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March 11, 2021

American Rescue Plan Act extends and expands COVID-19 relief legislation

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (ARPA), providing extensive and varied relief meant to mitigate the impact of COVID-19. This Alert focuses on the following tax provisions that affect employers:

  • Extending and modifying the employee retention credit
  • Extending and modifying the Families First Coronavirus Response Act paid leave credit
  • Providing a 100% COBRA subsidy
  • Temporarily increasing the income exclusion for dependent care assistance
  • Expanding the IRC Section 162(m) disallowance for deduction of certain compensation paid by publicly held corporations

Employee Retention Credit

Section 9651 of the ARPA adds new Section 3134 to the Internal Revenue Code (IRC) creating an employee retention credit (ARPA ERC), which is fundamentally an extension of the employee retention credit that was created by the CARES Act (CARES ERC) and later enhanced and extended by the Consolidated Appropriations Act, 2021 (CAA). The ARPA ERC extends the enhanced CARES ERC through the end of 2021 (the CAA had previously extended the credit through June 30, 2021). Like the CARES ERC, the ARPA ERC provides a credit against payroll taxes based on qualified wages paid by an eligible employer.

The ARPA ERC makes the following modifications to the credit, which apply prospectively to credits claimed for the third and fourth calendar quarters of 2021:

  • While the credit continues to be refundable, it is now a credit against the employer's 1.45% share of the Hospital Insurance tax (i.e. the Medicare tax), rather than a credit against the employer's share of the Old Age, Survivors, and Disability Insurance tax (i.e., the Social Security tax).
  • As under the CARES ERC, employers become eligible by experiencing (1) a full or partial suspension of operations due to certain COVID-19-related governmental orders or (2) a significant decline in gross receipts. The ARPA ERC adds a third path to eligibility for a recovery startup business (RSB). An RSB is an employer that does not qualify under either of the first two eligibility gateways and commenced a trade or business after February 15, 2020, for which the average annual gross receipts over a three-year lookback period (prorated for periods less than three years) do not exceed $1 million. While eligible employers generally are limited to a credit of $7,000 per employee per quarter, an RSB is limited to a total credit of $50,000 per quarter for all employees.
  • In defining qualified wages, the ARPA continues to distinguish between large employers that averaged more than 500 full-time employees during 2019 (2020 if the employer did not exist in 2019), and small employers under this threshold. For large employers, qualified wages continue to be wages paid to an employee who is not providing services due to the circumstances that caused the employer to be eligible for the credit. For small employers, the slightly modified qualified wages definition includes wages paid — without regard to whether the employee was providing services — during (1) the suspension period or (2) the calendar quarter for which the gross receipts test was met. Additionally, ARPA ERC modifies what constitutes qualified wages for a "severely financially distressed" employer that experienced a greater than 90% decline in gross receipts. For such an employer, whether a large or small employer, qualified wages include any wages paid during the calendar quarter.
  • The statute of limitations period for IRS assessment is extended from three years to five years.

Families First Coronavirus Response Act paid leave credit

The FFCRA required employers of fewer than 500 employees to provide paid leave to employees absent from work due to certain specified COVID-19-related reasons, and allowed a payroll tax credit to employers based on the amount of leave required to be paid (see Tax Alert 2020-0586). The CAA allowed the paid leave requirement to expire on December 31, 2021, but extended the credit through March 31, 2021, to employers who voluntarily paid leave that would have been required had the requirement been extended (see Tax Alert 2020-2938). Section 9641 of the ARPA further extends the credit (again without the associated paid leave requirements) through September 30, 2021, with certain modifications:

  • In addition to the original leave categories, leave taken because the employee is receiving or recovering from a vaccination is now also eligible for the credit.
  • Both the original leave categories and the new leave category are now eligible for treatment as paid family leave (previously limited to extended school closure leave), for which 12 weeks of leave are available. However, it is unclear whether the 12 weeks of leave are replenished, so if an employee has already used some of the family leave allotment,  the extent to which additional leave may be treated as qualified wages may require guidance.
  • The ten-day maximum amount of paid sick leave that ran from April 1, 2020 through March 31, 2021, will reset on April 1, 2021, allowing a new ten days of paid sick leave.
  • The maximum credit for paid sick leave remains capped at $511 per day for the employee's own diagnosis, isolation or quarantine, and $200 per day when the employee is caring for someone else in those circumstances.
  • The maximum amount of wages that may be taken into account per employee for paid family leave is increased from $10,000 to $12,000.
  • Eligibility for the credit is now subject to a requirement that the leave be provided in a manner that does not discriminate in favor of highly compensated employees or based on the employee's tenure with the employer.
  • Like the ARPA ERC, the credit is now against the employer's Medicare tax, rather than the Social Security tax.
  • The qualified wages are now subject to Social Security tax but the credit amount is increased by the amount of both the Social Security tax and the Medicare tax. This gross-up and the qualified health plan expenses allocable to qualified wages are not subject to the caps on the credit. The amount of the credit is included in the employer's gross income.

COBRA Premium Subsidy

Section 9501 of the ARPA subsidizes COBRA continuation coverage premiums for coverage provided to assistance-eligible individuals from April 1, 2021 through September 30, 2021. Unlike the 65% COBRA premium subsidy provided by the American Recovery and Reinvestment Act in 2009, the ARPA subsidizes 100% of the COBRA premium (which may include the 2% administrative fee allowed under IRC Section 4980B(f)(2)(C)).

An assistance-eligible individual is one who (1) has qualified for COBRA continuation coverage due to a reduction in hours or an involuntary termination in employment that is not due to the employee's gross misconduct and (2) elects COBRA continuation coverage.

Under normal circumstances, a plan administrator is responsible for providing a notice of continuation coverage when a COBRA-qualifying event occurs. From April 1, 2021 through September 30, 2021, the ARPA requires this notice to include additional details concerning the premium assistance program and imposes additional notification requirements beyond the initial notice. The ARPA allows an assistance-eligible individual an extended period to elect continuation coverage even if coverage had not been previously elected. In addition, the ARPA allows plans to permit eligible individuals to elect into certain different coverage of a same or lesser value to the individual's previous enrollment. Assistance-eligible individuals are not taxed on the amount of the premium assistance and must be reimbursed by the plan, employer or other coverage provider if they pay premiums not required by virtue of the premium assistance. The premium assistance program ends on September 30, 2021, but cuts off sooner if (1) an individual becomes eligible to enroll in certain other group health plan coverage or Medicare or (2) the individual's COBRA coverage period expires.

In connection with the premium assistance program, the ARPA adds a new IRC Section 6432, which allows a refundable credit against the employer's share of Medicare tax for the amount of premium assistance provided to assistance-eligible individuals. Depending on the type of coverage, the credit is allowed to either the multiemployer plan, the issuer of insured coverage or the sponsoring employer for all other coverage. The credit is treated as gross income to the entity. Like the extended ARPA ERC, the credit is subject to a five-year statute of limitations period.

Dependent Care Assistance

Employees may generally exclude the value of dependent care assistance up to $5,000 annually from income and wages. This exclusion applies whether the dependent care assistance is provided directly or using a flexible spending arrangement (FSA) under a cafeteria plan. Salary reduction used to fund a dependent care assistance FSA is generally forfeited if the amount is not used during the plan year; however, the CAA temporarily modified the use-or-lose rules that apply to FSAs, allowing for carryover of unused amounts. Although the IRS has informally indicated that it understood the CAA's intent to not treat dependent care FSA carryover amounts as taxable, this was unclear under the statute. Section 9632 of the ARPA resolves this ambiguity by increasing the excludable amount to $10,500 for 2021.

IRC Section 162(m)

Section 9708 of the ARPA expands IRC Section 162(m)'s disallowance for deduction of certain compensation paid by publicly held corporations, effective for tax years beginning after December 31, 2026. Prior to the change, covered employees included (1) anyone serving as CEO or CFO during the year, (2) the next three highest compensated officers, and (3) any individual who was a covered employee in any previous tax year beginning after December 31, 2016.

Section 9708 of the ARPA expands the scope of covered employees to include the five highest compensated employees — not limited to officers — that are not already treated as covered employees under (1) or (2) above. In contrast to the permanency of covered employee status for the existing group of covered employees, this new group of covered employees will not permanently retain that status for subsequent tax years.


The ARPA generally extends the duration and expands the size and scope of the relief provided to employers in prior COVID-19 legislation.

The extension of the employee retention credit through the end of 2021 significantly increases the amount of the credit available to employers that continue to be adversely impacted by the COVID-19 pandemic. Expanding the credit for businesses that were severely impacted by the COVID-19 pandemic and including startup businesses established during the COVID-19 pandemic will be particularly helpful to those businesses that have been uniquely impacted. By defining the ARPA ERC and the paid leave credits as refundable credits against Medicare tax, eligible employers may receive more of the credit in the form of a refund than under prior legislation.

The amendment to IRC Section 162(m) to apply to up to five additional individuals represents a significant expansion to the $1 million deduction limitation. In addition to increasing the number of covered employees, the amendments apply IRC Section 162(m) to non-officer employees for the first time. Many industries and sectors have non-employee officers earning significant amounts of compensation, such as sales or media employees. It is helpful to taxpayers that these individuals are determined on an annual basis and not subject to the "once covered, always covered" permanency rule. These five employees might also include officers who are covered employees only by virtue of the permanency rule, which would cause the non-officer covered employees to be fewer than five in a given year.

One important question is whether IRC Section 162(m) will continue to rely on the SEC definition of "compensation" to determine who is most highly compensated. Many taxpayers currently identify their IRC Section 162(m) covered employees in conjunction with preparing their proxy disclosures of officer compensation, which may not be well suited to assessing non-officer compensation.

The amendment will not be effective until tax years beginning after 2026, which may allow time for the Treasury and IRS to provide clarifying guidance. Taxpayers should consider how this determination could be incorporated into existing practices but may not need to take immediate action. Taxpayers should keep an eye out for any further guidance on how this determination should be made.


Contact Information
For additional information concerning this Alert, please contact:
Compensation and Benefits Group
   • Christa Bierma (
   • Stephen Lagarde (
   • Rachael Walker (
   • Bing Luke (