Posted: March 30, 2021
On March 11, 2021, which was coincidentally the one-year anniversary of the start of the COVID-19 pandemic, Joe Biden signed the American Rescue Plan Act of 2021. This piece of legislation will impact employee benefit plans as well as the tax deductions that publicly-traded companies can take for executive compensation. Let’s take a closer look at what bill means for America's top executives moving forward. Changes made The American Rescue Plan Act (ARPA) will impact areas like COBRA subsidies and the special enrollment window, pension funding relief, employer-provided dependent care limits, and will also expand Section 162(m) of the IRS code. This will have an impact on companies, employees, and executives as far as salaries, pensions, and tax deductions are involved. Let’s break it down by each stakeholder. Impacts for companies When it comes to pension funding relief, ARPA will change the rules for sponsors of single-employer defined benefit pension plans. First, it will extend favorable interest rate provisions until 2030. Second, it will lengthen the amount of time that sponsors can pay off their plan’s underfunded amounts from 7 years to 15 years. This will make it easier for companies or plan sponsors to repay any underfunded amounts on their plans. Impacts for employees Starting on April 1, 2021, ARPA will provide up to six months of free COBRA coverage for certain “assistance eligible individuals”. Plan sponsors are expected to notify their employees who are “assistance eligible” to receive this benefit. If you’re not familiar, the Consolidated Omnibus Budget Reconciliation Act (or COBRA) offers workers or families who lose their health benefits in uncertain terms (involuntary job loss, transitioning jobs, loss of hours) the right to continue receiving group health benefits provided by their group health plan. Additionally, for the tax year of 2021 only, the limit for a dependent care flexible spending account (FSA) will be extended from $5,000 to $10,500. Employers are not required to increase this temporary limit but if they do it will offer more assistance to employees who might be feeling more financial pressure from the extra time spent with their kids due to COVID-19. Impacts for executives ARPA will also expand the IRS Code Section 162(m) which limits the tax deductions that all publicly-traded corporations can take in regard to the compensation paid to their executives. The bill refers to these executives as “covered employees”, which includes the company’s Chief Executive Officer, Chief Financial Officer, as well as the next three highest-paid officers. The limit of deductions that can be taken for “covered employees” currently sits at $1 million per year. However, starting in 2027, ARPA will also expand the number of “covered employees” so that it includes the CEO, CFO, as well as the next five highest-paid employees. Except for the CEO and CFO, the list of the next five employees is not set and can fluctuate year-to-year based on compensation. This might encourage corporations to create vastly different executive compensation structures for their highest paid employees as they will only be able to deduct up to $1 million per “covered employee”. The nuances of ARPA and how they will affect your executive compensation can be complicated and can vary widely depending on specific circumstances. Leveraging an executive compensation consultant is a great way to navigate the finer details of ARPA and ensure that executive pay is maximized to its fullest potential in the face of new legislation. To learn more about maximizing executive compensation, visit our Contact Page, or contact us directly by email at email@example.com or by phone at 415-618-6060.