On February 24, 2021, Representative John Yarmuth of Kentucky introduced HR1319 – the American Rescue Plan of 2021. The Bill was passed by the House (pending some technical corrections) on February 27. This bill includes a myriad of assistance plans intended to provide funding for economic recovery in the wake of the COVID-19 pandemic, including COBRA premium assistance for certain displaced workers and a temporary increase to the Dependent Care FSA maximum annual exclusion.
COBRA Premium Assistance
Section 2401 of the Bill, labeled “Preserving Health Benefits for Workers,” calls for COBRA premium relief for individuals who have experienced a loss of health coverage due to an involuntary termination of employment or reduction in hours (“assistance-eligible individuals”). Note: There is no requirement that the termination of employment or reduction in hours be related in any way to the COVID-19 pandemic. Under the proposed bill, assistance-eligible individuals will be eligible for an 85% COBRA premium subsidy, beginning the first day of the month following enactment of the bill and ending September 30, 2021. (A payment of 15% of the regular COBRA premium from the qualified beneficiary or another party other than the employer will be considered full payment of the COBRA premium).
Any assistance-eligible individuals who did not elect continuation coverage but might have done so or whose COBRA coverage ended prematurely will also have an opportunity to re-elect COBRA coverage in order to obtain the coverage at the reduced premium. They will also be given an opportunity to make a new election within 60 days after notice is provided by the plan sponsor of their eligibility for the premium reduction.
The premium reduction for COBRA beneficiaries will continue until the earliest of the following:
- The first date the person is eligible for coverage under “any other group health plan.” This differs from the COBRA rule that permits continuation coverage to remain in force until the individual actually becomes covered by another health plan.
- When the maximum COBRA coverage period is exhausted (generally, 18 months after the qualifying event date, or 29 months if a total disability extension applies).
In addition to the premium relief, the Bill also includes an optional provision that allows COBRA qualified beneficiaries who are eligible for premium assistance to change their health coverage elections to a lower-cost health option. The alternative coverage cannot consist solely of excepted benefits (such as a limited-purpose dental or vision benefit), a QSEHRA, or flexible spending arrangement. Employers adopting this rule must notify premium assistance individuals of their ability to change plans and allow 90 days to elect the alternative coverage.
The COBRA premium reduction will be financed by plan sponsors, who may then claim a credit against Medicare taxes payable each quarter during the relief period. If the bill passes both the House and Senate and is signed into law, the tax credit will be available beginning with the second quarter, 2021 filing (i.e., effective April 1, 2021).
A variety of notice requirements are anticipated in the Bill, and if it is passed into law, model notices and regulations will be issued by the Secretaries of Health and Human Services, Labor and Treasury following enactment.
Dependent Care FSA Exclusion Limit
The Bill (Section 9632) includes a proposed increase in the taxable income exclusion for employer-provided dependent care assistance benefits (DCAPs) that will apply to “any taxable year beginning after December 31, 2020, and before January 1, 2022.” For most taxpayers, the taxable year is the calendar year. This one-time-only relief will increase the maximum exclusion for dependent care to:
- $10,500 (from $5,000) for a married individual filing a joint return with a spouse, as well as for a single/head of household filer; and
- $5,250 (from $2,500) for a married individual filing separately from his or her spouse.
This optional temporary increase to the limit resolves the outstanding question of how any carryover might affect the tax treatment of reimbursements over $5,000 (or $2,500).
In addition to the expansion of limits under DCAPs, the Bill includes an increase in the individual dependent care tax credit for the 2021 tax year, adjusts the applicable income threshold amount, and expands the definition of a “qualifying child” to a dependent who has not attained age 18 for purposes of the credit.
The bill must pass in both the Senate and House before it reaches the desk of President Biden. At this point, the bill has not yet made its way to the Senate for consideration. The Brown & Brown Research and Compliance team will continue monitoring the situation and providing updates as they are received.
This document is provided for general information purposes only and should not be considered legal or tax advice or legal or tax opinion on any specific facts or circumstances. Readers are urged to consult their legal counsel and tax advisor concerning any legal or tax questions that may arise.
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