasons. However, employers who voluntarily provide paid leave can continue to claim a tax credit for wages paid under the ARPA. The credits are refundable in advance, meaning employers can simply keep the taxes that they otherwise would have deposited with the IRS, including federal income tax withheld from employees, Social Security taxes and Medicare taxes up to the amount of the credit. If the employer does not have enough federal employment taxes on deposit to cover the amount of the anticipated credits, the employer may claim an advance payment of the credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19, rather than waiting to file a return for the tax year.

As it turns out, reports have emerged indicating that the processing time on Form 7200 can be weeks from the date the employer submits the form to the IRS for repayment.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about whether the IRS’ process for paying advance credits is adequate.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes

Bloink

Their Reasons:

Byrnes: Businesses across the board are opting to allow employees to take paid sick leave for vaccines, vaccine recovery time and, of course, COVID-19 recovery time. It’s understandable that the IRS would need time to process Form 7200 requests for advance payment of the employer tax credits for the paid leave. We have to assume that the IRS is doing its best to process the forms as quickly as possible given the circumstances.

Bloink: By this time, the IRS shouldn’t be taking weeks to process a request for advance payment of these tax credits—which have existed for over a year. Business owners want to do what they can to help employees. However, some of these businesses are barely scraping by at this point. How can they afford to float paid leave to employees–while still paying those employees who are coming into work–for weeks at a time?

____

Byrnes: Employers have the option of retaining their employment tax deposits to cover at least a portion of the paid wages–which offers relief while the IRS processes additional requests for hundreds, if not thousands, of businesses.

Bloink: It’s up to the IRS to devise a system that makes these paid leave tax credits workable for struggling business owners—or risk the possibility that employers will have no choice but to stop offering paid leave. Without a system to offer quick relief to employers, employees could soon begin to experience the trickle-down impact—perhaps having to use vacation time to recover from an adverse vaccine reaction or worse, go without pay entirely.

____

Byrnes: With tax filing season just now drawing to a close, it’s not surprising that the IRS is running behind schedule in processing Forms 7200. Of course, the IRS could take steps to reassure business owners that they will, in fact, receive their advance tax credits within a certain time frame—but I don’t think a few weeks is an unreasonable delay, especially now that most businesses can resume operations with minimal restrictions.

Bloink: Paying these struggling business owners should be a priority if we’re focused on reopening the economy and helping Americans return to some level of normalcy. The IRS has the authority to delay tax filing season. We filed in June 2020 with little publicized impact. If the IRS is backlogged, which would be understandable, they have the authority to offer themselves relief by delaying the filing deadline and making it a priority to process these important tax credit payments first.

by Prof. Robert Bloink and Prof. William H. Byrnes

By now, most employers are aware that they are no longer obligated to provide employees with paid time off for coronavirus-related reasons. The Families First Coronavirus Response Act (FFCRA) paid leave requirements were allowed to expire after 2020. However, employers who choose to voluntarily provide paid leave are still entitled to claim a tax credit for qualified wages paid to employees. Tucked away in the fine print is a “reset” button that small business clients might not yet understand. The “reset” provision provided in the American Rescue Plan Act (ARPA) allows business owners to claim a credit for wages paid in 2021 even if the employee exhausted initial paid leave availability in 2020.

Business owners who are considering providing leave voluntarily should understand the new rules—and carefully consider the consequences before developing a plan to provide paid leave under the ARPA rule.

FFCRA Paid Leave: Where We Stand Now

Under the ARPA, employers are entitled to claim a 100% tax credit for paid sick leave. The credit remains capped at $511 per day for ten days (with an overall per-employee cap of $5,110) for employees who cannot work because they (1) are experiencing COVID-19 symptoms and seeking a diagnosis, or (2) are subject to government-mandated quarantine or a recommendation to self-quarantine.

The additional paid sick leave is capped at 2/3 of the employee’s pay rate, subject to a maximum $200 cap per day (or $2,000 total) if the employee: (1) is caring for or assisting someone subject to quarantine, (2) caring for a child whose school or care provider is unavailable or (3) experiencing “substantially similar conditions” specified by the Secretary of Health and Human Services (HHS).

The ARPA modifies prior law so that the credits are available with respect to wages paid to (1) employees waiting for the results of a COVID-19 test or medical diagnosis of COVID-19 if the employee was exposed to COVID-19 or the employer requested the test and (2) employees who are obtaining COVID-19 vaccines or recovering from any injury, disability, illness or other condition related to the immunization.

ARPA’s Reset Button: What Employers Need to Know

The ARPA “resets” the ten-day limitation period for the maximum number of days for which the employer can claim the paid sick leave credit for wages paid to an employee (the reset happens after March 31, 2021, for employees and January 1, 2021, for self-employed taxpayers). In other words, employers who paid the full amount of qualifying leave in 2021 can once again claim tax credits for wages paid in 2021.

Employers deciding whether to voluntarily adopt plans to offer a new bank of paid sick leave should first consider the interaction between federal and state paid sick leave requirements. Employers who voluntarily decide to provide paid leave under the ARPA may be required to provide an additional ten days of paid sick leave between April 1 and September 30, on top of state and local requirements. However, it initially seems that employers are not required to offer federal paid leave until September 30—and can instead choose to offer leave as they deem necessary.

Employers should be reminded of the new non-discrimination provision that prevents employers from offering leave in a way that discriminates in favor of highly compensated employees, full-time employees or on the basis of seniority. In other words, employers who update their policies to grant an additional ten days of paid leave should provide that leave across-the-board to all employees.

Employers should also develop a system to carefully track employee leave to ensure they’ll qualify for federal tax credits—noting that the federal tax credits are only available if the employee takes leave for a qualifying reason, but that employees remain entitled to choose which type of leave to use.

As it stands, it appears that the reset button is only available for FFCRA paid sick wages (not the expanded 12 weeks of FMLA paid time off). Small business clients should pay close attention to guidance from the DOL and IRS as it continues to emerge and clarify the law itself.

Conclusion

As with prior COVID-19 relief laws, it’s expected that guidance will be released in the form of a FAQ—and that the guidance will be applied retroactively. As such, employers should closely monitor regulatory guidance to ensure they remain eligible for these valuable tax credits going forward.

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by Prof. Robert Bloink and Prof. William H. Byrnes

The American Rescue Plan Act (ARPA) provided a number of valuable tax benefits for Americans who continue to struggle with the cost of childcare in the wake of the pandemic. In addition to expanding the child tax credit, ARPA made dependent care flexible spending accounts (FSAs) much more valuable for 2021—and also expanded the availability of the dependent care tax credit for 2021. Many small business owners might be wondering whether to take action and implement the optional new rules for dependent care FSAs in 2021. Those employers might not be aware of the changes to the IRC Section 21 dependent care tax credit, which offers a now-refundable tax credit for expenses related to caring for a dependent. There are a lot of moving pieces to consider in 2021—and both employers and employees should understand all of the options before taking action.

Key ARPA Changes for 2021

Under previously existing IRC rules, employers are permitted to offer tax-preferred dependent care benefits so that employees can use pre-tax dollars to fund the cost of childcare for children under the age of 13 (for 2020 and 2021, children up to age 14 qualify). In most cases, employers offer this benefit through a dependent care flexible spending account (FSA), so that employees can use their pre-tax dollars to pay for daycare, before and after school programs, summer camps and other qualifying programs.

The ARPA doubled the annual contribution limit under IRC Section 129 to $10,500 in pre-tax dollars for 2021 ($5,250 for taxpayers who are married and file separate returns). The new dependent care FSA rules are optional, and employers must amend their plans by the end of 2021 in order to offer the increased limit retroactively, for all of 2021.

While pre-tax dependent care benefits are extremely valuable, the ARPA also expanded the dependent care tax credit for 2021. The dependent care tax credit provides a tax credit to offset the cost of qualifying work-related dependent care expenses (a dependent who is a child must be under age 13 to qualify). Those expenses can include the cost of physically caring for the dependent—and also include household expenses, such as hiring someone to help with cooking and cleaning for a child, as long as the expenses are primarily for the benefit of the dependent.

For 2021 only, the dependent care tax credit is fully refundable. The maximum credit percentage was increased from 35% to 50% of qualifying dependent care expenses (the credit phases down to 20% for taxpayers with income between $125,000 and $183,000). The level of qualifying dependent care expenses also increased for 2021—from $3,000 to $8,000 for a single qualifying dependent and from $6,000 to $16,000 for two or more qualifying dependents.

In other words, a lower-income family with two children and at least $16,000 in childcare expenses might qualify for a refundable dependent care tax credit of up to $8,000 in 2021 (in 2020, the maximum credit would have been limited to $2,100 for families with more than one child).

Considerations for Employers

Employers have a choice to make when it comes to amending their dependent care FSA programs to incorporate the ARPA changes for 2021. When making the change, small business clients should, of course, consider how many employees might benefit from an increased dependent care FSA contribution limit. If the dependent care FSA is widely used, expanding the contribution limit might provide a valuable employment benefit.

Employers should also consider whether increasing the contribution limit for dependent care FSAs would impact nondiscrimination testing. Generally, employers must provide average benefits to non-highly compensated employees that are worth at least 55% of the average benefits provided to highly compensated employees under all employer-sponsored dependent care assistance programs (a highly compensated employee in 2021 is one who earned more than $130,000 in 2020).

Practically, employers should consider whether any administrative issues might prevent them from making the changes before the end of 2021. For some, the administrative burden of making a single-year change might be difficult—although Congress has a history of extending popular programs.

Conclusion

While employers should be careful not to offer any opinion on employee choices, they should communicate with employees so that their employees can understand the various tax law changes for 2021—and, as always, should speak with a tax advisor before implementing any changes on a company-wide level.

by Prof. Robert Bloink and Prof. William H. Byrnes

The new COBRA premium assistance subsidies created by the American Rescue Plan Act (ARPA) have generated a number of questions for employers and employees alike. While many employers are familiar with COBRA subsidy relief, it’s been over a decade since business owners have had to grapple with these benefits. IRS Notice 2021-31 provides important guidance to help employers determine which employees qualify for the subsidy—and how to claim the valuable tax credit that’s available for entities that provide the premium payments on behalf of qualifying individuals (called “assistance eligible individuals”, or AEIs). Employers who are subject to the new rules include most employers with 20 or more full-time and part-time employees—and those small business clients should pay close attention to the new guidance, as compliance failures may result in the imposition of ACA excise taxes.

COBRA Premium Assistance: Notice 2021-31

As background, the ARPA provided a 100% premium assistance subsidy for individuals who suffered an involuntary termination or reduction in hours for up to six months of coverage between April 1, 2021 and September 30, 2021. The first round of IRS guidance on the new ARPA COBRA premium subsidies clarified the definition of “involuntary termination”—which is valuable guidance because an employee must be involuntarily terminated or suffer a reduction in hours to qualify for the subsidy in the first place.

As an initial matter, the IRS is clear that a facts-and-circumstances analysis will always be required to determine whether termination of an employment relationship was involuntary on the employee’s part.

An employee is involuntarily terminated if the employee is willing and able to continue working, and yet the employer chooses to end the employment relationship. For example, if the employer terminates the employee while absent from work due to illness or disability, the termination is considered involuntary if there was a reasonable expectation that the employee would return to work.

On the other hand, an employee’s termination is considered voluntary if the employee resigns for many reasons—even if the employee resigns because the employee can no longer find childcare or because a child’s school has closed.

Termination for gross misconduct is also treated as a voluntary termination that disqualifies the employee from receiving the subsidy.

Usually, terminations resulting from a material change in employment terms that are equivalent to a constructive discharge—such as a change in employment location or material reduction in hours—are treated as involuntary termination. However, if the employee quits because of concerns about workplace safety, even in response to the employee’s health situation or the health of a household member, it’s treated as a voluntary termination unless the employee can show that the employer’s actions with respect to workplace safety created a material negative change in the employment relationship similar to a constructive discharge.

Employees who are furloughed and expected to return to work can qualify for the subsidy—even if the employee voluntarily participates in the furlough.

Employer Tax Credit

The employer paying an AEI’s COBRA premiums is entitled to a refundable tax credit for 100% of the premiums not paid by the AEI for any coverage period—including both retroactive and prospective periods. For example, if the AEI retroactively elects coverage as of April 1, 2021, and provides the election notice on June 1, the employer remains entitled to a credit for premiums the AEI has not paid from April 1 through June 1.

On the first day of each subsequent coverage period (generally, each calendar month), the employer is entitled to a credit for premiums the AEI does not pay that month.

The employer reports the credit and individuals receiving the credit on Form 941 and is entitled to reduce federal employment tax deposits in anticipation of the credit. Like other credits that were made fully refundable in response to COVID-19, if the employer’s tax deposits are not sufficient to cover the entire credit amount, the employer can file Form 7200 to receive an advance payment of the credit.

To claim the tax credit, employers should substantiate the employee’s involuntary termination or reduction in hours. The employer is entitled to rely on self-certifications providing that the employee experienced a qualifying event and did not qualify for other health coverage or Medicare (the ability to enroll in a spouse’s employer-sponsored health coverage may disqualify an otherwise qualifying individual from receiving the subsidy).

Conclusion

The new COBRA premium assistance rules are complex and impose significant administrative burdens on employers. It’s important for employers to note that the subsidy requirements continue to apply even if the employer reduces employment levels so that they’re no longer obligated to offer COBRA coverage (as long as the employer was subject to federal COBRA rules at the time the employee qualified for benefits).

by Prof. Robert Bloink and Prof. William H. Byrnes

The American Rescue Plan Act (ARPA) created a new 100% COBRA premium subsidy for employees who lost coverage during the pandemic because of a reduction in hours or involuntary termination. ARPA also created significant questions for many employers about how to actually implement the program. Now, the IRS has offered extensive guidance about steps employers should take to obtain reimbursement for any COBRA premiums paid between April 1 and September 30. Because COBRA continuation coverage requirements generally apply to any business with at least 20 full and part-time employees, these new rules could impact nearly every small business. It’s critical for these small business clients to pay close attention to the IRS guidance in Notice 2021-31 to avoid getting stuck with an unexpected bill for COBRA premiums.

COBRA Premium Subsidies: Background

The ARPA provides free COBRA continuation coverage for a six-month period beginning on April 1, 2021, and running through September 30, 2021 (the “subsidy period”) for employees and their family members who have lost or lose group health coverage because of involuntary termination or reduced work hours. The new 100% COBRA subsidy generally applies to all employees who lost employer-sponsored health care due to an involuntary loss of work since the COVID-19 pandemic began.

Assistance eligible individuals (AEIs) include those who (1) are eligible for COBRA coverage during all or part of the subsidy period because of an involuntary termination of employment (other than for gross misconduct) or a reduction in hours or (2) elected COBRA coverage during the subsidy period or were already enrolled in COBRA coverage as of April 1, 2021.

The Employer Tax Credit

On the date when the AEI provides the employer with a COBRA election, the employer is entitled to a tax credit for premiums not paid by the AEI for any coverage period that began before that date. In other words, if the AEI retroactively elects coverage as of April 15, 2021, and provides the election notice in June, the employer is entitled to a credit for premiums not paid from April 15 through June.

On the first day of each subsequent coverage period (month), the employer is entitled to a credit for premiums the AEI does not pay that month. The employer is entitled to the credit at the start of the coverage period even if the employer would have billed for coverage at a later date absent the subsidy.

However, the employer cannot claim the credit before the employee becomes eligible for the subsidy and elects COBRA coverage.

The employer reports the credit and individuals receiving the credit on Form 941 and is entitled to reduce federal Medicare tax deposits in anticipation of the credit (Notice 2021-24 offers additional guidance on penalty relief for reducing deposits). Like other COVID-19-related tax credits, if tax deposits are not sufficient to cover the entire credit amount, the employer can file Form 7200 with the IRS to receive advance payment of the credit.

Employees who become eligible for other health coverage or Medicare are no longer eligible for premium assistance. If the employee fails to notify the employer about the new coverage, it is the employee who is subject to penalty. The employer can keep the amount of the credit already claimed unless the employer knew the employee was eligible for other coverage. Employers should, of course, keep detailed records to substantiate eligibility during the COBRA subsidy period.

The guidance also contains a “no double dipping” rule. The employer cannot claim the COBRA premium subsidy credit for amounts that were also claimed under the employee retention tax credit or paid sick and family leave credit rules.

Conclusion

The IRS guidance on the credit is provided in a Q&A format that contains many examples that may be helpful to employers with unique situations. Small business clients should pay close attention to the details to avoid missing any of these valuable benefits or becoming subject to future penalties for noncompliance.

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by Prof. Robert Bloink and Prof. William H. Byrnes

Under the ARPA, taxpayers who qualify for the child tax credit are now eligible to receive advance payments of the credit beginning in July 2021, based on 2020 income. For many Americans, these advance payments will provide a valuable cash infusion each month. For others, they could create a tax headache when it comes time to file 2021 income tax returns. Taxpayers are permitted to opt-out of the advance payments, but they have to act quickly in order to take advantage of the option—or risk an unanticipated tax bill in 2022.

Advance Child Tax Credit Payments: The Basics

Eligible taxpayers don’t have to take any action to receive the refundable tax credit payments on the 15th of every month. Monthly payments will total up to $300 for each child under age six and up to $250 per month for each child aged six and older (the child must be younger than age 18 as of January 1, 2022 to qualify). Depending upon the information the IRS has on file, payments will be made via direct deposit, paper checks or debit cards.

The credit can be reduced to a total of $2,000 per child (annualized) if the taxpayer earns more than $150,000 (joint returns), $112,500 (heads of household) or $75,000 (single filers). The credit can be further reduced for taxpayers who earn at least $400,000 (joint) or $200,000 for all other filing statuses.

In total, advance payments for the year will equal up to 50% of the amount the taxpayer is eligible to receive based on 2020 filing information (2019 information if 2020 tax information is not available). If, based on 2021 tax information, the taxpayer was not eligible to receive the advance payments, the IRS will require repayment. The taxpayer’s otherwise available refund can be reduced, or the taxpayer may owe for underpayment.

According to new IRS guidance, taxpayers who were not otherwise required to file tax returns for 2020 can file simplified returns for 2020 to receive monthly advance payments of the expanded child tax credit. Those taxpayers can file Form 1040, Form 1040-SR or Form 1040-NR, providing information such as Social Security numbers and addresses on the returns and must write “Rev. Proc. 2021-24” on the forms. Taxpayers who had $0 in adjusted gross income (AGI) can report $1 in AGI in order to file electronically and qualify for advance payments.

Should You Opt-Out?

Every taxpayer’s situation is different. It’s possible that some clients may appear to qualify for the child tax credit based on reduced income during the COVID-19 pandemic during 2020. If the client no longer qualifies based on a rebounded 2021 income (or if the child turns 18 before January 1), they’ll end up with a lower refund or an unexpected tax bill.

Some clients may qualify for the child tax credit but not actually need the advance payment to make ends meet. It’s possible that those clients may rely upon a refund at tax time to make large purchases or pay down bills. Those clients should be advised that they’ll likely have a lower refund if they accept the advance payments in 2021.

Clients who opt out of the advance payment structure remain eligible to claim the child tax credit on their 2021 return.

To opt-out, the taxpayer must complete an enrollment form that’s available via the Manage Payments Portal on the IRS website (the same portal can be used to manage how the client receives the payments). For married couples, each spouse is required to complete a form (otherwise, the spouse who doesn’t opt-out will receive half the available amount).

The taxpayer will need to sign in with their IRS username or create an account to access the opt-out form. Creating a secure account also requires a U.S. photo ID and access to a smartphone.

The first opt-out deadline was June 28, 2021. However, there will be additional opt-out deadlines each month until the end of the year (the next deadline is August 2, 2021).

Conclusion

Advance payment of the child tax credit can offer a lifeline for some clients who are struggling to make ends meet during 2021. However, accepting the credit can complicate tax filing next year, meaning that some clients might prefer to simply opt-out and evaluate their eligibility once tax time rolls around again.

___________________

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• Get 10% off any Tax Facts product just for being a ThinkAdvisor reader! Complete the free trial form or call 859-692-2205 to learn more or get started today.

by Prof. Robert Bloink and Prof. William H. Byrnes

The Department of Labor (DOL) and Treasury tolled both the required COBRA election and payment deadlines in response to the COVID-19 outbreak last year. The deadlines were extended for up to one year or until 60 days after the COVID-19 national emergency ended (this “outbreak period” remains ongoing to date). Many employers (and beneficiaries) have been wondering exactly how these deadlines apply given the ongoing nature of the pandemic—and whether employees could potentially have two years from the date of the initial qualifying event to make a premium payment. The IRS has offered some guidance in Notice 2021-58 to clarify these and other questions that have arisen over how the relief will apply—and some transition relief to help COBRA beneficiaries in the meantime.

Guidance on COBRA Premium Payment Deadlines

Typically, the period during which a COBRA beneficiary may elect coverage runs from the date when the qualified beneficiary’s coverage terminates under the plan due to a qualifying event until 60 days after the later of 1) the date when the coverage terminates; or 2) the date when notice is provided by a plan administrator to any qualified beneficiary of the right to continued coverage.

This and other deadlines were extended in response to the COVID-19 outbreak. We already know that the extensions apply to each COBRA recipient individually. Notice 2021-58 clarifies that the one-year tolling relief for individuals to elect COBRA coverage and to make a premium payment applies concurrently. In other words, these beneficiaries will not have a full two years to make an initial payment.

Generally, with respect to the initial payment, the individual has one year and 45 days after the date of the election to make the payment if the election is made within the typical 60-day deadline. For elections made after that 60-day timeframe, the individual has one year and 105 days from the date the COBRA notice was provided (to reflect the one-year suspension of the 60-day election period and the 45-day grace payment period).

The Notice also provided transition relief so that the COBRA eligible individual cannot be required to make an initial premium payment before November 1, 2021, as long as the individual made the initial premium payment within one year and 45 days after the date of the COBRA election. Therefore, individuals who were counting on the tolling periods running consecutively still have time to make their initial payment on time.

For subsequent payments, the individual’s payment is due one year and 30 days from the date the payment was originally due (reflecting the applicable 30-day grace period).

Interaction with ARPA Subsidies

The American Rescue Plan Act (ARPA) provided a 100 percent COBRA subsidy for periods of coverage beginning on or after April 1, 2021, and before September 30, 2021. COBRA-eligible individuals also got another chance to elect COBRA coverage (and employers were required to provide notice of this option). The subsidy was also available to both employees who initially elected COBRA, but allowed their coverage to lapse. These individuals were offered an additional 60-day window to elect COBRA coverage and were not be required to pay retroactive premiums to the original loss-of-coverage date.

Notice 2021-58 clarifies that the extended timeframes do not apply to the ARPA notice deadline or to the deadline for electing ARPA-subsidized COBRA coverage. In other words, plans could require individuals to elect subsidized coverage within 60 days of receiving the ARPA notice (or lose eligibility to retroactively elect COBRA).

However, after the subsidized COBRA period ends, the “disregarded periods” discussed above continue to apply if the individual remains eligible for COBRA after the subsidy expires (assuming the outbreak period has yet to end).

Conclusion

The IRS guidance offers many different examples of how these deadlines and timeframes might operate in practice. These examples may help clients understand how the new guidance might apply in their specific situation—and add clarity to the general rules discussed above.

The American Rescue Plan Act of 2021 (ARPA) further enhanced the employee retention tax credit, which remains fixed at 70 percent of qualified wages (up to a $10,000 per-quarter cap) for employers who have experienced a 20 percent year-over-year decline in per-quarter gross receipts (or suspension of business).  Starting June 30, 2021, certain small businesses that began operations after February 15, 2020 will be eligible for a maximum $50,000 per-quarter credit. For more information on the employee retention tax credit, see Q 8555.

The ARPA expands and modifies the tax credits for paid sick leave and paid family leave included in the Families First Coronavirus Response Act (FFCRA) enacted in March 2020.  The new rules apply to wages paid with respect to qualifying leave taken between April 1, 2021 and September 30, 2021 for employers with fewer than 500 employees.  In other words, the new credit rules take effect after the existing FFCRA credit rules expire.  However, the credits will now be available in additional situations.  For more information on the FFCRA tax credits, see Q 769.

The ARPA provides free COBRA coverage for a six-month period beginning April 1, 2021 through September 30, 2021 for employees and their family members who lose group health coverage because of involuntary termination or reduced work hours.  The new COBRA subsidy applies to all employees who lost employer-sponsored health care due to an involuntary loss of work since the COVID-19 pandemic began. Employees who lost coverage as of April 2020 are potentially eligible for the entire six-month subsidy.  Those employees’ 18-month COBRA period includes the period from April 1 through September 30, 2021.  However, individuals who are eligible for other group health coverage or Medicare are not eligible.  For more information on the COBRA election rules, see Q 371.

Under IRC Section 162(m), publicly traded corporations are not permitted to deduct compensation paid to “covered employees” to the extent the employees’ annual compensation exceeds $1 million.  Covered employees generally include the CEO, CFO and the next three-highest paid employees.  However, for tax years beginning in 2027, the ARPA will require corporations to include the five next most highly compensated employees, increasing the number of covered employees to at least 10.  For more information on the Section 162(m) deduction and changes made by the 2017 tax reform legislation, see Q 3520.

Under the IRS, employers are permitted to offer tax-preferred dependent care benefits so that employees can use pre-tax dollars to fund the cost of childcare for children under the age of 13. In most cases, employers offer this benefit through a dependent care flexible spending account (FSA), so that employees can use their pre-tax dollars to pay for daycare, before and after school programs, summer camps and other qualifying programs. The ARPA doubled the annual limit under IRC Section 129 from $5,000 per year to $10,500 in 2021 ($5,250 for taxpayers who are married and file separate returns). Employers will be permitted to amend their plans retroactively through the end of 2021 in order to provide for the increased limit.  For more information on dependent care flexible spending accounts and how these plans have been expanded in response to the Covid-19 pandemic, see Q 8903.

The Butch Lewis Emergency Pension Plan Relief Act (EPPRA), contained within the overall American Rescue Plan Act (ARPA), provides financial assistance for struggling pension plans, allowing some plans to pay all benefits for 30 years–including benefits suspended or reduced under the Multiemployer Pension Reform Act of 2014 (MPRA).  Plans that suspended benefits under MPRA must restore those benefits to apply for assistance under the new EPPRA.  For more information on MPRA 2014, see Q 3736.

The ARPA expanded the premium tax credit rules to provide a more generous ACA benefit for 2021 and 2022.  Under the normal rules, the premium tax credit is available to taxpayers with household income between 100 percent and 400 percent of the federal poverty line. ARPA generally eliminates the upper income limit and increases the amount of the premium tax credit because it decreases the percentage of household income that individuals are required to contribute to their health insurance coverage. Under the new law, the percentage rates will range from zero to 8.5 percent of household income (down from between 2.07 percent and 9.83 percent in 2021 under prior law) regardless of how much a family earns. In other words, even taxpayers with household income that exceeds 400 percent of the federal poverty line will be eligible for a credit if their cost of coverage exceeds 8.5 percent of income. For more information on the premium tax credit, see Q 8849.

The ARPA expanded and enhanced the child tax credit for the 2021 tax year. For tax years beginning after December 31, 2020 and before January 1, 2022, the child tax credit amount increased from $2,000 to $3,000 per qualifying child.  The credit amount is also fully refundable for the 2021 tax year only (under TCJA, $1,400 was refundable). The $3,000 amount is also further increased to $3,600 per qualifying child under the age of six years old as of December 31, 2021.  For more information on the child tax credit, see Q 760.

The American Rescue Plan Act (ARPA) suspended the requirement that taxpayers repay any excess advance premium tax credits for the 2020 tax year. Typically, taxpayers are required to increase their tax liability to repay any portion of ACA premium tax credits paid out in advance if it turns out that the taxpayer did not qualify for the full amount of the advance credit. The IRS will process tax returns without Form 8962 for 2020 by reducing the excess advance premium tax credit repayment amount to zero. For more information on the premium tax credit, see Q 8854.

The American Rescue Plan Act (ARPA) exempts the first $10,200 ($20,400 for joint returns) in unemployment compensation from federal tax for taxpayers with modified adjusted income of less than $150,000. However, because the law was signed on March 11, many taxpayers had already filed their federal returns and even received tax refunds. Because of that, the IRS (in IR-2021-71) announced that it will take steps this spring and summer to recalculate those taxpayers’ federal income tax liability and issue refunds as appropriate (or apply the amounts to the taxpayers’ outstanding tax liability). For more information on items that are included in taxable income, see Q 8513.

The ARPA “resets” the 10-day limitation period for the maximum number of days for which the employer can claim the paid sick leave credit for wages paid to an employee (the reset happens after March 31, 2021, for employees and January 1, 2021, for self-employed taxpayers).  In other words, employers who paid the full amount of qualifying leave in 2020 can once again claim tax credits for wages paid in 2021.  However, a new non-discrimination provision prevents employers from offering leave in a way that discriminates in favor of highly compensated employees, full-time employees or based on seniority.  In other words, employers who grant an additional ten days of paid leave should provide that leave across the board to all employees.  As it stands, it appears that the reset button is only available for FFCRA paid sick wages (not the expanded 12 weeks of FMLA paid time off).  Small business clients should pay close attention to guidance from the DOL and IRS as it continues to emerge and clarify the law itself.  For more information on ARPA changes to the FFCRA wage law, see Q 769.

ARPA requires employers to notify qualifying individuals about the availability of the 100 percent COBRA subsidies and their rights under the new law. Earlier this month, the DOL released a series of model notices that must be provided in certain situations. The general notice must be provided within 60 days after a qualifying COBRA event (as is normally the case) for individuals who have any qualifying event between April 1, 2021-September 30, 2021 (including voluntary terminations). Failure to provide the notices on time can subject the employer to a $100 per day, per beneficiary penalty. For more information, see Q 372.

Under the American Rescue Plan Act (ARPA), small employers can receive a tax credit for providing paid time off to allow employees to receive a COVID-19 vaccine and for any time needed to recover from the vaccine. For example, if an eligible employer offers employees a paid day off in order to get vaccinated, the employer can receive a tax credit equal to the wages paid to employees for that day (up to the generally applicable dollar limits). Self-employed individuals are eligible for similar tax credits. For more information on the details of the tax credit, see Q 769.

ARPA’s changes to the child tax credit have received much attention but, to date, the expansion of the child and dependent care tax credit under IRC Section 21 has received relatively little coverage. The dependent care tax credit provides a credit to offset the cost of qualifying work-related dependent care expenses (a dependent child must be under age 13 to qualify). Expenses can include the cost of funding physical care for the dependent, and also household expenses, as long as they are primarily for the benefit of the dependent. For 2021 only, the dependent care tax credit is fully refundable. The maximum credit was increased from 35% to 50% of qualifying dependent care expenses (phasing down to 20% based on taxpayer’s income). The level of qualifying dependent care expenses increased for 2021—from $3,000 to $8,000 for a single qualifying dependent and from $6,000 to $16,000 for two or more qualifying dependents. For more information on available tax credits, see Q 758.

The American Rescue Plan Act (ARPA) allows employers to increase contribution limits for dependent care assistance programs (DCAPs) or dependent care FSAs to $10,500 for 2021. The 2021 CAA also allows participants to carry over unused DCAP benefits from 2020 or 2021 into the following plan year. Initially, there was some confusion over the tax consequences if a participant took advantage of both the increased contribution limit and carryover relief. Notice 2021-26 clarified the issue by providing that participants may take advantage of both (1) tax-free reimbursements of contributions made during the 2021 plan year up to the maximum $10,500 limit and (2) tax-free reimbursements of amounts carried over from the prior year. In other words, a participant with a $5,000 carryover amount from 2020 and a $10,500 contribution in 2021 can take tax-free distributions up to $15,500 in 2021 if that participant incurs enough qualifying expenses during the 2021 plan year. For more information on the expansion of dependent care benefits for 2021, see Q 8903.

The first round of IRS guidance on the new ARPA COBRA premium subsidies clarified the definition of “involuntary termination”—and, thus, offers valuable guidance on who qualifies for the subsidies. An employee is involuntarily terminated if the employee is willing and able to continue working, and yet the employer chooses to end the employment relationship. However, an employee’s termination is considered voluntary if the employee resigns—even if the employee resigns because the employee can no longer find childcare or because a child’s school has closed. Termination for gross misconduct is also treated as a voluntary termination that disqualifies the employee from receiving the subsidy. If the employee quits because of concerns about workplace safety, even in response to the employee’s health situation or the health of a household member, it’s treated as a voluntary termination unless the employee can show that the employer’s actions concerning workplace safety created a material negative change in the employment relationship similar to a constructive discharge. The IRS makes it clear that it takes a facts-and-circumstances analysis to determine whether termination of an employment relationship was involuntary on the employee’s part. For more information on the subsidy, see Q 372.

Under the ARPA, taxpayers who qualify for the child tax credit will now receive advance payments of the credit beginning in July 2021, based on 2020 income. Eligible taxpayers don’t have to take any action to receive the refundable tax credit payments on the 15th of every month. Monthly payments will total up to $300 for each child under age six and up to $250 per month for each child age six and older. Depending upon the information the IRS has on file, payments will be made via direct deposit, paper checks or debit cards. The advance payments will total up to 50 percent of the amount the taxpayer is eligible to receive based on 2020 filing information. According to new IRS guidance, taxpayers who were not otherwise required to file tax returns for 2020 can file simplified returns for 2020 to receive monthly advance payments of the expanded child tax credit. Those taxpayers can file Form 1040, Form 1040-SR or Form 1040-NR, providing information such as Social Security numbers and addresses on the returns and must write “Rev. Proc. 2021-24” on the forms. Taxpayers who had $0 in adjusted gross income (AGI) can report $1 in AGI in order to file electronically and qualify for advance payments. This same information can also help non-filers receive economic stimulus payments. For more information on the child tax credit, see Q 760.

The IRS guidance on the availability and implementation of the ARPA 100 percent COBRA premium assistance provides some useful guidance on specific scenarios that employers and employees may now be facing. Generally, individuals remain assistance-eligible individuals (AEIs) during eligibility waiting periods if the period overlaps with the subsidy period. For example, the individual will be an AEI during periods outside the open enrollment period for a spouse’s employer-sponsored health coverage. Employers who change health plan options must place the AEI in the plan that’s most similar to their pre-termination plan, even if it’s more expensive (and the 100 percent subsidy will continue to apply). Importantly, employers who are no longer covered by federal COBRA requirements may still be required to advance the subsidy (for example, if the employer terminated employees so that the federal rules no longer apply). If the employer was subject to COBRA when the individual experienced the reduction in hours or involuntary termination, the employer must offer the subsidy. For more information on the COBRA premium subsidy, see Q 372.

The IRS announced that it’s ready to issue nearly four million additional refunds to taxpayers who overpaid taxes on unemployment compensation received in 2020—and that additional adjustments are on the way this summer. The American Rescue Plan Act (ARPA) excluded up to $10,200 in unemployment compensation received in 2020 from taxable income. However, the law was enacted in March–well after many taxpayers had filed their 2020 tax returns. Rather than requiring those taxpayers to file amended returns, the IRS is reviewing Forms 1040 and 1040SR that were filed prior to the law’s enactment and automatically making adjustments. The IRS will issue a refund, apply the amount to outstanding taxes or to other state or federal taxes owed by the taxpayer. While taxpayers aren’t required to take any action to obtain the refund, taxpayers whose income was reduced by as much as $10,200 may be eligible for deductions and credits they did not claim on an original return. Those taxpayers may wish to file an amended return to claim credits such as the additional child tax credit or earned income tax credit.  For more information on the child tax credit in 2021, see Q 760.

The PBGC issued an interim final rule implementing the special financial assistance (SFA) rule for multiemployer pension plans in the American Rescue Plan Act. Eligible plans may apply to receive a lump-sum payment from a new Treasury-backed PBGC fund. Under the new rules, eligible plans are entitled to amounts that are sufficient to pay all benefits for the next 30 years. According to the PBGC interpretation, that means sufficient funds to forestall insolvency through 2051 (but not thereafter). Plans are entitled to receive the difference between their obligations and resources for the period. Surprisingly, the PBGC rule provides that SFA funds will be taken into account when calculating a plan’s withdrawal liability. However, plans are required to use mass withdrawal interest rate assumptions published by the PBGC when calculating withdrawal liability until the later of (1) 10 years after the end of the year in which the plan received the SFA or (2) the time when the plan no longer holds SFA funds. For more information on multiemployer pension plan withdrawal liability, see Q 3739.

The IRS updated its frequently asked questions on the American Rescue Plan Act (ARPA) paid sick and family leave credits.  Now, employers are entitled to claim the tax credits if they provide paid leave for employees to accompany family, household members and certain others to obtain a COVID-19 vaccine or to care for someone recovering from immunization.  The new eligibility requirement also applies to self-employed taxpayers.  Generally, employers are no longer obligated to provide employees with paid sick and family leave.  However, those who choose to offer paid leave for qualifying reasons may claim a tax credit for wages paid.  To date, the tax credits for leave have been extended through September 30, 2021.  For more information on the FFCRA paid leave tax credits for sick and family leave, visit see Q 769.

IRS Revenue Procedure 2021-33 provides a safe harbor allowing employers to exclude certain amounts from gross receipts for the sole purpose of determining eligibility for the employee retention tax credit (ERTC). Amounts that may be excluded include: (1) the amount of the forgiveness of a paycheck protection program (PPP) loan, (2) Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, and (3) Restaurant Revitalization Grants under the ARPA.  Employees elect to apply this safe harbor by simply excluding these amounts for purposes of determining whether it is an ERTC-eligible employer on an employment tax return.  Employers are required to apply the safe harbor consistently in determining ERTC eligibility (meaning the employer must exclude the amounts from gross receipts for each calendar quarter when gross receipts are relevant to determining ERTC eligibility).  If the employer applies the safe harbor, it also must apply the safe harbor to all employers treated as a single employer under aggregation rules.  For more information on the ERTC, see Q 8555.

The American Rescue Plan Act (ARPA) COBRA subsidies are set to expire September 30, 2021.  Under the ARPA, assistance-eligible individuals are entitled to receive notice when their subsidy ends.  Assistance eligibility might end on the earlier of (1) the day the individual becomes eligible for other qualifying health coverage, including Medicare or (2) when the individual otherwise loses eligibility for COBRA coverage or (3) the end of the last coverage period beginning on or before September 30, 2021.  The required notice must be given to the impacted individual between 15 and 45 days before the person’s premium assistance ends.  In other words, if the person’s premium assistance ends on September 30, the employer must provide the notice between August 16 and September 15, 2021.  Model notices are available on the Department of Labor website.  For more information on the required COBRA notices, see Q 372.