On March 11, 2021, the American Rescue Plan Act of 2021 became law. This new law made numerous tax-related changes impacting individuals and businesses. If you are an employer, be sure to note the following changes applicable to you.
If your business has a group health plan and is subject to federal or any state COBRA rules requiring you to offer continuation health coverage to certain individuals who experience certain events, special rules apply from April 1, 2021, through September 30, 2021. During this period, you are required to pay premiums for an “assistance eligible individual.” This is an employee who’s been involuntarily terminated (other than for gross misconduct) or whose hours have been reduced (e.g., changed from full-time to part-time) if they elect continuation coverage.
The good news is that the cost of these premiums is covered by a refundable federal tax credit. The credit is an offset to employment taxes. Form 941 will be amended to allow for this employment tax credit.
You must provide affected individuals with various notices by set time limits. The DOL has model notices you can use for this purpose.
The DOL offers FAQs to help you with required actions.
Paid sick leave and paid family leave
In 2020, small employers were required to provide certain paid sick leave and paid family leave to employees impacted in various ways by COVID-19. Like COBRA, the cost of these benefits was covered by employment tax credits for employers. For 2021, paid sick leave and paid family leave is voluntary; employers may choose whether to offer these benefits. What’s more, there are different rules from January 1, 2021, through March 31, 2021, and from April 1, 2021, through September 30, 2021 (which is the period in which such benefits for employees are funded through employment tax credits). Of course, employers may continue to offer paid sick leave and paid family leave, but employment tax credits cease on September 30, 2021 (unless Congress extends this rule).
The IRS has guidance on the rules for employers for the first part of 2021. It has yet to issue guidance on the rules effective on April 1, but check the IRS for an update.
Employee retention credit
In 2020, to incentivize employers to keep workers on the payroll during the pandemic, yet another employment tax credit was created…the employee retention credit. This credit has been extended through the end of 2021, allowing small businesses to benefit from paying workers’ wages, even if they’re not working. Different rules apply to the first two quarters of 2021 and then to the last two quarters of the year. IRS guidance has guidance on the rules for Q1 and Q2 of 2021. Check back with the IRS for guidance on the new rules for Q3 and Q4 of 2021. These will address the changes that allow a new category of qualified businesses to claim the credit (those that started February 16, 2020, or later); businesses in this category are limited to a total credit of $50,000 per quarter.
Keep in mind that no double dipping is allowed, so any wages taken into account for this tax credit may not also be used for the work opportunity credit, Empowerment Zone employment credit, and certain other credits, as well as wages covered by PPP loans, Shuttered Venue Operators grants, and Restaurant Revitalization grants.
Be sure to stay alert to further guidance as well as any additional tax changes impacting employers for 2021 and for years to come.