The American Rescue Plan Act: What’s Inside

As many of you are aware, on March 11, 2021, President Joseph Biden signed the American Rescue Plan Act of 2021 (ARPA) into law. Large parts of the bill acting as an economic stimulus for individuals and businesses affected by the COVID-19 pandemic. The $1.9 trillion bill includes stimulus checks, child tax credits, jobless assistance, vaccine-distribution assistance, healthcare subsidies, and aid for struggling small businesses. But what’s not inside? Terms for raising the minimum wage.

Direct Payments to Individuals

Much like the previous two coronavirus-related stimulus actions, individuals and families with incomes below certain thresholds can expect to receive a stimulus check (or direct deposit) from the government.

In addition, families will receive an extra $1,400 per dependent. The term “dependent” is a significant change in this legislation, as previous stimulus funds were only applicable to taxpayers with children younger than 17. Accordingly, taxpayers with older dependent children, or other dependent family members living with them, will now see an enhanced payment amount.

Taxpayers with adjusted gross income (AGI) above established thresholds will see their eligibility for a payment phase out more quickly than under previous legislation. Regardless of the number of dependents, taxpayers with income that exceeds the upper phaseout threshold will not receive a payment at all. For those taxpayers within the phaseout range, their stimulus payment can be determined using the following formula: (AGI – applicable threshold) / (upper phaseout threshold – applicable threshold)

The determination of income will be based on a taxpayers’ 2019 income tax return if their 2020 taxes have not yet been filed. If individuals would be entitled to a higher payment if 2020 AGI figures were used, they can file their return to claim eligibility to the higher payment. If a taxpayer receives a stimulus payment based on 2019 income and then files a 2020 return with a lower AGI that entitles them to a higher payment, the government will use the 2020 AGI amount and supplement any payment already made that was based on their 2019 income.

A final opportunity for the maximum stimulus payment amount would come when taxpayers file their 2021 income tax return. If that return yields an AGI figure that entitles taxpayers to a higher amount than their 2019 or 2020 income did, they will receive a refundable tax credit equal to the increased stimulus payment amount eligibility.

The timing of the checks is not definitive, but some Americans have already seen the checks deposited into their accounts as early as this week while others will have to wait a little longer.

Not sure if you qualify for the newest stimulus check? Check out the Washington Post’s handy calculator to help!

If you’ve filed your 2020 taxes, your stimulus check amount would be based on that income. If you haven’t filed your 2020 taxes, it would be based on your 2019 tax filing. If you’re waiting for a missed payment, individual tax returns have an extra line called “recovery rebate credit” to claim your stimulus payment.

Expansion of Unemployment Benefits

Unemployed individuals, including those who typically aren’t otherwise entitled to unemployment compensation under state law (e.g., self-employed) and self-certify that they have been adversely affected by the COVID-19 pandemic, may receive unemployment compensation for an additional period of up until September 6, 2021.

In addition to any weekly unemployment compensation available under state law, unemployed individuals are entitled to an additional $300 per week September 6, 2021. This has been termed Federal Pandemic Unemployment Compensation.

The bill allows for up to $10,200 of unemployment income per individual to be tax-free, subject to income limits. The stated income limit is an AGI of $150,000, which would include the sought-to-be-excluded unemployment income. The bill does not specify different income limits based on tax filing status. Consequently, it can be reasonably assumed that the AGI limit of $150,000 applies to all filing statuses. Additionally, the $150,000 AGI limit for unemployment income to be considered tax-free is not a phaseout threshold; rather, it appears to be a “cliff”.

Loans to Distressed Small Businesses

The Paycheck Protection Program (PPP) will receive $7.25 billion in additional funding. Small businesses will be eligible for forgivable, government-backed small business loans under the PPP. The same basic eligibility standards previously adopted for the PPP will remain applicable, and the window to request a loan will still close on March 31, 2021, unless otherwise extended.

A new Small Business Administration program designed to provide assistance to the disproportionately affected restaurant industry, called Restaurant Revitalization Grants, is funded in the Act. Similar to the PPP program, these tax-free Restaurant Revitalization Grants would be offered based on several conditions related to a loss of revenue due to the pandemic. Certain companies are excluded from eligibility for these loans, including restaurant chains with more than 20 locations and publicly traded companies. The first 21-day application period will be reserved for certain groups of owners (e.g., women-owned businesses, veterans).

Child Tax Credit

Many taxpayers will see an increase in their available child tax credit for the 2021 tax year from $2,000 per qualifying child to $3,000 per child age 6 and older and $3,600 per child younger than age 6 as of December 31, 2021. Although the child tax credit is typically not subject to AGI limitations, the Act does put income limits in place for the enhanced credit amount over the typical $2,000.

If a taxpayer’s AGI exceeds the above-referenced threshold, the taxpayer’s eligible child tax credit over the typical amount of $2,000 would be reduced by $50 for every $1,000 of income over the threshold

Taxpayers may receive an advance on their child tax credit in multiple installments beginning in July 2021. It is important to note that, unlike the direct stimulus payments, the advance of child tax credit amounts would need to be reconciled on the taxpayer’s 2021 tax return and could result in a liability for a return of any credit received that was in excess of their eligibility based on their 2021 tax return.

Additionally, the Child and Dependent Care tax credit, which provides tax credits for eligible childcare expenses incurred, will have expanded income eligibility and a higher potential credit amount during the 2021 tax year under the American Rescue Plan Act.

Another tax credit that has expanded eligibility under the Act is the Earned Income Credit (EIC). Individuals and couples without children, as well as younger individuals (as young as 19), could see access to a much higher EIC than was previously available.

Subsidized COBRA Benefits

Former employees who had their employment terminated and are eligible for an extension of their employee-sponsored health insurance under COBRA will not be responsible for health insurance premiums under COBRA from April until September 2021. Instead, those premiums will be paid by the former employer, and the employer will receive a refundable payroll tax credit. There will be a 60-day enrollment period for individuals to elect COBRA coverage, and eligibility for coverage would extend to individuals who lost their employment as far back as November 2019.

Student Loan Forgiveness

The Act also changes the treatment of student loan forgiveness to be nontaxable through 2025. In the past, President Biden has expressed a desire to forgive $10,000 in student loan indebtedness for each borrower, so experts theorize that this provision may be an anticipation of future executive and/or legislative action to forgive a portion of existing student loans.

Dependent Care Flexible Spending Account (FSA)

For those with a Dependent Care Flexible Spending Account (FSA), there may be some good news on the horizon. The American Rescue Plan Act boosts the amount that companies can allow workers to deposit in their dependent-care FSAs for 2021. Here are some details to remember:

• Dependent Care Contributions: The limit on contributions to Dependent Care FSAs is now higher under the American Rescue Plan Act. For married couples filing jointly, the cap is $10,500, up from $5,000. For single filers, the limit is $5,250, up from $2,500.
• Health FSA Contributions: Health FSA contributions are unaffected by the latest stimulus bill, meaning contributions to Health FSAs are still capped at $2,750.
• FSA Rollovers: Employees may carry over all or some of their unused health and/or dependent care FSA funds from a plan year ending in 2020 or 2021.

Although this may be deeply appreciated news for many, there is one caveat to keep in mind. Employers can choose whether to make any modifications to their plans under these temporary rule changes but are under no obligation to do so.

Could there be more stimulus passed this year? It seems unlikely if the U.S. economy continues to expand.

According to a fresh estimate from New York Times, our economy will expand nearly twice as fast as originally expected, growing at an estimated 6.5% in 2021 versus the 3.2% projected in December.

Obviously, these projections rest on a lot of assumptions about vaccination rates, reopening, and consumer spending.

Let’s hope we stay on track.

That was a lot of information to absorb. Have questions? 

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