The American Rescue Plan Act of 2021 – Labor, Employment and Benefits Implications

On March 11, 2021, President Biden signed the $1.9 trillion COVID-19 pandemic stimulus package known as the American Rescue Plan Act of 2021 (“ARPA”) into law.  ARPA includes COVID-19 employer and employee relief, COBRA premium subsidies, as well as relief for troubled multiemployer pension plans and funding relief for single-employer pension plans.



One of the more significant federal employment law responses early in the pandemic was the Families First Coronavirus Response Act (“FFCRA”). Under FFCRA, employers with less than 500 employees were required to provide paid leaves of absence for certain reasons related to COVID-19. In turn, payroll tax credits were made available to employers providing FFCRA leave to offset the cost.

Mandatory FFCRA leave expired on December 31, 2020. However, under a new stimulus bill (the Consolidated Appropriations Act, 2021), tax credits for FFCRA paid sick leave provided on a voluntary basis were extended to March 31, 2021. ARPA further extends such tax credits for employers providing FFCRA leave on a voluntary basis to September 30, 2021.

The tax credits available for providing FFCRA paid leave apply to 100% of “qualified sick leave wages” or “qualified family leave wages” (i.e., those wages that would be required to be paid under the FFCRA paid leave law). Of particular interest to unionized employers, ARPA increases the cap on tax credits to include certain collectively bargained defined benefit pension plan contributions as well as apprenticeship program contributions. Employers with labor contracts containing either type of contribution should coordinate with their payroll administrators and accountants to ensure the full value of payroll tax credits is taken.

ARPA expands the availability of leave for employees in a number of ways (discussed more fully, below). while creating a new restriction on employers. More specifically, ARPA creates a non-discrimination obligation for employers who wish to take tax credits for voluntarily providing FFCRA leave. The credits are not available to employers who, in the providing of such leave, discriminate: (1) in favor of highly compensated employee (as defined by existing IRS interpretations under IRC sec. 414(q)), (2) with respect to full-time status, or (3) on the basis of employment tenure. Guidance is expected to issue on the parameters of the non-discrimination requirement. For now, however, employers should be cautious with respect to providing paid leave to only certain eligible segments of the workforce.

With respect to the expanded availability of leave, ARPA broadens the scope of FFCRA leave in the following ways:

With respect to tax credits for FFCRA paid sick leave, ARPA has effectively created a new year for employers as of April 1, 2021.  Consequently, the tax credits are available to employers for paid sick leave voluntarily offered on or after April 1, 2021 even if the full available tax credit for paid sick leave has been taken for leave provided prior to April 1, 2021.

Lastly, ARPA removed the two-week unpaid leave waiting period for emergency family leave and increased the aggregate paid leave cap to $12,000, meaning employers can now take an additional $2,000 in tax credits per employee for providing qualifying leave. Yet to be released regulations and guidance are expected to clarify the extent of available tax credits, given that ARPA expanded the qualifying reasons for FFCRA paid family leave to include all qualifying reasons for FFCRA paid sick leave, leaving two sources of paid leave during the first two weeks of absence from work.


A significant benefit available under the Coronavirus Aid, Relief and Economic Security (CARES) Act was a substantial expansion of unemployment insurance benefits. The CARES Act expanded benefits for those who had exhausted their state unemployment benefits as well as non-employees (for example, independent contractors). One of the more controversial aspects of the CARES Act was the Federal Pandemic Unemployment Compensation (“FPUC”) program, which provided an additional $600 weekly benefit to individuals who also qualified for state unemployment insurance benefits. The FPUC benefit was reduced to $300 per week in the Consolidated Appropriations Act, 2021.

ARPA has extended the unemployment insurance benefits established by the CARES Act through September 6, 2021, with the FPUC benefit remaining reduced to a $300 weekly amount.


The CARES Act established an employee retention credit (“ERC”) to encourage financially distressed employers to keep employees on the payroll. The ERC was expanded under the Consolidated Appropriations Act, 2021, by enlarging the availability of the credit through the first two quarters of 2021, increasing the rate of credit from 50% to 70% and permitting employers who had received a Payroll Protection Program (“PPP”) loan to now apply for the credit (with the exception that the credit could not be claimed for wages paid with the proceeds of a PPP loan).

ARPA has further expanded the ERC through the end of 2021 and has introduced the credit to “recovery startup businesses” (i.e., those that began a trade or business after February 15, 2020 with gross annual receipts of $1 million or less). The ERC available to such a business is up to $50,000 per calendar quarter.  ARPA also expanded the ERC to “severely financially distressed employers,” regardless of size, that have experienced a decline of more than 90% in quarterly receipts.



Overview.  ARPA includes six months of a 100% COBRA premium subsidy (“COBRA subsidy”) to an “assistance eligible individual”(“AEI”) - any employee or dependent who is a COBRA qualified beneficiary (or will become one) resulting from an involuntary termination of employment or a reduction of hour (e.g., job elimination, layoff, termination) for reasons other than gross misconduct.  These rules apply to all group health plans providing major medical benefits subject to federal or state COBRA obligations and self-funded, insured, multiemployer, and governmental employer plans.[1]  These COBRA subsidies should operate similarly to the American Reinvestment and Recovery Act’s (“ARRA”) 2009 subsidies. 

How much and how long?  The COBRA subsidy is equal to 100% of the entire cost of COBRA premiums for the six-month period of April 1, 2021 to September 30, 2021 for any AEI who is enrolled in COBRA coverage during the that six-month period or enrolls during the special enrollment period described below.[2]  The COBRA subsidy terminates at the earlier of: (1) the end of the subsidy period; (2) the end of the AEI’s COBRA continuation period (i.e., 18 months); or (3) when the AEI becomes eligible for other group health plan coverage or Medicare. 

Who is an AEI?  The COBRA subsidy is available to any individual entitled to COBRA due to an involuntary termination or reduction in hours. There is no COBRA subsidy for employees who voluntarily terminate employment and dependents who lose coverage for any other reason (i.e., other COBRA qualifying events).  The COBRA subsidy will be available to any AEI who is enrolled or will enroll in COBRA on or after April 1, 2021 and before the subsidy ends on September 30, 2021.

Additionally, ARPA provides a second enrollment window for an individual not enrolled in COBRA by April 1 to enroll in COBRA as of April 1, 2021 and take advantage of the COBRA subsidy.   Here, any former employee who did not elect COBRA coverage or dropped COBRA coverage prior to April 1 but would otherwise be within his/her 18-month COBRA coverage period between April 1 and September 30, 2021, will be eligible for the COBRA subsidy during this added enrollment period.  This added enrollment period runs for 60 days after the individual receives the notice described below.  For example, a former employee who lost health coverage due to job elimination on April 15, 2020 but did not elect COBRA coverage could elect COBRA coverage during this additional enrollment window, and that COBRA coverage would be effective for the same six-month period.  For coverage to continue after September, a COBRA premium would be due. The plan must notify these individuals of their extended opportunity to prospectively elect COBRA coverage.  This added enrollment period runs for 60 days after the individual receives notice as discussed below. 

Employers, plan sponsors and plans should quickly develop a compliance plan and identify (with the assistance of PEOs, payroll providers, insurers or COBRA administrators, where applicable) any AEIs who must be notified of the COBRA subsidy (and in some cases, track how many AEls took advantage of the subsidy and for how long), to allow the employer or plan to file for a payroll tax credit.   Steps should be taken to identify those individuals who involuntarily terminated employment or who experienced reduced hours within the past 18 months who have not elected COBRA in preparation for providing a new 60-day election period for these individuals. COBRA forms will either need to be revised or supplemented to comply with the new rules, and the new notice regarding the expiration of the subsidy period will need to be issued.

What is an involuntary termination of employment?  Other than the text of ARPA and some history with COBRA premium subsidies, we do not have guidance yet on what exactly will be considered an “involuntary termination of employment” under ARPA.  Congress enacted another version of a COBRA subsidy in 2009 in response to the economic housing crisis under the 2009 ARRA, and the IRS issued guidance defining an “involuntary termination of employment.”  Under the 2009 regulations, an “involuntary termination” meant: a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request where the employee was willing and able to continue performing services.  We do not know yet how the IRS will define an involuntary termination under ARPA; however, it is likely any determination of what constitutes an involuntary termination will be based on the facts and circumstances. 

We await further guidance from the IRS and Department of Labor on the above issues as well as other grey areas: how will the COBRA subsidy apply in the case of severance or other arrangements that provide for alternative forms of continuation coverage; will states issue any rules under their state “mini-COBRA” laws; how must an employer find former employees who are AEIs; and what documentation will be required to substantiate eligibility for tax credits.  We will keep you updated on future guidance. 

What are the notice obligations?  Plan sponsors/employers must provide a notice of availability of the COBRA subsidy and the added enrollment period to AEIs. First, by May 31, 2021, all AEIs who were entitled to elect COBRA before April 1, 2021 must be notified of their new rights.[3]  Second, notice must be provided to those AEIs, entitled to an extended election period, by May 31, 2021 of the availability of the new 60-day opportunity to elect COBRA prospectively for the COBRA subsidy period.  Lastly, notice must be provided to AEIs no less than 15, and no more than 45 days, that their COBRA subsidy is ending, unless the COBRA subsidy would terminate because the AEI becomes eligible for other group health plan coverage or Medicare.   Per usual, failure to provide ARPA-compliant notices will be treated as a failure of the COBRA notice requirements.  Since employers/plan sponsors have the notice obligations, we recommend they use the model notice when it is available, subject, of course, to review of that notice for completeness.

What are the tax implications?  Under ARPA, employers in most cases (with self-insured or fully insured health plans) will receive a dollar-for-dollar reimbursement of the waived COBRA premiums for AEIs through a payroll tax credit against the employer’s quarterly taxes. If the credit exceeds the amount of payroll taxes due, the credit will be refundable when the employer submits its quarterly federal tax return (i.e., Form 941).  The COBRA subsidy is not considered income and non-taxable to the AEI.  And, in some cases, the insurer will be entitled to the tax credit, while in the case of a multiemployer self-insured health plan, the plan would be entitled to the credit.  Plan sponsors/employers must quickly begin to track and document the COBRA subsidies to be able to claim the tax credits later, where appropriate.  The IRS should be providing more guidance in the coming weeks on exactly how to claim the tax credit, like it did in 2009, and we will keep you updated.  As the above is only a legal overview and not tax advice, please consult your tax advisor concerning the tax credit specifics.


ARPA increases the dependent care flexible spending account (“FSA”) limit for 2021 from $5,000 to $10,500 (from $2,500 to $5,250 for married filing single).  An employer can amend its plan retroactively to adopt this increased limit, if it amends the plan by the end of the plan year and operates consistently with the amendment.


ARPA reduces the funding requirements for single-employer pension plans in response to COVID-19 disruptions in contribution levels and investment returns, which is very similar to the 2009 ARRA.  Basically, ARPA makes two changes with respect to the minimum funding requirements, and the effects will depend on the plan’s Pension Protection Act of 2006 funding and plan year (i.e., calendar v. fiscal year).  In lieu of the 15-year amortization period, plans may elect to amortize losses incurred in either or the first two plan years ending after February 29, 2020, over a 30-year period. Plans may also revise their asset valuation method, which is ordinarily subject to a five-year limit, to smooth the losses over 10 years, and allow the smoothed actuarial value to exceed the market value by 30%, instead of the normal 20% corridor. 


Financial Assistance for Troubled Plans

ARPA includes revised provisions of the Butch Lewis Emergency Pension Plan Relief Act of 2021, a bill that had been in discussions since 2014, providing for significant direct financial assistance to deeply underfunded multiemployer pension plans, funding rule changes for these plans, and increases the plan premiums payable to the Pension Benefit Guaranty Corporation (“PBGC”).  Many ARPA provisions and their implications will depend on future federal agency guidance to be released this summer. 

Under ARPA, the PBGC will provide special financial assistance to the approximately 185 highly distressed multiemployer pension plans meeting certain criteria.  A plan must satisfy one or more of the following criteria to be eligible for this financial assistance:

ARPA financial assistance is paid directly to plans as single lump sums in an amount determined to allow the applicant plan to remain solvent through the 2051 plan year.[4]  This financial assistance is supported by the general fund of the U.S. Treasury and paid through a new PBGC fund. This differs from the existing PBGC multiemployer financial assistance entirely supported by plan premiums paid to the PBGC. In contrast to current law requiring plans to repay PBGC financial assistance, plans will not be required to repay this ARPA financial assistance.

To receive this financial assistance, the plan must prospectively reinstate any previously reduced benefits under MPRA (including back payments for previously suspended benefits).  PBGC (with Treasury) will not prohibit other benefit reductions (including adjustable benefit suspensions), nor will it impose plan governance or funding requirements. Plans must continue to pay PBGC premiums.  They must also segregate the financial assistance from other plan assets and only use it to make benefit payments and pay plan expenses and may only invest it in investment grade bonds, unless PBGC permits otherwise. This financial assistance is disregarded when determining plans’ minimum funding requirements. 

Plans must generally apply to the Treasury and PBGC for assistance by December 31, 2025.[5]  

Withdrawal Liability

Unfortunately, ARPA does not specifically address how this new financial assistance will impact a contributing employer’s withdrawal liability, and ARPA’s impact on withdrawal liability is unclear until we receive guidance, if any.  Interestingly, ARPA removed a previous plan-favorable bill provision stating that employer withdrawal liability would be calculated without including the financial assistance for the 15 plans years after a plan received the assistance.  Under ARPA, PBGC is authorized to “impose, by regulation or other guidance, reasonable conditions on an eligible multiemployer plan that receives special assistance relating” to both “reductions in employer contribution rates” and “withdrawal liability.”  We may yet see regulations that mirror the above removed provision.  Additionally, ARPA provides that the interest rate used to calculate withdrawal liability for plans receiving assistance is limited and could be capped at approximately 5%.  The lower the interest rate used by a plan for withdrawal liability results in higher employer withdrawal liability.  We will keep you updated on future guidance.

Funding Relief

A plan may elect that its zone status for the first plan year beginning on or after March 1, 2020 and ending on February 28, 2021, or for the next succeeding plan year be the same status as for the plan year prior to the designated plan year.

Plans in either endangered, critical, or critical and declining status in the first plan year beginning during the period of March 1, 2020 through March 1, 2021, may elect to retain their same status for the following plan year, and, if elected, they are not required to update either their funding improvement or rehabilitation plan.

If the plan is projected to have sufficient assets to pay expected benefits and anticipated expenditures over the amortization period as of February 29, 2020, the plan may choose to:  (1) smooth investment losses over a period of up to 10 years in one or both of the two plan years ending after February 29, 2020, when determining the actuarial value of assets; and (2) amortize experience losses attributable to investment losses and other losses related to the pandemic (including experience losses related to reduction in contributions and employment and deviations from anticipated employment rates) in one or both of the plan years ending after February 29, 2020, over a period up to 30 years.  Current legal restrictions on plan amendments that increase benefits apply, and Treasury must rely on plan sponsors’ calculations of plan losses unless those calculations are clearly erroneous.

Plans in endangered or critical status for a plan year beginning in 2020 or 2021 may extend their funding improvement and rehabilitation period by five years.

PBGC Premiums

The PBGC is the financial backstop for retirees’ benefits under ERISA and has been chronically underfunded and forecasted to be insolvent in less than five years.  MPRA increased the plan premium rate from $12 to $26 per participant per plan year in 2014, and the rate is $31 per participant in 2021.  ARPA sharply increases the rate to $52 per participant, effective for plan years beginning after December 31, 2030.[6]

Authors: David P. Ofenloch and Scott M. Wich


[1] Although we do not know for sure until further guidance is released, the COBRA subsidy will likely not apply to dental and vision plans.  Flexible spending accounts are not subject to ARPA’s COBRA subsidy rules. 

[2] ARPA does not extend the COBRA coverage periods (i.e., 18-months).

[3] The Departments of Labor, Treasury and Health and Human Services must coordinate and issue model notices regarding the new COBRA election rules within 30 days of April 1, 2021, and a model notice regarding the expiration of an AEI’s COBRA subsidy period within 45 days of April 1, 2021.  Employers can also modify or prepare their own notices containing the following information: the availability of the COBRA subsidy and the conditions for receiving it; the forms necessary for establishing eligibility for the subsidy; the name, address and telephone number necessary to contact the plan administrator and any other person maintaining relevant information in connection with the subsidy; a description of the extended election period; and a description of the option to enroll in different coverage, if applicable.

[4] In calculating the amount of a plan’s financial assistance required to remain solvent until 2051, asset returns must generally be projected using the lesser of (a) the interest rate assumed by the plan actuary for the 2020 plan year or (b) the third segment rate from the single-employer funding rules (without regard to the 25-year average corridor) plus 200 basis points. The third segment rate from the single-employer funding rules plus 200 basis points currently results in an interest rate of 5.59%. The other actuarial assumptions will generally be the same as those used by the plan actuary for the 2020 plan year unless the plan proposes the use of different assumptions and PBGC, in consultation with the Department of Treasury, accepts the change.  The amount of financial assistance is determined without regard to whether benefits are above or below the PBGC maximum guarantee level. 

[5] The PBGC is required to publish regulations implementing ARPA’s financial assistance program within 120 days of enactment, including application details, and may impose conditions on plans that receive financial assistance, subject to certain limitations.  Under ARPA, the PBGC generally has 120 days to review an application, after which the application will be deemed to be approved if PBGC has not acted on it.  Additionally, the PBGC has authority to prioritize applications from plans within five years of insolvency, have unfunded liabilities eligible for guarantee by PBGC exceeding $1 billion, or have previously reduced participant benefits under MPRA. PBGC may restrict applications to only priority plans during the 2-year period following enactment of ARPA and may establish additional criteria for identifying priority plans.

[6] This premium rate is indexed for inflation thereafter.