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The American Rescue Plan Act: Key COBRA, FSA and Tax Provisions

Friday, March 12, 2021


The American Rescue Plan Act of 2021 (ARPA) was signed into law by President Biden on March 11, 2021.  ARPA is the latest COVID relief package intended to deliver a $1.9 trillion economic stimulus aimed at providing financial assistance to employers and individuals affected by the COVID-19 public health emergency.  ARPA includes a number of provisions that relate to employee benefits, including some important health and tax provisions detailed below.


COBRA Premium Subsidy

One of the provisions in ARPA includes a 100% fully subsidized COBRA premium for certain individuals beginning on April 1, 2021 and ending on September 30, 2021 (subsidy period).  This law applies not only to employers subject to federal COBRA but also to employers who have less than 20 employees and are subject to state continuation laws comparable to federal COBRA:


Dependent Care FSAs

ARPA increased the dependent care FSA limit for calendar year 2021.  Employees can now contribute $10,500, which is an increase from a $5,000 limit (the limit has also increased from $2,500 to $5,250 for married taxpayers who file separately). Employers who choose to adopt this new limit can amend their Section 125 plan retroactively so long as the amendment is adopted by the last day of the plan year in which the amendment is effective.  For example, an amendment made to a calendar year plan has to be adopted by December 31, 2021.


ACA Premium Tax Credit

The ACA provides premium tax credits for individuals who purchase health insurance through an Exchange and whose household incomes are between 100% and 400% of the federal poverty line (FPL).  ARPA has increased the eligibility for individuals who are eligible for the ACA premium tax credit by eliminating the upper income limit for eligibility in the 2021 and 2022 tax years. ARPA also 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.  Individuals with income above 400% of the FPL will have their premiums capped at 8.5% of their income.


FFCRA Tax Credit Extension

ARPA extends the FFCRA tax credit provisions through September 30, 2021 but allows employers to continue to voluntarily determine whether they want to extend FFCRA paid leave to their employees.  Should an employer determine that they want to continue to offer paid leave to their employees, there are other applicable modifications to the FFCRA as a result of ARPA that will become effective on April 1, 2021.


The modifications include an expansion of the covered reasons for emergency paid sick leave and emergency FMLA.  They are being expanded to employees who are (i) obtaining an immunization related to COVID-19 or recovering from any injury, disability, illness or condition related to such immunization; or (ii) seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19, when such employee has been exposed to COVID-19 or the employer has requested such test or diagnosis.  Importantly, the original emergency FMLA provisions of the FFCRA were limited in regard to the covered reasons it could be utilized by employees (school closing/loss of child care).  In ARPA, those reasons have been expanded to include all the reasons utilized for emergency paid sick leave, including the two new reasons noted above.  It also removes the two-week waiting period on emergency FMLA leave and raises the aggregate cap on emergency FMLA leave from $10,000 to $12,000.  Further, employees who previously took 10 days of emergency paid sick leave under the FFCRA will now be permitted to obtain another 10 days of paid leave.


ARPA also includes new non-discrimination rules for employers that opt to voluntarily provide FFCRA leave and obtain the tax credits. Specifically, ARPA disallows the tax credits for any employer who discriminates with respect to leave: (1) in favor of highly compensated employees; (2) in favor of full-time employees; or (3) on the basis of employment tenure.


Employee Retention Credit

ARPA encourages businesses to retain their employees despite the challenges posed by COVID-19 by extending the Employee Retention Tax Credit, previously set to expire in June 2021, until December 31, 2021. Eligible employers who experience a full or partial shutdown due to COVID-19 or a qualifying decline in their receipts in 2021 may qualify for the Employee Retention Tax Credit.  The credit is also expanded to include certain start-up businesses (with a credit capped at $50,000 per quarter) even if they do not experience an eligible decline in gross receipts, or a full or partial suspension.


Though ARPA is now law, federal agencies will be tasked with issuing more detailed guidance to address practical elements of the ARPA’s various provisions.  Employers should anticipate the release of this information over the coming weeks.


Additional Resource



This Benefits Brief is not intended to be exhaustive, it is for informational purposes only and should not be considered legal or tax advice. A qualified attorney or other appropriate professional should be consulted on all legal compliance matters.

Posted by in Blog, Health & Benefits, Human Resources

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