The CAA: The Legislative Gift that Keeps on Giving

December 31, 2020

The Consolidated Appropriations Act, 2021 (“CAA” or the “Act”) passed December 27, 2020, includes a number of measures intended to provide varying degrees of “relief” to plan sponsors, plan administrators, and participants.  But as is often the case, peel away the packaging and you have somewhat of a mess.  It is like opening the box to find 6,000 pieces nicely separated into ten plastic bundles, pages of stickers, and four manuals on how to put the castle together.  There is a lot of room between the excitement of opening the box and satisfaction with the finished product.  And between those two points, there are a lot of decisions to be made.

The CAA makes numerous tools available to address various needs of those in the benefits industry.  But which tools to use, how to use them, when to use them, and even whether to use them, requires evaluating them in context.  What may be easy for an administrator may not be the best choice for a particular plan sponsor.  What may be ideal from a plan sponsor’s perspective may not be cost effective from an administrator’s perspective.  Great care needs to be taken to wade through the options.  Just because they have been presented as “relief” and their use is “optional” does not necessarily mean a plan sponsor should change its benefit plans.  There should be a good reason to change.  Part of the evaluation involves identifying the “ripple effects.”  It is more complicated than concluding the optional relief should be adopted because it minimizes forfeitures.  That is a good reason, but once adopted and implemented, the cost to the plan sponsor due to unexpected “ripple effects” may outweigh the good reason and the good feelings attributable to minimizing forfeitures.

When evaluating the pros and cons of the optional relief, some of the ripple effects to consider include:

1. Collective bargaining language. Can the changes even be made?  In most cases, even “beneficial” changes to the terms and conditions of employment require bargaining.  If changes are made without bargaining, what happens to the plan sponsor’s ability to change them later?
2. Nondiscrimination testing requirements. What impact do the changes have on testing, particularly utilization types of testing?  Who are the “target” participants (e.g., highly compensated employees, key employees, officer, owners)?  What if a participant is not a target participant in the first year (e.g., not highly compensated), but a target participant (e.g., highly compensated) in the second year?  The CAA provides no special relief with respect to nondiscrimination testing under the Code.
3. Statutes that are not amended. What are the tax consequences of dependent care reimbursements received in excess of $5,000 in a taxable year?  What are the tax consequences of being reimbursed for the dependent care expenses of a 13 year old child?  Both of these questions are determined under Section 129 of the Code.
4. Summary plan descriptions (SPDs) under ERISA. If the plan does not have to be amended until later, does the SPD have to be updated before the amendment?  What about written plan documentation required under ERISA?  The Act speaks in terms of the special relief not precluding treatment as a cafeteria plan under the Code.  Nothing is said about ERISA plan and SPD requirements.
5. Communication responsibilities. What kind of communication needs to be made?  How can that communication be made?  How does that compare to information that has already been provided?  How do you reconcile the differing communications?
6. Multifaceted benefit programs. How do the optional changes interplay with other benefit programs not amended?  For example, HDHP medical coverage, HSA eligibility, and an enhanced carryover for a health FSA.
7. Predecessor relief guidance. What is the interplay between this optional relief and other temporary changes made pursuant to other “optional” guidance (e.g., extended carryover under a health FSA for plan year ending 2020 under IRS Notice 2020-29)? How do you mesh prior action taken (or not taken) with the optional provisions of the Act?  Can a plan sponsor undo or modify action previously taken by adopting optional relief?  And how many delayed amendments do you need to adopt and by when?
8. Mandatory COVID-19 requirements. How does the optional relief coordinate with earlier mandatory changes related to COVID-19?  For example, how do you mesh the optional relief under CAA with the required extended deadlines for claims submission and determination?  How do you determine what is left at the end of a plan year that is subject to the temporary enhanced grace period or enhanced carryover?

The key is to make an informed decision.