[Client Alert] IRS Clarifies Cafeteria Plan Flexibility into 2022: Amendments Required to Take Advantage

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (also known as the Consolidated Appropriations Act, 2021 or CAA) was signed into law on December 27, 2020. With regard to flexible spending accounts (FSAs), Section 214 of the CAA provided great flexibility for plan years 2021 and 2022. Please see our January 11, 2021 Client Alert. However, tax consequences of these relaxed rules were unclear.

On February 18, 2021, the IRS provided the necessary clarity by releasing Notice 2021-15.

Notice 2021-15 imposes some additional limitations and provides some expansions to Section 214 of the CAA. Significantly, the Notice expands the mid-year change in election relief to group health plans as long as certain requirements are met. The Notice further addresses the impact on HSAs, COBRA, and nondiscrimination testing with regard to FSA carryovers and grace periods. Moreover, it tightened the plan amendment timeline. Finally, it allows additional time for health FSA and HRA plans to be amended to include OTCs and menstrual care products.

The Notice reiterates the loosened rules as provided in the CAA, with the following clarifications:

Expanded Carryover Rules

  • Carryover to the 2021 Plan Year: This provision allows any unused benefits or contributions in both dependent care and health FSAs from plan years ending in 2020 to be carried over to the plan year ending in 2021;
    • The carryover must follow rules similar to the health FSA rules… however, while health FSA carryovers are normally subject to a $550 cap [as indexed], the Notice specifically states that any unused benefits or contributions may be carried over.
    • Significantly, dependent care FSAs were not previously allowed to have a carryover provision.
  • Carryover to the 2022 Plan Year: This provision allows any unused benefits or contributions in FSAs from plan years ending in 2021 to be carried over to the plan year ending in 2022;
    • We find this provision important especially in situations involving the dependent care FSAs. These FSAs have a maximum reimbursement of $5,000 per calendar year in order to be excluded from gross income.  See Code section 129(a). If an employee is allowed to carry over unused contributions into 2021 from 2020, but had also elected a full $5,000 for plan year 2021, s/he would have an overfunded account. This can be handled in one of two ways: (1) carrying over the extra funds from 2021 to 2022, and/or (2) prospective election changes for FSAs for plan years ending in 2021 without regard to the strict status change rules (see the Change in Election section below). With regard to the latter, employees can reduce their dependent care election for 2021 and prevent future contributions from being made.
      • Note: While Example 3 of the Notice indicates that more than $5,000 can be reimbursed, we recommend exercising caution here. Code section 129(a), which clearly limits the dependent care exclusion from gross income to $5,000 of services rendered during a taxable year, was not amended. Code 129(a)(2)(A) says: “The amount which may be excluded under paragraph (1) for dependent care assistance with respect to dependent care services provided during a taxable year shall not exceed $5,000.”
    • While widely understood, the Notice clarifies that carryover of amounts in a general-purpose FSA will make an employee ineligible for HSAs. Employers may amend their plans to convert general-purpose FSAs to ones compatible with HSAs (limited-purpose or post-deductible) or may amend their cafeteria plans to allow employees to opt out of the carryover feature to preserve their eligibility for HSAs.
    • This limited relief allows the Expanded Carryover to be adopted, regardless of whether the plan currently has a grace period or carryover or not (having carryovers and grace periods in the same years normally would not be allowed – see Notice 2013-71).
    • Moreover, the Notice provides that an employer may limit the carryover amount and may limit the carryover to a specified date during the plan year.
    • Plan amendments are required.
  • However, an employer may not adopt both the Extended Grace Period and Expanded Carryover rules with respect to a particular FSA.

Extended Grace Periods

  • Grace Periods: Health or dependent care FSAs may adopt an extended grace period for plan years ending in 2020 or 2021, which is extended from the traditional two months and 15 days to a full 12 months after the end of such plan year in order for unused benefits or contributions to be utilized.
    • As with the Expanded Carryovers, Extended Grace Periods in a general-purpose FSA will make an employee ineligible for HSAs. Employers may amend their plans to convert general-purpose FSAs to ones compatible with HSAs (limited-purpose or post-deductible) or may amend their plans to allow employees to opt out of the grace period feature to preserve their eligibility for HSAs.
    • This limited relief allows the Extended Grace Period to be adopted, regardless of whether the plan currently has a grace period or carryover or not (having carryovers and grace periods in the same years normally would not be allowed – see Notice 2013-71).
    • An employer may limit the grace period to a specified date during the plan year.
    • Plan amendments are required.
  • Post-Termination Health FSA Reimbursements: Health FSAs are now allowed to continue to reimburse former participants for claims incurred post-termination similar to dependent care FSAs, namely:
    • Employees who ceased participation in the plan during calendar years 2020 or 2021 may continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which participation ceased (including any grace period).
    • Cessation of participation includes termination of employment, change in employment, or a new election during calendar year 2020 or 2021.
    • This is only allowed if Extended Grace Period is adopted. It is not applicable for Expanded Carryovers…
    • COBRA still applies.
    • An employer may limit this to a specified date during the plan year.
    • Employers may limit the amount in a health FSA to the amount of contributions made by the employee from the beginning of the plan year in which the employee ceased to be a participant (i.e., not including carryover/grace period amounts).
    • Participation in a general-purpose FSA will make an employee ineligible for HSAs. Employers may amend their plans to convert general-purpose FSAs to ones compatible with HSAs (limited-purpose or post-deductible) or may amend their plans to allow employees to opt out of the extended participation feature to preserve their eligibility for HSAs.
    • Plan amendments are required.
  • However, an employer may not adopt both the Extended Grace Period and Expanded Carryover rules with respect to a particular FSA.

Dependent Care FSA Age Out Rule

  • Dependent Care FSA Age Out Rule: In order for eligible employees to receive reimbursement for dependent care assistance, their dependent must be under the age of 13 when the expenses were incurred. However, for employees who were enrolled in the dependent care FSA (as long as the regular enrollment period was on or before January 31, 2020), age 14 is substituted for age 13 for the last plan year, and, if the employee had an unused balance in the FSA for such plan year, age 14 may also be substituted for the subsequent plan year with respect to those unused amounts.
  • Plan amendments are required.

Nondiscrimination

  • Amounts available due to either the Expanded Carryover or Extended Grace Period, as well as the Dependent Care FSA Age Out Rule, are not taken into account for Section 125 and/or Section 129 nondiscrimination testing. However, otherwise, the nondiscrimination rules remain in effect.

Normal Rules Resume for Plan Years Ending In/After 2022

  • Normal FSA rules resume for plan years ending in or after 2022,
    • Calendar year plans with regular grace periods will allow all amounts remaining at the end of the 2022 plan year to be used during the first 2.5 months of 2023.
    • Calendar year plans with regular carryovers will allow up to $550 (as inflated) to be carried over and used in any month of 2023.
    • Carryovers, as previously, will only be allowed for health FSAs.

Change in Election

  • Change in Election for FSAs: Similar to IRS Notice 2020-29, but for plan years ending in 2021, health and dependent care FSAs may allow employees to make mid-year election changes prospectively without regard to the rigid change in status rules Under Treas. Reg. 1.125-4.
  • Change in Election for Group Health Plans (health / dental / vision):
    • Although the CAA did not so provide, Notice 2021-15 also allows mid-year changes under a cafeteria plan for group health plans without regard to change in status rules as long as certain requirements are met.
    • Similar to relief provided by Notice 2020-29, an employer may amend one or more of its Section 125 cafeteria plans to allow employees to:
      • (1) make a new election for employer-sponsored health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage;
      • (2) revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage);
      • (3) revoke an existing election for employer-sponsored health coverage on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer.
    • The Notice includes sample written attestation language.
  • Plan amendments are required.
  • The Notice clarifies that health FSAs may only be used for medical care expenses and dependent care FSAs may only be used for dependent care expenses.
  • Employers can limit election changes in a plan year to increases in coverage, decreases in coverage, number of changes, and others.
  • Under this relief, employers may allow employees to change from general-purpose health FSAs to HSA-compatible FSAs for a portion of the year.
  • No cash outs of FSAs are allowed.

COBRA

  • The Notice clarifies the application of COBRA with regard to these unique changes:
    • Extended Grace Period: Health FSA spend down amounts for terminated employees will not prevent individuals with qualifying events from having a loss of coverage (i.e., they will still have the right to COBRA), and the employer must provide the COBRA notice.
    • Expanded Carryover or Extended Grace Period: If a terminated employee qualifies for COBRA, s/he may elect and access the additional funds made available due to the carryover or grace period. However, these excess amounts will not be included when determining the applicable COBRA premium.

Amendments

  • To allow any of the above provisions, the cafeteria plan or arrangement must be amended to allow for such provisions.
  • Rarely are cafeteria plan amendments allowed to take retroactive effect, however, this Notice provides some of those rare opportunities. A cafeteria plan amendment to adopt one of the above provisions may be implemented retroactively if:
    • (1) the amendment is adopted not later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective, and
    • (2) the plan or arrangement is operated consistent with the terms of the amendment during the period beginning on the effective date of the amendment and ending on the date the amendment is adopted.
  • For a calendar year plan, if 2020 FSA amounts carry over to 2021, the amendment must be adopted by December 31, 2021. For a non-calendar year plan where the last day of the applicable plan year ends in 2021, the plan amendment must be adopted by December 31, 2022.
  • With regard to amendments to allow over-the-counter drugs and menstrual care products to be reimbursed from health FSAs, the Notice also clarifies that retroactive amendments are allowed:
    • Under the CARES Act, FSAs/HRAs (and HSAs) may reimburse over-the-counter drugs and menstrual care products incurred after December 31, 2019 if the FSA/HRA is amended. Typically, as mentioned above, Code section 125 only allows reimbursement after the plan is amended (and Code section 105(b) only allows exclusion from gross income if the plan covers the expense on the date the expense was incurred). However, this Notice clarifies amendments and coverage can be retroactive to January 1, 2020.

Form W-2 Reporting

  • Amounts contributed to dependent care FSAs are required to be reported in Box 10 (the employee’s salary reduction amount elected plus any employer matching contributions).  However, this does not need to include account amounts that remain available during the grace period. The Notice clarifies that this rule continues to apply for with regard to amounts available due to Expanded Carryovers and Extended Grace Periods.

Conclusion

Obviously there are numerous relaxed rules contained within this Notice, each with its own set of requirements and implications. As always, consultation is important to determine if these changes will be of benefit to employers and their employees. Many factors should be considered, such as nondiscrimination rules, adverse selection with allowing mid-year changes, whether extending health FSA reimbursement provisions will negatively affect health savings accounts, and additional required employee communications.

Plan sponsors must determine whether they wish to proceed with any of the above provisions, largely in part depending on whether typical FSA rules would result in unprecedented forfeitures due to the pandemic. If so, they must communicate such provisions with their workforce and must administer the cafeteria plan or arrangement accordingly as of the amendment’s effective date, even if the amendment is adopted at a later date.

As you are well aware, the law and guidance are rapidly evolving in this area. Please check with your Fraser Trebilcock attorney for the most recent updates.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.

[Client Alert] Outbreak Period Nightmare: Employee Benefit Deadline Extensions Now Based on Individual Case-by-Case Basis

Employee benefit plan administration is no small feat. However, it is becoming more and more difficult, especially with pandemic related modifications. As you may recall from our previous Client Alert regarding the Outbreak Period, various benefit deadlines were extended due to COVID-19. Plans could not deny certain benefits or impose certain deadlines during the designated Outbreak Period (i.e., March 1, 2020 through 60 days after the National Emergency ends (or another specified date)). However, when the Outbreak Period ends has been a lingering question recently, and the Department of Labor has just answered it in a way that may make plan administrators’ heads spin.

In summary, the period of time which must be disregarded for certain benefits deadline purposes (such as HIPAA special enrollment, as well as certain COBRA and claims procedure due dates) will now end on the earlier of: (a) 1 year from the date that the individual or plan was first eligible for the particular relief, or (b) 60 days after the announced end of the National Emergency (the end of the Outbreak Period). What does this mean? It means that plan administrators must keep track on a case-by-case basis of each individual who would have had a deadline imposed on/or after March 1, 2020 but for the 2020 relief, the date of the original deadline, and track one year from that date (unless the Outbreak Period ends earlier).

Background

Last year when the pandemic hit, and to assist plan participants and beneficiaries, employers and other plan sponsors, plan fiduciaries, and other service providers of employee benefit plans impacted by the COVID-19 pandemic, the U.S. government took the following action as authorized by ERISA Section 518:

2020 Disaster Relief Notice

On April 28, 2020, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) issued EBSA Disaster Relief Notice 2020-01 (Disaster Relief Notice). The Disaster Relief Notice provided deadline relief and other guidance and extended the time for plan officials to furnish benefit statements, annual funding notices, and other notices and disclosures required by Title I of the Employee Retirement Income Security Act of 1974 (ERISA).

2020 Joint Notice

Additionally, on April 28, 2020, the Department of Treasury, the Internal Revenue Service (IRS), and EBSA issued a joint notice which extended certain time frames affecting participants and beneficiaries under ERISA and the Internal Revenue Code (Joint Notice). The Joint Notice extended time frames affecting a participant’s right to group health plan coverage during the COVID-19 outbreak, special enrollment periods, and COBRA continuation of such coverage. Time periods for filing claims for benefits, appealing denied claims, and external review periods were also extended.

The Joint Notice is applicable to all group health plans, disability plans, other employee welfare benefit plans, and employee pension benefit plans subject to ERISA or the Code. Specifically, the Joint Notice provided that these plans must disregard the period from March 1, 2020 until sixty (60) days after the National Emergency ends (or other specified date) when determining certain deadlines for plan participants, beneficiaries, qualified beneficiaries, and claimants. This period is called the Outbreak Period. In particular, plans must disregard the Outbreak Period for the following due dates:

  • HIPAA Special Enrollment
  • COBRA Election Period
  • COBRA Premium Payment Due Date
  • Date for Individuals to Notify the Plan of Qualifying Events or Disability Determinations
  • Claim Procedure Date for Individuals to File A Benefit Claim
    • Keep in mind health FSA runout periods and forfeitures are also delayed during this period
  • Claim Procedure Date for Claimants to File An Appeal
  • Date for Claimants to File A Request for External Review
  • Date for Claimants to Perfect A Request for External Review

Note: The Joint Notice only extended the claims procedure deadlines for claimants; it did not explicitly extend the date by which a plan administrator had to respond to claims and appeals. However, the plan administrator’s deadlines for issuing such adverse benefit determination on claims and appeals would appear to fall within the general notice and disclosure relief provided by the Disaster Relief Notice. 

Additionally, for purposes of group health plan obligations, the Outbreak Period is disregarded for the following:

  • Date to Provide a COBRA Election Notice

Employers and Plan Sponsors have had to pay close attention to these deadlines as they can have significant administrative and economic impacts.

Lingering Questions

However, many have questioned whether the deadline extension would end on February 28, 2021 due to statutory provisions within ERISA and the Internal Revenue Code stating that with such declared disasters, the Secretaries of Labor and Treasury may provide that periods of time up to one year may be disregarded when determining certain deadlines. That one year period from March 1, 2020 would have expired February 28, 2021.

However, the Department of Labor answered at the last hour, and unfortunately, the difficulty of these previous administrative functions has just been magnified.

Answer: EBSA Disaster Relief Notice 2021-01 (Released Friday, February 26, 2021)

On Friday, February 26, 2021, the Department of Labor released EBSA Disaster Relief Notice 2021-01. The Departments of Treasury, IRS and HHS have reviewed and concur with this guidance.

Instead of ending the disregarded periods on February 28, 2021, or instead of extending the period of disregarded periods to a future date certain, the Department of Labor instituted a case by case analysis, applicable to individuals and plans for whom timeframes were extended. Specifically, individuals and plans who are subject to the relief afforded under the 2020 Disaster Relief Notice and the 2020 Joint Notice as described above will have the applicable periods under the Notices disregarded until the earlier of:

(a) 1 year from the date they were first eligible for relief, or
(b) 60 days after the announced end of the National Emergency (the end of the Outbreak Period).

On the applicable date, the timeframes for individuals and plans with periods that were previously disregarded under the Notices will resume. In no case will a disregarded period exceed 1 year.

Notice 2021-01 provides examples to illustrate application of the above:

If a qualified beneficiary, for example, would have been required to make a COBRA election by March 1, 2020, the Joint Notice delays that requirement until February 28, 2021, which is the earlier of 1 year from March 1, 2020 or the end of the Outbreak Period (which remains ongoing). Similarly, if a qualified beneficiary would have been required to make a COBRA election by March 1, 2021, the Joint Notice delays that election requirement until the earlier of 1 year from that date (i.e., March 1, 2022) or the end of the Outbreak Period. Likewise, if a plan would have been required to furnish a notice or disclosure by March 1, 2020, the relief under the Notices would end with respect to that notice or disclosure on February 28, 2021. The responsible plan fiduciary would be required to ensure that the notice or disclosure was furnished on or before March 1, 2021. In all of these examples, the delay for actions required or permitted that is provided by the Notices does not exceed 1 year.

The Department of Labor further reiterates concerns over COVID-19 related problems that plan participants and beneficiaries may encounter. In such vain, the Department states as follows:

  • plan fiduciaries should make reasonable accommodations to prevent the loss of or undue delay in payment of benefits in cases where pandemic delayed deadlines are reinstated; and
  • plans should take steps to minimize the possibility of individuals losing benefits because of a failure to comply with pre-established time frames, such as:
    • affirmatively sending a notice regarding the end of the relief period;
    • reissuing or amending disclosures regarding the end of the relief period and the time period in which participants and beneficiaries are required to take action, e.g., COBRA election notices and claims procedure notices;
    • reminding participants and beneficiaries who are losing coverage under ERISA group health plans that other coverage options may be available to them, including the opportunity to obtain coverage through the Health Insurance Marketplace in their state.

The Department of Labor understands that full and timely compliance with ERISA’s disclosure and claims processing requirements by plans and service providers may not always be possible due to the end of the relief period. Good faith compliance will be taken into consideration.

Conclusion

The case-by-case determinations were not anticipated last year and will require continual monitoring and possibly enhanced recordkeeping, especially if initially imposed deadlines were not accurately recorded at the time due to the deadline delay. Plan sponsors should promptly speak with their benefit and COBRA administrators to ensure the new guidance can be followed. And, as mentioned by the Department of Labor, group health plan communications regarding these deadline changes should be made as quickly as possible.

As you are well aware, the law and guidance are rapidly evolving in this area. Please check with your Fraser Trebilcock attorney for the most recent updates.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.

Governor Whitmer Issues New Order on Capacity Limits in Michigan

Under a new Order issued by Governor Whitmer on March 2, 2021, the following capacity limits were changed:

    • Restaurants and bars can go to 50% capacity and 100 people with an 11 p.m. curfew, up from the 25% capacity and 10 p.m. curfew.
    • Retail is now allowed to be at 50% capacity.
    • Indoor residential gatherings are now up to 15 people from three households, an increase from the previous 10 people from two households, while outdoor residential gatherings can now include up to 50 people.
    • Public meetings and other small indoor gatherings may resume with the allowance of up to 25 people for indoor non-residential gatherings where people interact across households.
    • Exercise facilities can go to 30% capacity with restrictions on distancing and mask requirements.
    • Casinos are now allowed to be at 30% capacity.
    • Outdoor non-residential gatherings where people interact across households are permitted up to 300.
    • Indoor entertainment venues are allowed to be at 50% capacity, up to 300 people.
    • Indoor stadiums and arenas are allowed to have 375 if seating capacity is under 10,000; 750 if seating capacity is over 10,000.
    • Outdoor entertainment and recreational facilities may host up to 1,000 patrons.

The new Order is effective Friday, March 5, through April 19, 2021.

If you have questions, please contact Ed Castellani or your Fraser Trebilcock attorney. When it matters in Michigan, Fraser Trebilcock is the trusted advisor for businesses and individuals facing legal and regulatory challenges, and our capabilities extend to wherever clients require counsel.

Fraser Trebilcock Business Tax Attorney Edward J. CastellaniEdward J. Castellani is an attorney and CPA who represents clients involved with alcohol beverages as a manufacturer, wholesaler, or retailer. He leads the firm’s Business & Tax practice group, and may be contacted at ecast@fraserlawfirm.com or 517-377-0845.

CDC Eviction Moratorium Declared Unconstitutional

On Thursday, February 25, 2021, the United States District Court for the Eastern District of Texas issued a declaratory ruling holding that the current CDC eviction moratorium is unconstitutional. For details on the moratorium and applicable CDC order please see my prior article “The DHS – CDC September Surprise; The Order to Temporarily Halt Residential Evictions.”

The general terms of the CDC Moratorium originally appeared in the CARES Act in March of 2020. Upon expiration of the CARES Act moratorium at the end of July, 2020, and the pending expiration of state-imposed moratoria, the CDC September moratorium was issued. That September CDC moratorium was scheduled to expire on December 31, 2020. That December 31 date was extended through federal legislation to January 31, 2021. That January 31 date was again extended by the CDC, with support of the Biden Administration, under an extension that sought to keep the moratorium in place through March 31, 2021.

The Michigan Supreme Court, through administrative action, ruled that Michigan courts would honor the CDC moratorium on October 22, making it, effectively, the law of Michigan. See here.

However, Terkel et al., v. Centers for Disease Control and Prevention et al., No. 6:20-cv-00564 (E.D. Tex., Feb 25, 2021; Hon. J. Campbell Barker) held that the Constitution’s Commerce Clause did not support or justify the CDC moratorium. The court did not address state power to enact or impose such moratoriums, and indeed, cited a long history of such state prohibitions going back to at least the great Depression. The court did not expressly order any federal agency not to enforce the CDC moratorium because attorneys arguing the matter for the Department of Justice indicated on the record that the government would honor the declaration.

The federal government has appealed this ruling according to the Justice Department’s website: Department of Justice Issues Statement Announcing Decision to Appeal Terkel v. CDC | OPA | Department of Justice. The Justice Department is taking the position that this ruling only applies to the specific parties in that case and that it does not strike the CDC Moratorium nationwide. This declaratory judgment is not strictly binding precedent in Michigan courts but may be cited, of course, as persuasive authority. It is uncertain whether the Michigan Supreme Court will do anything to update its October, 2020 administrative order as a result.

If you are a landlord in Michigan and seek further guidance on this matter please contact Jared Roberts at Fraser Trebilcock.

Jared Roberts is a shareholder at Fraser Trebilcock who works in real estate litigation and transactions, among other areas of the law. Jared is Chair of the firm’s Real Estate department, and also “walks the walk” as a landlord and owner of residential rental properties and apartments in Downtown Lansing. He may be reached at jroberts@fraserlawfirm.com and (517) 482-0887.

Second Stimulus Bill PPP Loan Changes and Eligibility for Second Loans

The Paycheck Protection Program (“PPP”) was created as part of the CARES Act, passed last spring, which amended the Small Business Act (“SBA”) to provide short term loans to companies with fewer than 500 employees. On December 27, 2020, President Trump signed the 2021 Consolidated Appropriations Act, which also contained a stimulus relief bill. Part of that bill was the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act (the “Act”), which made changes to all PPP loans, re-opened the PPP program for new loans, and allowed certain borrowers to obtain a second PPP loan.

This article summarizes some of the key provisions of the Act that impact all PPP loans, as well as those related specifically to second PPP loans.

Existing PPP Loans

  • Tax Treatment: Tax deductible expenses used to generate forgiveness of PPP loans may be taken to reduce taxable income.
  • Covered Period Flexibility: PPP borrowers may set the length of the “Covered Period” for purposes of PPP loan forgiveness at any length between 8 and 24 weeks.
  • EIDL Advance Does Not Affect Forgiveness: Under the CARES Act, PPP forgiveness was reduced by the amount of any Economic Injury Disaster Loan advance received. The Act repealed this provision.
  • Simplified Forgiveness: A new simplified forgiveness process for PPP loans of not more than $150,000 was established, including a one-page forgiveness application.
  • Expanded Forgivable Uses of PPP Loan Proceeds: The Act adds four additional categories of expenses that are now eligible for forgiveness under PPP loans, including covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures.

Second PPP Loans for Eligible Borrowers

  • Eligibility: In order to be eligible to receive a second PPP loan, a borrower must:
      • Have 300 employees or less;
      • Have used or will use the full amount of their first PPP loan; and
      • Demonstrate at least a 25 percent reduction in gross receipts in any quarter of 2020 relative to the same 2019 quarter.
  • Second PPP Loan Terms: Borrowers may receive a loan amount ($2 million or less) up to 2.5 times average monthly payroll costs in the one year prior to the loan or the calendar year. Borrowers in industries assigned to NAICS code 72 (Accommodation and Food Services) may receive loans of up to 3.5 times average monthly payrolls costs.
  • Loan Forgiveness: Borrowers of a second PPP Loan are eligible for loan forgiveness equal to the sum of their payroll costs, covered mortgage, rent, and utility payments, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures incurred during the covered period.

Conclusion

For small to medium-sized businesses in many sectors of the economy that are still hurting from the COVID-19 fallout, the additional financial relief, and simplified processes for requesting forgiveness of loans, are welcome developments. If you have any questions about the Act and its implications, please contact Fraser Trebilcock shareholder Paul McCord.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

FHEO Notification – Gender Discrimination

On February 11, 2021, the U.S. Department of Housing and Urban Development (HUD) issued a Memorandum Implementing Executive Order 13900 on the Enforcement of the Fair Housing Act. The Executive Order addresses the U.S. Supreme Court’s recent decision in Bostock v Clayton County. The Bostock decision prohibits discrimination on the basis of sexual orientation and gender identity.

HUD’s Office of General Counsel concluded that the Fair Housing Act’s sex discrimination provisions are comparable to Title VII of the Civil Rights Act of 1964 (the subject of Bostock) and because of that discrimination because of sexual orientation and gender identity is prohibited in the administration of HUD’s various programs.

HUD’s Office of Fair Housing and Equal Opportunity (FHEO) now will take and investigate sex discrimination complaints including those because of gender identity or sexual orientation. Local organizations and agencies that receive HUD grants must also comply with this new requirement, among other changes in HUD programs to implement this policy change.  This would mean, among other things, that HUD will no longer discriminate against transgender homeless people.

We expect to see reinstatement of HUD’s 2013 Affirmatively Furthering Fair Housing Rule now that this Memorandum has been issued.

Click here to view the HUD Memorandum:

Stay tuned for more information on changes in HUD programs from Fraser.

If you have any questions, please contact Mary Levine.

Mary P. Levine is an attorney with Fraser Trebilcock, focusing on affordable housing and community development. Mary was the former President and Secretary of the Greater Lansing Housing Commission (GLHC). She can be reached at mplevine@fraserlawfirm.com or (517) 377-0823.

Federal Court Rules in Favor of Restaurant Group for Insurance Coverage Related to Loss of Business Income Due to COVID-19 Shutdown Orders

In one of a series of closely watched cases concerning the extent of insurance coverage available to businesses who have suffered damages as a result of the COVID-19 crisis, a federal district court recently ruled in favor of a group of restaurants that were ordered closed by government authorities.

The U.S. District Court for the Northern District of Ohio ruled in favor of the policyholders on cross-motions for summary judgment in Henderson Road Restaurant Systems, Inc., dba Hyde Park Grille, et al. v. Zurich American Ins. Co., No. 1:20 CV 1239, 2021 WL 168422 (N.D. Ohio Jan. 19, 2021). In the Henderson case, the court ruled that business interruption coverage was available to the restaurant group under a policy issued by Zurich American Insurance Company (“Zurich”).

The property policy at issue provided coverage for suspension of operations caused by order of civil authority or a government order that prohibited access to the covered premises. The policy required that the suspension result from “direct physical loss of or damage to” property located within one mile from the covered premises.

The parties disagreed as to whether such “direct physical loss of” or “damage to” the policyholders’ restaurants occurred under the circumstances. Ultimately, the court sided with the policyholders about the meaning of the phrase “direct physical loss of” the real property, construing what it found to be ambiguities in the language in the policyholders’ favor.

The policyholders argued that they “lost their real property” when state shutdown orders were issued that prevented the properties from being used for their intended purposes as dine-in restaurants. Since the policy language was susceptible to this interpretation, and ambiguities are strictly construed against the insurer in Ohio, the court ruled that Zurich was obligated to provide business income coverage since the policy language could be interpreted in the policyholders’ favor.

The court rejected Zurich’s argument that coverage shouldn’t be available because the restaurants could still conduct carry-out business, finding it unreasonable to expect that the restaurants, which previously relied almost exclusively on in-person dining, should be expected to shift their businesses to a carry-out model. The court also rejected Zurich’s assertion that the policy required a permanent loss.

Zurich next argued the applicability of two exclusions to coverage. First, Zurich argued that a microorganism exclusion precluded coverage. However, the court rejected the microorganism exclusion’s application, finding there was no coronavirus at the restaurants themselves and that “it was clearly the government’s orders that caused the closures,” not the coronavirus. Moreover, the court noted that the parties had stipulated that “none of Plaintiffs’ Insured Premises were closed as a result of the known or confirmed presence of SARS-CoV-2 or COVID-19 at any of the Insured Premises.”

Zurich also argued that the policy’s loss-of-use exclusion should exclude coverage. The court rejected this argument, as well, ruling that “the Loss of Use exclusion would vitiate the Loss of Business Income coverage.”

We will continue to monitor and provide updates on other court decisions happening across the country on the extent of insurance coverage for losses related to COVID-19. If you have any questions about these issues, please contact Thad Morgan, Fraser Trebilcock’s Litigation Department Chair.

Morgan, Thaddeus.jpgThaddeus E. Morgan is a shareholder with Fraser Trebilcock and formerly served as President of the firm. Thad is the firm’s Litigation Department Chair and serves as the firm’s State Capital Group voting representative. He can be reached at tmorgan@fraserlawfirm.com or (517) 377-0877.

Out-of-State Workers Create Unanticipated Challenges for Employers During the Pandemic

The significant increase in remote workers due to COVID-19 has created unanticipated new challenges and questions for many employers, including: What are the state business qualifications, licensure, tax and employment law compliance implications for employing remote out-of-state workers?

The new work-from-home model ushered in over the last nine months has led many workers to disperse from the states where their employers are physically located to new jurisdictions. These cross-border work arrangements raise tax and employment law issues for employers and employees alike.

Employers “Doing Business”

Employers with facilities in only a single state may nevertheless have multiple obligations in other states. Pre-COVID, those obligations were typically known and planned; remote work across state lines opens new exposure.

In general, an entity is deemed to be “doing business” in any state where it has a non-insignificant and non-temporary business presence. Work performed by Company employees may be a sufficient nexus or presence for imposition of foreign-state regulation.

  1. Qualification to do Business; Licensure: Registration in the home state of an enterprise does not necessarily allow that business to have a significant and continuous presence in another state yet avoid regulation. The enterprise may need to file for qualification to be permitted to maintain a presence. Similarly, if an enterprise is, or its workers are, required to be licensed to do business or provide a service in the home state is it not unlikely that licensure in the foreign state may be required or advisable. Other unanticipated state-specific or even locality-specific obligations may also arise.
  2. Taxation: Doing business in a foreign state almost certainly imposes on the enterprise tax reporting and liability obligations of the foreign state – this of course is a state revenue issue. Doing business in a foreign state can subject the employer to that state’s various tax obligations including income, gross receipts, unemployment, and sales and use taxes.
  3. Tax Withholding and Remittance: Typically, the employer’s tax withholding obligation is owed to the jurisdiction where taxed work is actually performed. However, this general rule is subject to numerous exceptions, state-to-state reciprocity agreements, and fact-specific rulings or other considerations.

Note that some states have temporarily waived certain tax obligations for out-of-state employers with employees temporarily working remotely as a result of the pandemic. Nevertheless, even in those states the “home state” employer may still have to withhold and remit foreign-state income taxes on behalf of their out-of-state employees.

  1. Workers’ Compensation: Every state requires every employee to be covered by workers’ disability compensation insurance. Coverage may, or may not, follow the remote worker, and the particular situation of each remote worker’s duties in light of the laws of each involved foreign state need to be considered. Liability may be managed by limitation of duties and/or securing appropriate state-specific insurance coverage.

Tax Issues for Employees

Remote-working employees who during the pandemic are working in a new state, or newly working in multiple states, will need to consider the resulting tax consequences. This may be a benefit or liability. The writer’s son, a resident of high-tax-rate New York City who worked in Michigan for five months as the pandemic unfolded, may be able to claim earnings during that period to be taxed only in Michigan. Many persons are and may for an extended period be working away from their home state, creating a spiderweb of reporting and taxing concerns for them and their employers.

Labor and Employment Law Issues

Labor and employment laws are a combination of federal and state regulation. Federal law, where exclusive, has the advantage of being uniform across state lines. However, it is hard to identify an area of federal exclusivity – overtime, wage/hour, labor relations, employment discrimination, and other subjects all are nearly universally governed by overlapping state and federal rules, and there is essentially no consistency between federal, home state, and foreign state laws, regulations, and principles. Caveat emptor!

Seek Help for These Complex Issues

Having a remote workforce creates unanticipated and sometimes novel issues. Navigating those situations in our experience has requires an effective partnership between the enterprise and counsel.

If you have any questions, please contact Dave Houston or your Fraser Trebilcock attorney.

This alert serves as a general summary, and does not constitute legal guidance. All statements made in this article should be verified by counsel retained specifically for that purpose. Please contact us with any specific questions.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Fraser Trebilcock Shareholder Dave Houston has over 40 years of experience representing employers in planning, counseling, and litigating virtually all employment claims and disputes including labor relations (NLRB and MERC), wage and overtime, and employment discrimination, and negotiation of union contracts. He has authored numerous publications regarding employment issues. You can reach him at 517.377.0855 or dhouston@fraserlawfirm.com.

Upcoming Deadlines: (1) Form W-2 Reporting of Employer-Provided Health Coverage; and (2) Medicare Part D Notices to CMS

Reminder: Form W-2 Reporting on Aggregate Cost of Employer Sponsored Coverage

Unless subject to an exemption, employers must report the aggregate cost of employer-sponsored health coverage provided in 2020 on their employees’ Form W-2 (Code DD in Box 12) issued in January 2021. Please see IRS Notice 2012-09 and our previous e-mail alerts for more information.

The following IRS link is helpful and includes a chart setting forth various types of coverage and whether reporting is required; see here.

Please note this is a summary only and Notice 2012-09 should also be consulted. The IRS has issued questions and answers regarding reporting the cost of coverage under an employer-sponsored group health plan, which can be found here.

If you have questions regarding whether you or your particular benefits are subject to reporting, please feel free to contact us.

Deadline Coming Up for Calendar Year Plans to Submit Medicare Part D Notice to CMS

As you know, group health plans offering prescription drug coverage are required to disclose to all Part D-eligible individuals who are enrolled in or were seeking to enroll in the group health plan coverage whether such coverage was “actuarially equivalent,” i.e., creditable. (Coverage is creditable if its actuarial value equals or exceeds the actuarial value of standard prescription drug coverage under Part D). This notice is required to be provided to all Part D eligible persons, including active employees, retirees, spouses, dependents and COBRA qualified beneficiaries.

The regulations also require group health plan sponsors with Part D eligible individuals to submit a similar notice to the Centers for Medicare and Medicaid Services (“CMS”). Specifically, employers must electronically file these notices each year through the form supplied on the CMS website.

The filing deadline is 60 days following the first day of the plan year. If you operate a calendar year plan, the deadline is the end of February. If you operate a non-calendar year plan, please be sure to keep track of your deadline.

At a minimum, the Disclosure to CMS Form must be provided to CMS annually and upon the occurrence of certain other events including:

  1. Within 60 days after the beginning date of the plan year for which disclosure is provided;
  2. Within 30 days after termination of the prescription drug plan; and
  3. Within 30 days after any change in creditable status of the prescription drug plan.

The Disclosure to CMS Form must be completed online at the CMS Creditable Coverage Disclosure to CMS Form web page found here.

  1. The online process is composed of the following three step process: Enter the Disclosure Information;
  2. Verify and Submit Disclosure Information; and
  3. Receive Submission Confirmation.

The Disclosure to CMS Form requires employers to provide detailed information to CMS including but not limited to, the name of the entity offering coverage, whether the entity has any subsidiaries, the number of benefit options offered, the creditable coverage status of the options offered, the period covered by the Disclosure to CMS Form, the number of Part D eligible individuals, the date of the notice of creditable coverage, and any change in creditable coverage status.

For more information about this disclosure requirement (including instructions for submitting the notice), please see the CMS website for updated guidance found here.

As with the Part D Notices to Part D Medicare-eligible individuals, while nothing in the regulations prevents a third-party from submitting the notices (such as a TPA or insurer), ultimate responsibility falls on the plan sponsor. 

This email serves solely as a general summary of the Form W-2 reporting requirements and CMS disclosure for Medicare Part D.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.