COVID Relief Bill Temporarily Increases DCAP Maximum, Expands ACA Premium Tax Credit, and Extends Tax Credit for Paid Leave

Congress has passed, and the President is expected to sign, the American Rescue Plan Act of 2021 (ARPA), providing sweeping COVID-19 relief that includes several benefits-related provisions. A 100% COBRA premium subsidy has drawn perhaps the most attention (see our Checkpoint article), but other items are also of interest to group health plan sponsors, administrators, and advisors. Here are highlights:

• DCAP Changes. The maximum amount of DCAP benefits that can be excluded from income is temporarily increased from $5,000 to $10,500 (from $2,500 to $5,250 for taxpayers who are married filing separately) for taxable years beginning in 2021. Plans can be amended retroactively for the change so long as the amendment is adopted by the last day of the plan year in which the amendment is effective and the plan is operated in accordance with the amendment’s terms beginning on its effective date. Temporary changes have also been made to the dependent care tax credit (DCTC) for 2021. Among other things, the DCTC is refundable and the dollar limit on expenses that can be taken into account is increased from $3,000 to $8,000 for taxpayers with one qualifying individual and from $6,000 to $16,000 for taxpayers with two or more qualifying individuals. Changes have also been made to the child tax credit and earned income tax credit; these credits may be relevant when determining the federal tax savings from participating in a DCAP vs. claiming the DCTC.
• Enhanced Premium Tax Credit. The existing ACA premium tax credit is expanded for taxable years 2021 and 2022. (Under existing rules, the credit is limited to taxpayers with household income between 100% and 400% of the federal poverty line (FPL) who purchase insurance through an Exchange.) ARPA eliminates the upper income limit for eligibility and increases the amount of the premium tax credit by decreasing, in all income bands, the percentage of household income that individuals must contribute for Exchange coverage. The adjusted percentage ranges from zero to 8.5% (for 2020 it had been set at 2.06% to 9.78% and for 2021, 2.07% to 9.83%). Special enhancements to the credit are also included for individuals receiving unemployment compensation in 2021.
• Credits for Paid Sick and Family Leave. ARPA extends the tax credits that originated in the Families First Coronavirus Response Act (FFCRA) as a way to reimburse small and midsize employers for making required payments for pandemic-related sick or family leave. The FFCRA requirement to provide paid leave expired on December 31, 2020, but for employers voluntarily continuing to provide it, the Consolidated Appropriations Act, 2021 extended the credit through March 31, 2021, and ARPA further extends the credit to leave provided through September 30, 2021. ARPA’s extension applies the credit to Medicare taxes rather than Social Security; restarts the 10-day limit on the amount of qualified sick-leave wages taken into account with respect to any employee; increases the aggregate maximum credit for qualified family leave wages to $12,000; and adds a nondiscrimination requirement. In addition to the existing credit for certain health plan expenses attributable to sick or family leave, ARPA adds credits for collectively bargained defined benefit pension and apprenticeship program contributions and FICA taxes (both Social Security and Medicare) to the extent those contributions and taxes are allocable to sick or family leave wages for which the credit is allowed.

EBIA Comment: Plan sponsors, advisors, and administrators should not lose sight of these “other” ARPA provisions amid the COBRA subsidy implementation challenges. Unlike many benefit plan limits and thresholds, the maximum DCAP exclusion amounts are not indexed for cost-of-living changes, leaving some DCAP sponsors and participants to wonder whether they would ever increase—and perhaps disappointed that this change is only temporary. Whether plan amendments are needed to adopt the change will depend on how the DCAP is drafted. The expanded premium tax credit will help individuals seeking health coverage through the Exchange. But because applicable large employers (ALEs) potentially face shared responsibility penalties if full-time employees receive premium tax credits, expanded eligibility for the credits could increase penalty exposure for ALEs that do not offer affordable, minimum-value coverage to all full-time employees. For more information, see EBIA’s Cafeteria Plans manual at Sections XXIII.C (“DCAP Participation vs. Claiming the Dependent Care Tax Credit”) and XXIV.I (“Exclusion Is Limited to $5,000/$2,500 or Employee’s/Spouse’s Earned Income”), EBIA’s Health Care Reform manual at Section XXI.G (“Premium Tax Credits”), and EBIA’s Group Health Plan Mandates manual at Section XVI.F (“Tax Credits for Paid Leave and Health Coverage”).

Contributing Editors: EBIA Staff.