Month: March 2021

On March 26, 2021 the IRS released Announcement 2021-7, which provides that amounts paid for personal protective equipment for the primary purpose of preventing the spread of COVID-19 are treated as amounts paid for medical care under Section 213(d) of the Internal Revenue Code.  This means that amounts paid for things such as masks, hand sanitizer and sanitizing wipes may be:

1. eligible to be paid or reimbursed under a health FSA, HSA, or HRA, if the plan terms allow, or
2. claimed as an itemized deduction on a taxpayer’s income tax return provided that (a) the amounts are not reimbursed by insurance or otherwise, and (b) the taxpayer’s total medical expenses exceed 7.5% of the taxpayer’s adjusted gross income.

This guidance also provides that a health FSA, HSA or HRA that does not currently allow for reimbursement of COVID-19 related PPE expenses may be amended to allow for reimbursement of such expenses incurred on or after January 1, 2020.  Accordingly, employers who sponsor a health FSA, HSA or HRA may want to review their cafeteria plan or other relevant plan documents to determine if an amendment is needed.  Plans may be amended retroactively as long as the amendment is adopted no later than the last day of the first calendar year beginning after the plan year in which the amendment is effective, no retroactive amendment is adopted after December 31, 2022, and the plan is operated consistent with the terms of the amendment.

Earlier this month, the American Rescue Plan Act of 2021 (“ARPA”) became the latest COVID relief package passed by the federal government. ARPA, just like the many COVID relief packages that came before it, contains a number of changes that benefits professionals will want to become familiar with.

Only for 2021, ARPA allows employers to amend their dependent care assistance programs (“DCAPs”) to allow employees to contribute up to $10,500 for the tax year (or $5,250 for individuals married and filing separately). This is undoubtedly welcome relief to parents and caregivers who are likely to be returning to work in 2021 and unable to care for kids who may have not yet returned to school or other family members who continue to stay at home and need assistance. This change allows employees to pay for more of those increased dependent care costs with pre-tax dollars.

Employers generally maintain DCAPs as part of their cafeteria plans, which allow employees to contribute pre-tax dollars to a variety of qualified benefits. These contributions, in turn, reduce the employee’s taxable income. While employees are typically locked into their elections for the entire year, employees may be able to prospectively increase their DCAP election under previous IRS guidance released last month if the plan is so amended.

Prior to the ARPA change, the maximum amount that an employee could contribute to a DCAP and exclude from his or her gross income was $5,000 per tax year (or $2,500 for individuals married and filing separately).

A cafeteria plan that adopts these changes will be deemed to comply with the Code §§ 125 and 129 rules governing cafeteria plans and DCAPs. Employers may implement this change operationally now, but plans must be retroactively amended no later than the last day of the plan year in which the amendment is effective, and the plan must be operated consistent with the terms of the amendment on its effective date and ending on the date the amendment is adopted.

Late last week, President Biden signed the American Rescue Plan Act of 2021 (“ARPA”), which makes COBRA continuation coverage free for certain qualifying-individuals and their families from April 1, 2021 to September 30, 2021.  This free coverage is available to those who lose group health plan coverage because either:

1. they are terminated (not including resignations); or
2. their hours are reduced.

So, all you have to do is remember this for those who become eligible for COBRA for one of these two reasons from April 1, 2021 to September 30, 2021, right?  No, it is not that easy.  This free coverage is also available to those who already lost coverage because of one of these two reasons and who could have had COBRA coverage during the period from April 1, 2021 to September 30, 2021 (“Expired COBRA Participants”).  Expired COBRA Participants would include those who either failed to elect COBRA coverage during their normal 60-day (but now-expired) election period and those who elected COBRA coverage but discontinued that coverage before April 1, 2021.  Expired COBRA Participants would likely include individuals going all the way back to November of 2019.

New Election Period.  Expired COBRA Participants have a new 60-day election period that begins April 1, 2021 to newly-elect COBRA, but this does not extend their normal COBRA period (e.g., if they were entitled to 18 months of COBRA because of a termination of employment that occurred in November of 2019, their coverage would still expire April 2021).

New Notice Requirement.  Employers are required to notify the individuals described above of this new free coverage and its availability, including Expired COBRA Participants.  The ARPA requires the federal government to issue a model notice for this purpose by April 10, 2021.

Bottom Line.  We suggest you immediately get with your COBRA administrator and make sure they are on top of these new rules.  You will want to identify individuals who could have been entitled to COBRA (because of job loss or reduction in hours) during the period from April 1, 2021 to September 30, 2021 – including Expired COBRA Participants – because you are going to have to give them a new notice and a new election period.  Given the very complicated guidance (DOL Notice 2021-01) we received a few weeks ago that basically gives every COBRA-qualifying individual their own one-year extended period to elect COBRA coverage, and that guidance’s own notice requirements (in addition to that described above), COBRA is now free and very complicated.

If you have any questions, including any questions about how the subsidy will be paid to the plan or plan sponsor, please let us know.