(Updated March 11, 2021)
President Joseph R. Biden signed the American Rescue Plan Act of 2021 on March 11, which provides $1.9 trillion in relief funds across a broad spectrum of categories, including additional support for vaccine distribution, school reopenings, small business grants, tax credits, pension funds, unemployment support, health benefits, and homeowner assistance. Here are some key takeaways from the expansive bill that will be impactful to businesses across the United States.
REAUTHORIZATION OF STATE SMALL BUSINESS CREDIT INITIATIVE ACT
The American Rescue Plan Act restores the State Small Business Credit Initiative (SSBCI), which expired in 2017. The program provides federal financing to deliver flexible, affordable capital to small businesses across the country. This new iteration of the program will provide $10 billion in funding to support small businesses responding to and recovering from the economic effects of the COVID–19 pandemic.
The program will also ensure business enterprises owned and controlled by socially and economically disadvantaged individuals have access to credit and investments, will provide technical assistance to help small businesses applying for various support programs, and will allocate funds to pay reasonable costs of administering on how to file bankruptcy program. Allocation of funds by the US Department of Treasury is required within 30 days of the enactment of the American Rescue Plan Act and will be determined by focusing on each state’s respective employment level decline in 2020.
Of the amounts appropriated to the SSBCI, the US secretary of the Treasury will allocate at least $500 million to businesses with fewer than 10 employees, including sole proprietors and independent contractors. States must detail how minority-owned depository institutions and community development financial institutions will be encouraged to participate in such state’s funding programs. States receiving SSBCI funds may use them to support programs that leverage private lending to help finance creditworthy small businesses. Such lending programs include Capital Access Programs, loan guarantee programs, and venture capital funds.
Specific to the current business environment, states must provide a plan showing how they will quickly use funds to support small businesses, including business enterprises owned and controlled by socially and economically disadvantaged individuals, in responding to and recovering from the economic effects of the COVID-19 pandemic. The secretary of the Treasury will also set aside $1 billion from the SSBCI for an incentive program under which the secretary will increase allocations of funds to states demonstrating robust support for businesses owned and controlled by socially and economically disadvantaged individuals in terms of the initial program deployment.
PAYCHECK PROTECTION PROGRAM
The American Rescue Plan Act allocates an additional $7.25 billion to the Paycheck Protection Program (PPP), but it does not extend the program beyond the current expiration date of March 31, 2021. The current iteration of the PPP appropriated roughly $285 billion for small businesses, and as of the Small Business Administration’s (SBA’s) latest data report, roughly $120 billion remains of this appropriation. This means that significant additional funding for the PPP was not a priority for this legislation. However, the American Rescue Plan Act does expand PPP eligibility to include additional types of organizations.
First, the legislation makes additional not-for-profits eligible for the PPP by creating a new category called “additional covered nonprofit entity,” including those nonprofits listed in Section 501(c) of the Internal Revenue Code other than Sections 501(c)(3), 501(c)(4), 501(c)(6), and 501(c)(19) (entities under 501(c)(3) and (c)(6) are already eligible for PPP funding). These new categories of organizations are eligible to receive PPP loans so long as (1) an organization does not receive more than 15% of receipts from lobbying activities; (2) lobbying activities do not compose more than 15% of their activities; (3) the cost of lobbying activities of the organization did not exceed $1 million during the most recent tax year that ended prior to February 15, 2020; and (4) the organization does not employ more than 300 employees.
Second, the bill expands PPP eligibility to internet-only news and periodical publishers with more than one physical location, subject to a limitation of no more than 500 employees per physical location or the applicable SBA size standard. In order to be eligible, the organization would need to certify it is an internet-only news or periodical publisher and that the loan will support locally focused or emergency information.
SBA ASSISTANCE FOR RESTAURANTS AND BARS, AND SHUTTERED VENUE OPERATORS
The American Rescue Plan Act establishes a $29 billion Restaurant Revitalization Fund (RRF) to address the pandemic’s devastating impact on the food services industry. In addition to restaurants and bars, the legislation broadens eligibility for RRF grants to any place of business where patrons assemble to consume food or alcohol, including food trucks, brewpubs, and caterers. The new bill permits grants of up to $10 million per entity, or $5 million per physical location.
Grants will be calculated by subtracting 2020 revenue from 2019 revenue and, similar to the PPP, the funds may be used for a variety of eligible expenses including payroll, rent, and personal protective equipment (PPE) costs. Consistent with the Biden administration’s commitment to disbursing government funds equitably, the SBA will prioritize applications from restaurants owned and operated by women, veterans, and socially and economically disadvantaged individuals for the first 21 days of the RRF.
As part of the Biden administration’s continued efforts to sustain the live entertainment industry, the bill also sets aside an additional $1.25 billion for the Shuttered Venue Operators Grant (SVOG) program. These grants are separate from the RRF and an entity may not receive an RRF grant if it has applied for or received an SVOG.
Prior to the enactment of the American Rescue Plan Act, applicants for the SVOG could not apply for a new PPP grant on or after December 27, 2020, and also receive an SVOG. However, the American Rescue Plan Act changes this restriction to permit an entity to file for a PPP loan in 2021 and still be fully eligible to apply for the SVOG program, with the otherwise applicable SVOG amount simply being reduced by the total amount of loans guaranteed under the PPP (first draw or second draw) that are received by the eligible applicant on or after December 27, 2020.
Broadly speaking, the bill includes multiple tax-relevant provisions, including but not limited to making the first $10,200 in 2020 unemployment insurance benefits received by qualifying taxpayers nontaxable, a temporary expansion and increase of the child tax credit, and an expansion of the employee retention credit to new small businesses.
The bill contains a change in law effective in 2027 whereby publicly traded companies are denied deductions for compensation in excess of $1 million for the eight highest-paid employees, plus the chief executive officer and chief financial officer. Under current law, the deduction is denied only for the three highest-paid employees, plus the chief executive officer and chief financial officer. The five additional so-called “covered employees” will not become permanent covered employees merely because they are included in this “next five.”
Another change in law is highly relevant to the so-called “gig” or “sharing” economy. The bill amends Code Section 6050W to provide that increased reporting will be required (with a reporting trigger point of $600 instead of the prior law’s $20,000) on IRS Form 1099-K, Payment Card and Third Party Network Transactions, starting for payments in 2022. Form 1099-K is an informational return used to report certain payment transactions to the US Internal Revenue Service (IRS) to improve voluntary tax compliance. These revisions will result in an increase in reporting to the IRS by so-called “gig economy” or “sharing economy” companies, with the expected corresponding result of an increase in federal taxes paid ($8.4 billion over the next decade, per the government’s forecast).
The bill repeals Code Section 864(f) in its entirety. Congress enacted Section 864(f) in 2004 to provide taxpayers an election to treat members of a “worldwide affiliated group” as a single corporation for purposes of interest allocation. The section was expected to have a significant impact on the effect of interest expense apportionment, with the expectation that some US-based multinational companies would restructure or reconsider the borrowers under their debt arrangements. Section 864(f) was originally intended to be effective starting in 2008, but Congress has delayed the effective date three times, most recently to taxable years beginning after December 31, 2020. The repeal is expected to raise $22 billion over the next decade, per the government’s forecast, because the expectation is that Section 864(f) would have allowed US-based multinational companies to apportion excess interest expenses of all of their foreign subsidiaries to its domestic income, thereby raising the limit on the use of foreign tax credits.
SUPPORT OF EDUCATION AND TRIBAL GOVERNMENTS
The American Rescue Plan Act provides funding resources for educational institutions through both Title I and Title II, and earmarks certain funds for specific purposes and institutions including Howard University and institutions serving the deaf. While Title I relates to agriculture, the US secretary of Agriculture is required to allocate certain funds to support research, education, extension, scholarship, and internship programs as well as pathways to federal employment at specific institutions.
Universities entitled to receive support under Title I include 1890 Land Grant Universities, 1994 Tribal Land-Grant Institutions, and Insular Area Institutions as well as certain institutions that are Alaska Native, Native Hawaiian, and Hispanic serving. Title II of the American Rescue Plan Act provides funding resources to elementary and secondary schools and institutions of higher education.
The majority of funds to support elementary and secondary schools are targeted for distribution to local educational agencies with requirements for such schools to reserve certain funds and implement programming to support homeless children and youth, to address learning loss, to plan for a safe return to in-person instruction, and to provide equitable services to students in nonpublic schools with significant percentages of low-income student enrollment. Similarly, a portion of state funds are required to be used to implement programming to address learning loss or to support specified programs, activities, groups, training, supplies, and services.
In contrast, funds allocated for higher education are not directed to programming; rather, like the CARES Act funding, a significant portion of funds received must be used to provide emergency financial aid to students. To the extent institutions of higher education are not required to apply 100% of funds received to financial aid, a portion of the remaining funds must be applied to implementing practices intended to suppress the spread of COVID-19, and a portion must be directed at targeted outreach to financial aid recipients. A number of conditions, primarily intended to preserve funding and resources for high poverty and economically disadvantaged local education agencies, are attached to the funds.
The American Rescue Plan Act supports tribal governments by including them among the recipients of the Coronavirus State Fiscal Recovery Fund. Specifically, it provides $6.09 billion of pandemic-related assistance for Native American healthcare under existing programs. It also targets $20 billion to be reserved by the secretary of the Treasury for use by tribal governments, which can then apply for the funds. These funds are for mitigating the COVID-19 public health emergency and its negative economic impacts, and will allow tribal governments to cover costs and replace lost revenue, among other things.
Tribes will also welcome an earmark of $850 million for the Bureau of Indian Education, as well as support for ensuring the survival of Native American languages. The bill specifies tribes are to be included, along with states and territories, for eligibility for grants to cover child care assistance, healthcare coverage premium assistance, and similar programs.
MULTIEMPLOYER PENSION RELIEF
The Butch Lewis Emergency Pension Plan Relief Act of 2021 (EPPRA), which was included in the overall rescue plan, provides sweeping and broad-based relief to troubled multiemployer pension plans. Under EPPRA, eligible plans can receive financial assistance from a new Treasury-backed Pension Benefit Guaranty Corporation (PBGC) fund. The available financial assistance will be sufficient for eligible plans to pay all benefits for 30 years. This includes any benefits previously suspended under the Multiemployer Pension Reform Act of 2014 (MPRA), which must be restored by plans that apply for assistance under EPPRA. EPPRA’s special financial assistance will not, however, cover adjustable benefits that have been cut under a rehabilitation plan.
The assistance is payable in a single lump sum without any repayment obligation. To qualify for assistance, a multiemployer pension plan must meet one of four conditions:
- Be in critical and declining status
- Have previously imposed a benefit suspension under MPRA
- Be in critical status, have a modified funded percentage of less than 40% on a current liability basis, and have a ratio of active to inactive participants of less than 2 to 3
- Be insolvent
The PBGC may prioritize plans that are insolvent, that require more than $1 billion of assistance, or that have suspended benefits under MPRA. More information on the specific requirements of the EPPRA can be found in our ML BeneBits blog post.
DEFENSE PRODUCTION ACT FOR COVID-19 MATERIALS
The act appropriates an additional $10 billion to carry out Titles I, III, and VII of the Defense Production Act (DPA), principally with respect to COVID-19-related medical supplies and equipment. In particular, Title I authorizes the president to issue mandatory, priority-rated orders for the procurement of supplies and services, and Title III vests broad authority in the president to provide economic incentives designed to create, maintain, protect, expand, or restore domestic industrial base capabilities (see more details in our previous LawFlash).
The funds are intended for use in the purchase, production (including the construction, repair, and retrofitting of government-owned or private facilities as necessary), or distribution of medical supplies and equipment (including durable medical equipment) related to combating the COVID-19 pandemic. While the allocation of these funds is not specified in the bill, the funds are intended flexibly to cover a broad range of products, including products for the detection or diagnosis of the virus, PPE, and drugs, devices, and biological products for use in treating or preventing COVID-19. Importantly, the funds also can be used for machinery, manufacturing lines, facilities, and technologies necessary to produce these items, including in government-owned or private facilities.
After September 30, 2022, any remaining funds also can be used for any other activity necessary to meet critical public health needs of the United States, with respect to any pathogen that the president has determined has the potential for creating a public health emergency.
HOMEOWNER ASSISTANCE FUND
In an effort to assist homeowners, Congress created a $9.961 billion Homeowner Assistance Fund to be administered by the secretary of the Treasury. Amounts in the fund will be disbursed to the 50 states, the District of Columbia, Puerto Rico, and territories and tribal authorities to allow them to provide assistance to homeowners for the prevention of mortgage delinquencies, defaults, foreclosures, loss of utilities, or home energy services or displacement of homeowners experiencing financial hardship. Amounts in the fund will be available through September 20, 2025, but must be requested by the states and other recipients within 45 days of the enactment of the American Rescue Plan Act.
Amounts disbursed from the fund may be used to pay “qualified expenses,” which include the following:
- Mortgage payment assistance
- Financial assistance to allow for costs of reinstatement or other costs following a default or forbearance period
- Mortgage principal reduction
- Facilitation of mortgage interest reductions
- Payment assistance for utilities, internet service, homeowners’ and flood insurance payments, and homeowners’ association and condominium association fees
States and other recipients may also use the funds to promote housing stability, including default prevention. In each case, assistance related to mortgage loans is limited to single-family mortgage loans under the current conforming loan limits for Fannie Mae and Freddie Mac, and a majority of the amounts must be targeted to certain lower- and middle-income homeowners.
The permitted uses of amounts disbursed from the fund may have consequences for mortgage servicers and capital markets mortgage loan financing arrangements, including mortgage-backed securitizations (MBS). The permitted uses that amount to direct monetary relief to homeowners—such as mortgage payment assistance and financial assistance for the cost related to reinstatement of a loan following a default or forbearance period—may have a positive overall effect on cash flows for existing MBS and mortgage loan financing arrangements. However, it is unclear how the “facilitation” of interest rate reductions is intended to work under the program.
Typically, a rate reduction for an existing mortgage loan would require either a refinancing of the loan or lowering of the interest rate through a loan modification. Widespread or aggressive mortgage loan modifications may have an adverse effect on cash flows for existing capital markets mortgage financing arrangements, including MBS, and the consequences of such modifications may be unclear under REMIC rules.
Given the lack of clear guidelines on the use of the fund for the facilitation of interest rate reductions, mortgage servicers and securitization sponsors potentially may be faced with a host of differing modification programs from the various states.
PRESERVING HEALTH BENEFITS FOR WORKERS
The American Rescue Plan Act includes a 100% COBRA premium subsidy for 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 hours (referred to as an Eligible Individual). Employees who voluntarily terminate employment are not eligible for the COBRA premium subsidy. The COBRA premium subsidy is effective the first of the month following the date of the enactment of the legislation (April 1) and ends on September 30, 2021 (Subsidy Period).
Specifically, the COBRA premium subsidy will be available to any Eligible Individual who is enrolled in COBRA (or will enroll in COBRA) on or after April 1, 2021, and before the subsidy ends on September 30, 2021. In addition, any former employee (who is otherwise an Eligible Individual) 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, is eligible for the COBRA premium subsidy. The Subsidy Period would terminate if the Eligible Individual becomes eligible for other group health plan coverage (other than an excepted benefit) or Medicare. Eligible Individuals are required to notify the plan if they become eligible for other group health plan coverage.
The legislation includes specific requirements for employers to update COBRA notices (or include in a separate notice) describing the premium subsidy to all Eligible Individuals. Failure to provide such notice will be treated as a failure of the COBRA notice requirements. The secretary of the Department of Labor, in consultation with the secretary of the Treasury and the secretary of the Department of Health and Human Services (collectively, agencies), are required to provide model notices within 30 days of enactment. Employers must also provide notification of any early termination of the premium subsidy prior to September 30, 2021. The agencies are required to provide a model notice for this circumstance within 45 days of enactment.
Employers will receive a credit for the COBRA premium subsidy 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., IRS Form 941). As we wait for the agencies to issue model notices, employers should take swift action and work closely with their COBRA administrators to identify any Eligible Individuals who will need to be provided notification of the COBRA premium subsidy.
The American Rescue Plan Act extends unemployment benefits until September 6, 2021, and provides an additional $300 payment per week. The mixed-earner supplement provides an extra $100 per week for those whose income is a mix of self-employed and wages paid by their employer.
The act also extends the Pandemic Unemployment Assistance (PUA) program to September 6, capped at 79 weeks; the PUA program covers the self-employed, gig workers, part-timers, and others who are not eligible to receive regular unemployment benefits. There is also a new tax-free unemployment benefits allowance that will allow recipients with an annual household income of less than $150,000 to avoid paying tax on the first $10,200 of benefits.
FAMILY AND SICK LEAVE TAX CREDITS
The Families First Coronavirus Response Act required employers with less than 500 employees to provide COVID-19-related paid family leave and paid sick leave, and established corresponding tax credits. The employer mandate expired on December 31, 2020, and has not been renewed, but the American Rescue Plan Act extends the tax credits for qualifying family leave and sick leave wages that an employer voluntarily pays between April 1, 2021, and September 30, 2021.
Unlike the original and previously amended versions that allowed a credit against the 6.2% employer share of Social Security tax (up to annual wage caps) imposed under Code Section 3111(a), the current legislation would allow a credit against the 1.45% employer share of Medicare tax (without any annual wage cap) imposed under Section 3111(b). Additionally, the act makes leave taken due to a COVID-19 vaccination qualify; creates a reset date for counting paid sick leave (March 31, 2021); increases the total number of days of eligible family leave from 50 days to 60 days (which in turn increases the total amount of wages eligible for tax credit from $10,000 to $12,000 (plus health plan expenses properly allocable to qualifying leave); and allows 501(c)(1) governmental organizations to participate. The current legislation also gives the IRS five years from the tax return filing date to audit claimed tax credits, up from the standard three-year statute of limitations on assessment provided under Section 6501.