Federal Benefits Changes to Watch for in 2021

Congress has adjusted federal laws and regulations throughout 2020, which will affect the way SMBs plan and administer a few benefits next year.

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2021
Find out how your company’s health plans, payroll taxes, leave policies, and more may change after 2020

Small and medium-sized businesses may be wondering what mandates and challenges they’ll likely face in 2021. Following a year marked by a deadly pandemic, socio-political unrest, a contentious presidential election season, and economic uncertainty, SMBs can expect policy changes and proposals in some federally mandated benefits.

It’s not surprising that COVID-19 and the current economic slowdown prompted Congress to adjust federal laws and regulations. These changes will affect the way SMBs plan and administer a few benefits, ranging from group health plans to leave policies.

Healthcare 

Patient Protection and Affordable Care Act (ACA) 

The cost of employer-sponsored health plans could account for a larger share of workers’ household income in 2021. The IRS raised the threshold on employers’ lowest-cost, single coverage healthcare plans to 9.83% of employees’ earnings, up from 9.78% in 2020, but slightly lower than 2019’s rate of 9.86%. The IRS makes annual rate adjustments, known as cost-sharing limits, to ensure compliance with the ACA’s affordability mandate.

Benefits experts attribute the higher threshold to premiums for employer-sponsored and private-market plans outpacing income growth for workers. Cost-sharing limits apply to employers who had 50 or more full-time workers, or full-time equivalent employees (FTEs), in the previous calendar year.

Employers may want to price some plans below the threshold to avoid penalties for not complying with the ACA. To price plans based on cost-sharing limits, employers will need information on household incomes. However, they can calculate this data based on documentation they already have on file, including:

  • Employees’ pay rates
  • Employees’ W-2 forms
  • Federal poverty levels filed on Form 1095-C with the IRS for each employee offered health coverage under the ACA

Employers also can expect higher penalties for noncompliance with the ACA in 2021. Infractions classified as Penalty A rose from $2,570 annualized in 2020 to $2,700 annualized in 2021. Penalty B infractions rose from $3,860 annualized in 2020 to $4,060 annualized in 2021.

Other major changes to the ACA are unlikely in 2021, since congressional lawmakers remain in a political gridlock over whether to expand the act or overturn it. However, the United States Supreme Court is expected to hear arguments from Republican lawmakers in 2021 who want to abolish the act.

Employers also can expect higher penalties for noncompliance with the ACA in 2021.

Payroll taxes

Social Security 

Employers will see a modest increase in their share of payroll taxes under the Federal Insurance Contributions Act (FICA) as of January 1, 2021. The cap on earnings subject to the Social Security (SS) tax will increase from the current $137,700 to $142,800 in 2021. Employers and employees split the 12.4% tax (6.2% each) set by law to fund SS. The payout will be a bigger share of the benefit’s cost in 2021 to cover the $5,100 cap increase.

The Social Security Administration (SSA) subjects the taxable wage cap to an automatic cost-of-living adjustment (COLA), which the agency calculates annually based on increases in the national average wage index. COLA in 2021 will be 1.3% of workers’ SS benefits.

Medicare 

The Medicare portion of the FICA tax remains at 1.45% for both employers and employees, with no limit on earnings. Also, employers must continue to withhold the additional 0.9% Medicare tax on employers earning more than $200,000 in a calendar year.

The SSA posts a fact sheet on its website explaining the 2021 changes in:

  • SS tax
  • SS disability income thresholds
  • COLA
  • Retirement earnings exemptions

COVID-19 deferments 

Due to the pandemic, certain employers will be able to defer their payroll taxes into 2022.

Due to the pandemic, certain employers will be able to defer their payroll taxes into 2022. The Coronavirus Aid, Relief, and Economic Security (CARES) Act that lawmakers passed in March 2020 allows employers to defer the deposit and payment of their share of FICA taxes from March 27 through December 31, 2020, and then pay to the Treasury Department one half of the tax owed by December 31, 2021, and the second half by December 31, 2022.

The CARES Act allows employers to suspend the withholding of employees’ share of FICA taxes from September 1 to December 31, 2020. The deferment applies to only employees earning less than $4,000 during a biweekly pay period and salaried employees earning less than $104,000 a year. However, employers that defer withholdings can collect payments from employees between January 1 to April 30, 2021, to pay the tax.

The Society for Human Resource Management recommends that employers prepare for the increase in payroll taxes by adjusting their payroll tax system to cover the cost increase and notifying employees in advance of the change.

Leave benefits

SMBs that pay qualified leave wages currently are eligible for tax credits under the Families First Coronavirus Response Act (FFCRA), which evolved under the CARES Act. Employers that offer qualified sick leave, family leave, and retention leave — as well as health plan expenses — may take refundable tax credits against a certain share of their employment taxes through December 31, 2020. The FFCRA applies to employers with fewer than 500 workers and some public employers.

The legislation allows employers whose operations were fully or partially suspended by government orders or who experienced a decline in business due to COVID-19 a tax refund of up to 50% of the qualified wages. Included in the allowance are health expenses and a $10,000 limit per worker in qualified retention wages covering a sum of calendar quarters.

Whether Congress and the IRS will extend the tax credit into 2021 is unclear. But since the CDC expect surges in COVID-19 cases through November 2020, the question is whether lawmakers would be compelled to extend the tax credit into the new year.

Since the CDC expect surges in COVID-19 cases through November 2020, the question is whether lawmakers would be compelled to extend the tax credit into the new year.

Unemployment insurance

The CARES Act became law, in part, to help employers stay in business and keep workers on the payroll during the pandemic. But the $600 per week unemployment insurance benefit (UI) and the 39-week extension in state benefits from earlier this year were only temporary solutions.

Based on Bureau of Labor Statistics data, the Center on Budget and Policy Priorities (CBPP) — a nonprofit policy and research organization — forecasts a 10.2% hike in the unemployment rate for the first quarter of 2021. Unless Congress and the Administration agree to extend the CARES Act’s provisions beyond the current year and before the presidential election on November 3, 2020, SMBs can expect no changes in UI policy for 2021.

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