The Consolidated Appropriations Act of 2021 was signed into law on December 27, 2020. The Act contains multiple provisions relating to employer sponsored employee benefit plans. The Act provides an employer the ability to avoid plan termination resulting from workforce reduction and to provide flexibility and expanded tax benefits to employee participants during the pandemic period.
Relief to Prevent Plan Termination
A “partial termination” of a qualified retirement plan (like a 401(k) plan) results when there is a significant decrease in active plan participation and results in affected participants becoming fully vested in their accounts. A partial termination is determined based on facts and circumstances but there is a presumption of termination if there is at least a 20% turnover rate in a plan year. The Act provides that there will not be a finding of partial termination in 2020 if the number of active participants covered by the plan on March 31, 2021 is at least 80% of the active participants covered by the plan on March 13, 2020.
Additional Flexibility for Flexible Spending Accounts
There are several provisions in the Act allowing increased flexibility for use of FSA benefits.
- 2020 Carryover. Subject to narrow exceptions, an employee must use pre-tax FSA benefits by the end of a plan year or lose the benefits. The Act provides that for an FSA plan year ending in 2020, unused benefits or contributions may be carried over to the plan year ending in 2021. The above applies to both health and dependent care FSAs.
- 2021 Carryover. Carryover treatment is also extended to plan years ending in 2021 – benefits or contributions relating to the 2021 plan year can be carried over to the plan year ending in 2022.
- Grace Period Extensions. An FSA plan sponsor can provide an extended grace period of up to 12 months for use of benefits or contributions following the end of a plan year in 2020 or 2021.
- Permitted Change in Election Amount in 2021. There is generally a limited period in which an FSA participant can elect contributions for a plan year absent a change in the employee’s status. Under the Act, an employer may allow a prospective change in an employee’s election amount for the 2021 plan year (within applicable annual limits) regardless of whether the employee has a change of status in 2021.
- Reimbursements Post-Employment. The Act allows plan sponsors to continue to reimburse employees terminating in 2020 or 2021 through the end of the plan year in which the employee terminated employment, including any modified grace period available in that plan year.
- One Year Extension of Dependent Care Age-Out. Generally, a dependent care expense cannot be reimbursed for children over age 13. The Act provides reimbursement of expenses to age 14 for participants enrolled in a dependent care FSA in 2020. For participants with children turning 13 during the 2020 plan year, 2020 unused benefits can be carried forward to 2021.
- Required Plan Amendments. Changes to FSA benefits under the Act are optional. If an employer wants to provide benefits allowed under the Act, amendments to the employer’s cafeteria plan must be adopted by the end of the first plan year following the effective date of the change (December 31, 2021 for a calendar year plan with changes effective in 2020).
Note: an employer sponsoring an HSA must be careful not to disqualify the HSA through adoption of FSA changes.
Extended Tax-Free Student Loan Assistance
The CARES Act amended section 127 of the Internal Revenue Code and allowed employees to exclude up to $5,250 of qualified student loan payments made by their employers in 2020. The Act has extended tax free student loan assistance through 2025. An amendment to an employer’s Section 127 Employee Assistance Plan will be required for continuing tax-free payments.
Extension of Payroll Tax Deferral
The employee portion of payroll taxes (up to $4,000) relating to compensation paid in periods between September 1, 2020 and December 31, 2020 were payable on a deferred basis between January 1, 2021 and April 30, 2021. The Act has extended the due date for withholding and payment to December 31, 2021.
Paid Leave Guidance
We previously reported the extension of the employer paid leave tax credit for amounts paid through March 31, 2021. The Families First Coronavirus Response Act required employers to provide COVID related paid leave to December 31, 2020. Guidance from the Department of Labor has confirmed that employees taking leave for COVID related reasons in 2020 but not receiving payment can make claim for such payment based upon violation of the Families First Coronavirus Response Act within a statute of limitations period of two years following the alleged violation.
About the author:
Liam K. Healy focuses his practice on helping clients maintain compliance with the myriad of state and federal tax laws and regulations that govern individuals and businesses. A particular focus of Liam’s practice is in the area of employee benefits and ERISA. Liam specializes in designing pension and executive compensation plans to benefit business owners and executives. His practice includes drafting and reviewing deferred compensation agreements, severance agreements and non-compete agreements, representing employers in multi-employer plan collection and withdrawal liability matters.
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