On March 11, the American Rescue Plan Act (ARPA) of 2021 was signed into law. As a result, temporary provisions were announced that apply to COBRA, as well as Dependent Care Assistance Programs (DCAPs)—also known as Dependent Care Flexible Spending Accounts (FSAs).
Read on for a brief summary of these provisions.
Increase in DCAP Contribution Limit
The DCAP benefit provides tax savings for the care of children, a disabled spouse, or legally dependent parent during working hours.
For 2021 only, the DCAP contribution limit for qualifying dependent care expenses is increased from $5,000 to $10,500 for individuals or married couples filing jointly. It is also increased from $2,500 to $5,250 for married individuals filing separately.
For the change, the increase in the DCAP contribution limit is optional, and employers may amend their plans if they wish to implement this change. Plans may be amended retroactively, (as long as the amendment is adopted by the last day of the plan year in which the amendment is effective, and the plan is operated in compliance with the amendment’s terms beginning on its effective date.)
Please note:
Highly-compensated employees may elect to increase elections at a higher rate, which may cause discrimination issues. As a result, employers will want to consider the impact on non-discrimination requirements that this change may have.
Employers may choose to elect a maximum contribution that is less than the new contribution limit.
COBRA Subsidy for Group Health Insurance
COBRA refers to the Consolidated Omnibus Budget Reconciliation Act of 1985, and it’s a federal law that requires employers offering health care benefits to extend coverage options to people who would otherwise lose them because of job loss, leave of absence, or other qualifying events.
The second ARPA change affects COBRA regulations. Effective from April 1 to September 30, 2021, individuals who qualify for COBRA due to involuntary termination or reduction in hours are eligible for a 100% COBRA subsidy.
This means people who qualify for the subsidy won’t be required to make any premium payments during this time to maintain coverage. The 100% subsidy is calculated as the premium plus a 2% administrative fee, and it’s available to both the primary participants and eligible dependents.
This change is not optional for group health insurance. All group health plans subject to COBRA, except flexible spending accounts (FSA), must provide this coverage.
Provisions of the COBRA subsidy include:
Employers may claim a tax credit for all self-funded and fully-insured group health coverage that has been subsidized.
Eligibility will end before September 30, 2021 if the participant or dependent becomes eligible for Medicare or other group health plan coverage.
The same 60-day election period applies for individuals who had become eligible for COBRA up to 18 months prior to April 1, 2021, and either declined COBRA or dropped coverage in the period prior to April 1, 2021. Employees will have 60 days from the date the notice is sent.
Employers are required to provide notice of the availability of the COBRA subsidy and its expiration date. The Department of Labor (DOL) will provide a model notice that administrators may use within 30 days. It is likely that the DOL will consider the American Recovery and Reinvestment Act of 2009 when issuing guidance for ARPA of 2021.
Employers working with COBRA will likely want to consult their legal and benefits departments about the changes. It is also recommended to speak with your tax or benefits counsel regarding interpretation of the legislation.
To see additional legislative announcements that have come about as a result of the COVID-19 pandemic, including the American Rescue Plan Act of 2021 and other bills, please visit our Legislation Updates page here.
