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The American Rescue Plan Act of 2021 (“ARPA”) was signed into law on March 11, 2021, seeks to provide relief from the global pandemic by providing assistance to businesses and individuals. This assistance is wide ranging and includes direct economic recovery payments for individuals, expanded unemployment benefits, expanded tax credits, student loan relief, and more. The ARPA also provides corporate tax relief by allowing additional deductions for highly-compensated employees under Internal Revenue Code Section 162(m), extending the limitation on excess business losses for noncorporate taxpayers under Section 461(l), and providing expanded grant funding through the U.S. Small Business Administration for distressed businesses.
Annual cost-of-living adjustment and maximum benefit on hold is removed
Legislation that would have placed the annual cost-of-living adjustment and maximum annual benefit on hold, for defined contribution and defined benefit plans respectively, has been removed from the COVID relief package (formally known as the American Rescue Plan Act of 2021 (H.R. 1319) thanks to an amendment recently introduced by Senate Majority Leader Chuck Schumer. Had the freeze been implemented, as drafted under the House-passed bill, qualified retirement plan contribution and benefit limits were expected to decrease significantly. The freeze would have reduced the incentive for employers to offer a qualified retirement plan and likely caused some employers to terminate their plans altogether. Some employers may have felt that the tax benefits no longer justify the costs of offering a qualified retirement plan or that they could better recruit and retain employees by either offering a nonqualified deferred compensation plan or increasing cash compensation instead.
Thankfully, those proposed limitations are no longer part of the pending relief package. The amendment was made possible, in large part, by the tremendous efforts of the American Retirement Association (“ARA”). The ARA lobbied for several weeks driven by industry concerns that, although the limitations would not be in effect until 2030, it would be extremely challenging to reverse the effects of this legislation in the future. Any such efforts would have been made more difficult without the support of unions, which were exempted from the freeze under the proposed package. The current language, which is now passed back to the House for approval, preserves important incentives for employers offering retirement plans and marks a significant win for the retirement industry.
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Reminder: new incentives to establish or enhance employer plans under SECURE Act
We are highlighting the ability to receive certain tax credits for establishing a new retirement plan and adding an automatic enrollment feature. Please click HERE for our SECURE Act Compliance Alert for additional information about SECURE Act provisions impacting retirement plans.
Increased tax credits. For startup plans, the tax credit for the first three years of the plan is equal to $250 per eligible non-highly compensated employee, subject to a minimum credit of $500 and a maximum of $5,000. Small employers who add automatic enrollment to their plans may also be eligible for an additional $500 tax credit per year for up to three years.
Our take: We welcome these tax credits as they encourage small businesses to establish retirement plans to benefit their employees. Additionally, the incentive for adding an automatic enrollment feature is a win-win and we believe it will result in better outcomes and higher account balances for participants.
Deadline to setup new plan. An employer has until the due date of the company tax return (with extensions) to establish a new plan for the year. Previously, the deadline was the last day of their business year.
Our take: This is another welcome change that we believe will result in greater adoption of retirement plans by small businesses. Just like an individual has up until her tax return deadline to establish an IRA effective for the prior year, now businesses will have the same flexibility to establish a qualified retirement plan.
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In addition to this, the ARPA also brings changes for both single and multiple-employer plans, including:
Single employer plans
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Extended amortization of funding shortfalls. Effective for plan years beginning in 2022, the ARPA will provide “fresh start” and new shortfall amortization bases. Installments applicable to plan years prior to 2022 will become zero. Additionally, new funding shortfalls will be amortized over a 15-year period. Plan sponsors can adopt these changes retroactively to begin in the 2019, 2020, or 2021 plan years. The new 15-year amortization period permanently changes the funding rules.
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Extended pension funding stabilization percentages for single-employer DB plan. Recent interest rate smoothing legislation, under the Bipartisan Budget Act of 2015 (“BBA”), maintained a corridor around the 25-year average of the three rate segments. Under this regime, rates started at a 10% corridor through the 2020 plan year and gradually expanded at a rate of 5% per year beginning in 2021, reaching 30% in plan years beginning in 2024 and after.
Under ARPA, the three rates used for the applicable interest rates are bounded by minimum and maximum percentages, effectively stabilizing the rates used in future years. In addition, a permanent 5% interest rate floor established for each of the three segment rates before the floor is applied.
Multiple employer plans
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Special financial relief. ARPA expands the authority of the Pension Benefit Guaranty Corporation (“PBGC”) and creates a fund to provide financial relief for troubled plans so long as they meet certain criteria. Under the new relief program, plan sponsors who apply for assistance will receive enough financial aid to cover all benefits due through 2051, with no cuts to the earned benefits of participants, and without requiring the plans to repay the funds. Plans that previously cut benefits are required to restore the benefits to the affected retirees and are not eligible to apply for a new suspension of plan benefits.
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Temporary relief. Under ARPA, plans can now choose to delay the designation to “endangered,” “critical,” or “critical and declining” plan status. Under the new regime, plans are permitted to retain their funding zone status for plan year 2019 in plan years 2020 and 2021. Further, plans in “endangered” or “critical” status do not have to update the funding status on their plan or schedules until the first plan year beginning on or after March 1, 2021.
Plans in “endangered” or “critical” status for plan year 2020 or 2021 will also be allowed to extend their funding improvement period or rehabilitation period by five years.
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Increase in PBGC premiums. ARPA also increases this annual premium to the PBGC, for multiple employer-plans, to $52 per participant beginning in plan years starting after December 31, 2030. After 2030, the premium is expected to receive annual adjustments for inflation.
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