Employee Benefit Plan Provisions in New Tax Act

By Drew Cheney January 7, 2021

Within its 5,593 pages, the recently-passed Consolidated Appropriations Act, 2021 (the Act) contains numerous provisions that affect employee benefit plans. This article will provide a high-level overview of some of most important of these provisions.

Turbocharging the Flexibility in Flexible Spending Accounts (FSAs)

Traditionally, FSAs under Code Section 125 for health and dependent care benefits have been subject to certain limitations, including the “use-it-or lose-it” rule and the inability to make mid-year election changes in the absence of a qualifying event such as the birth of a child or a change in marital status. The Act contains several provisions that allow (but do not require) plan sponsors to make the following changes:

• Allow FSA election changes in 2021 regardless whether the employee has a permitted election change event (this relief was already made available in 2020 under IRS Notice 2020-29)
• Allow FSA balances to be carried over from plan years ending in 2020 to plan years ending in 2021 and from plan years ending in 2021 to plan years ending in 2022
• Extend from 3 months to 12 months the post-year end “grace period” for submitting FSA claims for plan years ending in 2021 and 2022
• Allow employees who, due to termination of employment or otherwise, cease participation in a health FSA during 2020 or 2021 to continue to receive reimbursements from unused balances through the end of the plan year, including grace periods
• In certain circumstances, provide for an additional year of dependent care reimbursements with respect to children who would normally have “aged out” due to turning age 13 during 2020

Student Loan Forgiveness Assistance

The CARES Act allowed employers to establish or amend Section 127 educational assistance plans to allow employers to pay for up to $5,250 of employees’ qualifying educational assistance loans. This provision originally applied only to 2020, which meant that many employers did not find it cost-effective to implement. The Act extends this provision through 2025. This extension will make it more worthwhile for employers to take the steps necessary to offer this benefit.

Partial Plan Termination Relief

In general, a partial plan termination takes place when more than 20% of plan participants are laid off in a plan year. This results in all terminated participants being 100% vested in employer contributions to the plan, regardless if whether the participants were employed long enough to meet the plan’s vesting requirements.

The Act provides that no partial plan termination will occur during the period from March 13, 2020 through March 31, 2021, provided that the number of active participants on March 31, 2021 is at least 80% of the number of active participants on March 13, 2020. This will give certain employers an incentive to rehire old employees or hire new ones between now and March 31, 2021.

FFCRA Credit Extension

The Families First Coronavirus Response Act (FFCRA), which was enacted early during the pandemic and just before the CARES Act, implemented mandatory paid sick time and paid family leave for certain individuals who were impacted by COVID-19. Employers were entitled to obtain a payroll tax credit for leave paid under these FFCRA mandates. We discussed these provisions here.

The FFCRA paid leave mandate expired on December 31, 2020. However, the Act extends until March 31, 2021 the payroll tax credit for employers who voluntarily continue to provide the previously-mandated paid leave.

Payroll Tax Deferral Repayment Extension

On August 21, 2020, the Treasury Department issued Notice 2020-65, which implemented the President’s mandate to allow employers to defer the withholding of employees’ share of FICA taxes which would otherwise have been withheld from their pay between September 1, 2020 and December 31, 2020. We discussed this notice here.

Most employers chose not to take advantage of this provision. For those who did (including the federal government), the Notice indicated that the deferred withholding from employees should take place over the first 4 months of 2021. The Act extends this period to all of 2021, so that the deferred withholding can now take place ratably between January 1, 2021 and December 31, 2021.

Qualified Disaster Relief Plan Withdrawals

The CARES Act contained a number of provisions allowing for special favorable tax treatment for COVID-related distributions and loans from qualified retirement plans. We discussed these provisions here, and they were expanded upon in IRS Notice 2020-50. These provisions expired on December 31, 2020, but the Act includes similar provisions for relief in the case of non-COVID disasters such as hurricanes and wildfires that were or will be presidentially declared between January 1, 2020 and February 25, 2021. Plan sponsors can, but are not obligated to, adopt any or all of the following provisions:

• Allow up to $100,000 of “qualified disaster distributions” that are exempt from the 10% penalty for early distributions and that can be repaid to the plan within 3 years, thus avoiding being subject to income tax;
• Avoid taxation on certain hardship distributions that were taken out to purchase or improve a principal residence within the disaster area, and that are repaid to the plan; and
• Allow individuals who live in disaster areas who sustained an economic loss due to the disaster to take plan loans of up to $100,000 (the normal limit is $50,000) and to delay for up to a year the repayment of both new and existing loans.

For more information or a discussion on how this may impact you, please contact your BNN advisor at 800.244.7444.