In a marathon push before the end of the year, Congress passed the Consolidated Appropriations Act of 2021, on Dec. 21, 2020. President Trump signed the bill on December 27, 2020. This legislation is a massive package that averts a government shutdown and provides $1.4 trillion to fund the federal government through September 2021. The bill also provides $900 billion in additional COVID-19 pandemic relief, funding a panoply of needs for individuals and businesses.
The following summary outlines both general provisions of the COVID-19 relief package as well as provisions that directly impact employers and their benefit plans (listed first).
FSA Plan Flexibility
Under the bill, employers are allowed, but not required, to amend plans as follows:
- Carryover unused FSA balance from plan year ending in 2020 to plan year ending in 2021.
- Carryover unused FSA balance from plan year ending in 2021 to plan year ending in 2022.
- Extend grace period to 12 months after the end of the plan year for plan year ending in 2020 and 2021 for both health and dependent care FSAs.
- Provide employees who cease participation in a health FSA during calendar 2020 or 2021 the opportunity to receive reimbursements from unused benefits or contributions through the end of the plan year in which such participation ceased (including grace period if applicable). At this point it is not clear whether this permits reimbursement of expenses incurred after termination or is simply an extended run-out period. Additional clarification on this will likely be forthcoming.
- Increase the maximum age (by one year) for dependent care beneficiaries who aged out during the pandemic.
- Prospective modification of election amount for health and dependent care FSAs (plan years ending in 2021).
Employers have considerable flexibility in the timing for amending plan documents. Amendments must be made by the end of the first calendar year beginning after the end of the plan year in which the amendment is effective. For example, calendar year 2020 plan amendments must be adopted on or before December 31, 2021. Plans must operate consistently with the terms of the amendment retroactive to its effective date.
FSA Plan Action Item for Employers
Decide What to Adopt: Employers must decide which, if any, of the plan flexibility options offered by this legislation to adopt. While considerable time is allowed to actually execute formal plan amendments, decisions on these issues should be made reasonably quickly to clarify for plan participants exactly what their plans will allow.
Expect Some Confusion: Employers can expect some measure of confusion in the marketplace and from plan participants. Some employers will adopt these enhanced flexibility provisions and others will not, adding a degree of variability that FSA plans do not typically have.
Open Ended Plan Years: Employers should be aware that extending flexibility for plan participants, in terms of when claims can be incurred or submitted, comes with the consequence of not being able to close out plan years in a timely manner. For example, employers who adopted the grace period extension for 2019 plan years, technically, still cannot close out the 2019 plan year.
Administration Platforms: Software platforms for FSA plan administration do not currently include mechanisms to allow the flexibility afforded by this legislation, such as rolling over balances. Suffice it to say, they will all be scrambling to modify their platforms to accommodate these changes. The changes will certainly be accommodated, but employers should expect potential delays while administration platforms are being updated.
Clear Communication: After decisions are made, employers should distribute clear communication about any plan flexibility adopted so that plan participants understand exactly what, if any, additional flexibility is included in their plan.
FFCRA Paid Leave Credits
The FFCRA paid sick leave and expanded FMLA leave provisions have been extended for employers on a voluntary basis through March 31, 2021. The corresponding payroll tax credits for paid sick leave and expanded FMLA leave remain available for employers electing to offer the paid sick and family leave. As a reminder, employers are required to continue employee benefit plans through any such leave period.
General Provisions of the Act
Aid for Small Businesses: $325 billion in aid for small businesses struggling after nine months of pandemic-induced economic hardships. This breaks down as:
- $284 billion to the SBA for first and second-draw PPP forgivable small business loans
- $20 billion to provide Economic Injury Disaster Loan (EIDL) grants to businesses in low-income communities
- $15 billion in funding available to shuttered live venues, independent movie theaters, and cultural institutions
- $12 billion in funding available to help business in low-income and minority communities.
Individual Stimulus Payments: $166 billion for a second round of economic impact payments of $600 for individuals making up to $75,000 per year and $1,200 for married couples making up to $150,000 per year. Each dependent child is also eligible for a $600 economic impact payment.
Unemployment Benefits: $120 billion to provide workers receiving unemployment benefits a $300 per week supplement from Dec. 26, 2020 until March 14, 2021. This is a renewal of the federal unemployment benefits provided by the CARES Act which expired in July. This bill also extends the Pandemic Unemployment Assistance (PUA) program, with expanded coverage to the self-employed, gig workers, and others in nontraditional employment, and the Pandemic Emergency Unemployment Compensation (PEUC) program, which provides additional weeks of federally funded unemployment benefits to individuals who exhaust their regular state benefits.
Rental Assistance: $25 billion in emergency rental aid directed to assist those affected by COVID-19 who are struggling to make rent. Assistance under this program will be administered by state and local governments and applies to past-due rent and future rent payment, as well as to pay utilities and prevent utility shut-offs. The national eviction moratorium was also extended through Jan. 31, 2021.
Transportation Industry: $45 billion in transportation funding, including $16 billion for airlines, $14 billion for transit systems, $10 billion for state highways, $2 billion each for airports and intercity buses, and $1 billion for Amtrak.
Colleges and Schools: $82 billion in funding for colleges and K-12 schools significantly impacted by the coronavirus pandemic. This includes support for HVAC repair and replacement to mitigate virus transmission and $10 billion in childcare assistance.
Health-Related Expenses: $22 billion for health-related expenses incurred by state, local, Tribal, and territorial governments.
Food Assistance: $13 billion for emergency food assistance, including a 15% increase for six months in Supplemental Nutrition Assistance Program benefits.
Broadband Expansion: $7 billion for broadband expansion.
100% Deductibility for Business Meals: Temporarily allows a 100% business expense deduction for meals (rather than the current 50%) for food or beverages provided by a restaurant. This provision is effective for expenses incurred after Dec. 31, 2020 (not retroactive to the 2020 tax year) and expires at the end of 2022.
Student Loan Provisions: The law extends the provision allowing employers to contribute up to $5,250 tax-free toward an employee’s student loan debt. This provision was set to expire on January 1, 2021 but was extended to payments made prior to Jan. 1, 2026. Notably, the law does not further extend the student loan moratorium on federally-held student loans and does not extend the forbearance period, the pause in interest accrual, or the suspension of collections activity past Jan. 31, 2021.
PPP Round Two
The return of the PPP is of particular interest to small businesses. The first round of PPP loans helped millions of small businesses acquire $525 billion in forgivable loans during the five months the program was accepting applications. The new round of PPP, or PPP2 as some are calling it, contains many similarities to the first round of the PPP but also has several important differences. Details of the new second round of the PPP can be found in the reference section below.
Tax Deductibility of PPP Expenses
The bill also specifies that business expenses paid with forgiven PPP loans are tax-deductible. This supersedes IRS guidance that such expenses could not be deducted and brings the policy in line with what hundreds of other business associations have argued was Congress’s intent when it created the original PPP as part of the $2 trillion CARES Act.
COVID-19 Payroll Tax Credits
The Act also extends and expands the Employee Retention Credit (ERC) under the CARES Act. Eligible businesses may now take advantage of the ERC through July 1, 2021. The ERC program has been expanded and modified for calendar quarters beginning after December 31, 2020, as follows:
- The ERC is expanded from a 50% refundable tax credit to 70%, and the $10,000 eligible wage limit per employee will be a quarterly limit (previously, this was an annual limit). So instead of a $5,000 credit per employee credit per year, the program will allow a credit of up to $7,000 per employee per quarter.
- To be eligible for the expanded ERC in 2021, an employer must show that gross receipts for such calendar quarter are less than 80 percent of the gross receipts for the same calendar quarter in 2019, or it experienced a full or partial suspension of operations during the quarter due to a governmental order. There is also a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.
- The definition of a large employer for purposes of the ERC is modified to mean more than 500 employees (currently, this threshold is 100 employees). As such, for eligible small to midsize employers (those who averaged 500 full-time employees or fewer in 2019), qualified wages for purposes of the ERC will be wages paid to any employee during the quarter where the employer meets the gross receipts test or experienced a full or partial suspension of operations due to a governmental order. These employers also will be able to receive advances on the ERC at any point during the quarter based on wages paid in the same quarter in a previous year.
In addition, employers who receive PPP loans may still qualify for the ERC with respect to wages that are not paid with forgiven PPP proceeds. This provision is effective retroactively to the enactment date of the CARES Act.
PPP2 loans will be available to first-time qualified borrowers as well as to businesses that previously received a PPP loan. Specifically, previous PPP recipients may apply for another loan of up to $2 million, provided they:
- Have 300 or fewer employees.
- Have used or will use the full amount of their first PPP loan.
- Can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.
As with PPP1, the costs eligible for loan forgiveness in PPP2 include payroll, rent, covered mortgage interest, and utilities. PPP2 also makes the following potentially forgivable:
- Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.
- Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.
- Covered operating costs such as software and cloud computing services and accounting needs.
To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period of either eight or 24 weeks, the same parameters PPP1 had when it stopped accepting applications in August.
PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year, the same as with PPP1, but the maximum loan amount has been cut from $10 million in the first round to the previously mentioned $2 million maximum.
The PPP2 program creates a simplified forgiveness application process for loans of $150,000 or less. Specifically, borrowers will receive forgiveness if they sign and submit to the lender a certification that is not more than one page in length, include a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. The SBA must create the simplified application form within 24 days of the bill’s enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
Other Special Provisions
The PPP2 also includes special allocations to support first-time and second-time PPP borrowers with 10 or fewer employees, first-time PPP borrowers that have recently been made eligible, and for loans made by community lenders.