Business Provisions of the American Rescue Plan Act
Targeted Economic Injury Disaster Loan Advances
New law. Under ARPA, eligible small businesses may receive targeted economic injury disaster loan (EIDL) advances from the Small Business Administration. Amounts received as targeted EIDL advances are not included in the gross income of the person who receives the amounts.
No deduction or basis increase is denied, and no tax attribute is reduced by reason of the gross income exclusion.
In the case of a partnership or S corporation that receives targeted EIDL advances, any amount of the advance excluded from income is treated as tax-exempt income.
Since the targeted EIDL advances are treated as tax-exempt income, they will be allocated to the partners or shareholders and increase their bases in their partnership interests.
The IRS will prescribe rules for determining a partner’s distributive share of the advance.
Under the single-class-of-stock rule, shareholders receive allocations of tax-exempt income from the targeted EIDL advances in proportion to their ownership interest in the S corporation.
Effective date. Date of enactment of ARPA, March 11, 2021.
Increase in the Exclusion for Employer-Provided Dependent Care Assistance
An eligible employee’s gross income generally doesn’t include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program
A DCAP can be maintained under a cafeteria plan as a DCAP flexible spending arrangement.
Under pre-ARPA law, the amount that could be excluded from an employee’s gross income under a DCAP during a tax year was not more than $5,000, or $2,500 in the case of a separate return by a married individual, subject to certain limitations. However, any contribution made by an employer to a DCAP cannot exceed the employee’s earned income or, if married, the lesser of employee’s or spouse’s earned income.
New law. For 2021 only, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500, and from $2,500 to $5,250 in the case of a separate return filed by a married individual.
Effective date. This provision is effective for tax years beginning after December 31, 2020.
COBRA Premium Subsidy
New law. Assistance-eligible individuals (AEIs) may receive a 100% subsidy for COBRA premiums for any period of COBRA coverage during the period beginning on April 1, 2021 (the first day of the first month beginning after enactment) and ending on September 30, 2021.
Eligibility. An AEI is a COBRA qualified beneficiary (i.e., employee, former employee, covered spouse, or covered dependent) who, with respect to a period of coverage during the period beginning on April 1, 2021, and ending on September 30, 2021, is eligible for and elects COBRA coverage due to a qualifying event of involuntary termination of employment or reduction of hours.
Extended election period. Individuals who do not have a COBRA election in effect on April 1, 2021, but who would be an AEI if they did, are eligible for the subsidy. In addition, individuals who elected but discontinued COBRA coverage before April 1, 2021, are eligible if they would otherwise be an AEI and are still within their maximum period of coverage. Individuals meeting these criteria may make a COBRA election during the period beginning on April 1, 2021, and ending 60 days after they are provided required notification of the extended election period.
COBRA coverage elected during the extended election period will commence with the first period of coverage beginning on or after April 1, 2021, and may not extend beyond the AEI’s original maximum period of coverage.
Duration. The subsidy is available for any period of coverage during the period beginning on April 1, 2021, and ending on September 30, 2021.
However, eligibility may end earlier if the qualified beneficiary’s maximum period of coverage ends before September 30, 2021, or if the qualified beneficiary becomes eligible for coverage under another group health plan (other than coverage consisting of only excepted benefits, or coverage under a health flexible spending arrangement or qualified small employer health reimbursement arrangement) or Medicare.
Plan enrollment option. Group health plan sponsors may, but are not required to, allow AEIs to elect to enroll in different coverage. Enrollment must occur within 90 days after the date of notice informing the individual of the enrollment option. Enrollment in different coverage may be permitted only if:
- the premium does not exceed the premium for the coverage in which the individual was enrolled at the time of the qualifying event;
- the different coverage is also offered to similarly situated active employees at the time of the election; and
- the different coverage is not coverage that provides only excepted benefits, or is a qualified small employer health reimbursement arrangement or health flexible spending arrangement.
Notices from individuals to group health plan. AEIs must notify the group health plan if they cease to be eligible for the subsidy because they become eligible for another group health plan or Medicare. Notices must be provided in the time and manner specified by the Department of Labor.
Penalties of $250 (or more for intentional failures) may be assessed for failure to provide such notification. No penalties will be assessed for failures due to reasonable cause and not to willful neglect.
Required notices to AEIs. Group health plans must provide the following notices to AEIs:
- Notice of assistance availability. Informs AEIs of the availability of the subsidy and the option to enroll in different coverage (if permitted by the employer). Must be provided to individuals who become eligible to elect COBRA during the period beginning on April 1, 2021, and ending on September 30, 2021. This notice requirement may be met by amending existing notices or including a separate document along with them. Specific content requirements apply.
- Notice of extended election period. Must be provided to individuals eligible for an extended election period within 60 days after April 1, 2021.
- Notice of expiration of subsidy. Must be provided between 45 and 15 days before the date on which an individual’s subsidy will expire, unless the subsidy is expiring because the individual has gained eligibility for coverage under another group health plan or Medicare.
Provision of these notices is required to meet COBRA’s notice requirements.
Model notices. Within 30 days of enactment, the Department of Labor is to issue model notices which can be used to notify eligible individuals of the availability of assistance and the availability of an extended enrollment period. Within 45 days, the Department is to issue model notices regarding the expiration of the subsidy.
Refundable tax credit. Employers will be allowed a quarterly tax credit against the Medicare payroll tax equal to the premium amounts not paid by AEIs. If the credit amount exceeds the quarterly Medicare payroll tax, the excess will be treated as an overpayment that is refundable. The quarterly credit may be paid in advance according to forms and instructions to be provided by the Department of Labor.
Coordination with HCTC. Effective for tax years ending after the date of enactment, AEIs are not eligible for the health coverage tax credit for any period of coverage in which they receive a COBRA subsidy.
Exclusion from income. Effective for tax years ending after the date of enactment, subsidy amounts will not be included in the gross income of AEIs.
Regulations and outreach. The Department of Labor, Treasury, and Health and Human Services may issue regulations as necessary or appropriate to carry out the provisions of the Act. The agencies are to provide public education and enrollment assistance to individuals, employers, plans, and other entities as appropriate.
Restaurant Revitalization Grants
New law. Under ARPA, eligible restaurants, food trucks, and similar businesses may receive restaurant revitalization grants from the Small Business Administration.
Amounts received as restaurant revitalization grants are not included in the gross income of the person who receives the amounts.
In the case of a partnership or S corporation that receives a restaurant revitalization grant, any amount of the grant excluded from income is treated as tax-exempt income.
Since the restaurant revitalization grants are treated as tax-exempt income, they will be allocated to the partners or shareholders and increase their bases in their partnership interests.
The IRS will prescribe rules for determining a partner’s distributive share of the grant.
Under the single-class-of-stock rule, shareholders receive allocations of tax-exempt income from the restaurant revitalization grants in proportion to their ownership interest in the S corporation.
Effective date. Date of enactment of ARPA, March 11, 2021.
Expansion of Rule on Deduction of Compensation of Publicly Held Corporation Employees
A publicly held corporation’s compensation deduction is limited to $1 million per year for compensation paid to any “covered employee.” Under pre-ARPA law, the definition of “covered employee” only includes the corporation’s principal executive officer, principal financial officer, the three other highest-paid employees, and anyone who was in one of those categories for any preceding tax year that begins after December 31, 2016.
New law. For tax years that begin after December 31, 2026, the above rule is changed to provide that “covered employee” includes the eight other highest-paid employees, rather than the three other highest-paid employees.
However, the above rule regarding employees who were in one of the covered employee categories in preceding years, does not apply to employees who are covered employees only because of the new rule.