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The American Rescue Plan Act- Financial Relief for Employers and Employees

The American Rescue Plan Act of 2021 was signed into law on March 11, 2021, offering much needed financial relief to employers and employees alike.  This $1.9 Trillion bill is intended to address the financial impact of COVID-19 by offering unemployment benefits, expanding tax credits, and addressing some outstanding tax questions from relief bills passed in the year since the pandemic began. Here we take a look at sections of this bill which are most likely to impact household employers as well as the caregivers and domestic workers who keep so many households running smoothly.

Expansion of Paid Leave Under FFCRA

Keeping payments to workers flowing has been a goal of all COVID-relief bills passed to date.  The Families First Coronavirus Response Act encouraged this by providing employer tax credits for Emergency Paid Sick Leave and Emergency Family Medical Leave required due to illness, suspected illness, government ordered quarantine, the need to care for loved ones who were ill, or the need to care for dependent children who’s school or daycare was closed.  Employer were required to provide up to 2 weeks paid sick leave and up to 10 weeks paid family medical leave, with a fully refundable tax credit offered to the employer.  This allowed households across the country to continue paying their nannies, housekeepers and  caregivers rather than forcing those employees to rely upon unemployment benefits.

The American Recovery Plan Act expands this tax credit to cover qualified paid leave taken between April 1, 2021 and September 30, 2021.  COVID vaccination appointments and complications from such vaccinations are now added to the list of qualifying reasons for leave. Further, the bill reset the limit on the amount of paid leave that can be offered to an employee.  This means qualified wages paid between April 1, 2021 and September 30, 2021 can be counted towards this tax credit, even if said wages are paid to an employee who previously used all available Emergency Paid Sick Leave and/or Emergency Family Medical Leave in 2020.   It should be noted that the Act did not make Emergency Paid Sick Leave and Emergency Family Medical Leave mandatory.  However,  the fully refundable credit leaves employers few reasons not to offer it.

Increased Dependent Care Flexible Spending Account (FSA) Limit

The American Recovery Plan Act increases the amount of income which can be deferred on a pre-tax basis to a Dependent Care Flexible Spending Account (FSA).  The new limit for 2021 will be $10,500 if single or married filing jointly ($5,250 if married filing separately).  Household employers should contact their employers or FSA Administrators about increasing their deferral elections in order to minimize income taxes.  Note that reimbursement from a Dependent Care FSA requires a nanny’s or caregiver’s pay to be on the books, as documentation of the provider’s name, tax identification number, and the dates of care must accompany a reimbursement claim.

Increased Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit increased and is now fully refundable.  it now maxes out at $8,000 for those with one child and $16,000 for those with two or more.  The credit is based on income as follows:

Household Income Credit % 1 Child 2+ Children
<$125,000 50% $4,000 $8,000
$125,001-$185,000 21%-50% $1,680-$4,000 $3,360-$8,000
$185,001-$400,000 20% $1,600 $3,200
$440,001-$440,000 1%-20% $80- $1,600 $160- $3,200
>$440,000 0% $0 $0

Note that there is an exclusion for expenses reimbursed through a Dependent Care FSA, so no double dipping allowed!

Increased Child Tax Credit

The Child Tax Credit has been expanded to $3,600 per child under age 6 and $3,000 per child age 6-17 for single parents making less than $75,000 and couples making less than $150,000.  The credit is phased out above these income limits, but those single parents earning up to $200,000 and couples earning up to $400,000 could still claim the base $2,000 credit per child.

An even bigger change is that half of the the Child Tax Credit will be paid out on a monthly basis between July and December of 2021, with the other half claimed on a taxpayer’s return in the spring.  This guaranteed monthly income is intended to help families until adults can get back to work as the  economic recovery continues.

Enhanced Unemployment Benefits & Income Tax Exemption

Federal unemployment benefits payments have been extended through September 6, 2021, providing $300 in weekly benefits.  Benefits are paid through state unemployment funds, and The Act allows for up to 53 additional weeks of payments to those who have fully exhausted state unemployment benefits. Up to $10,200 of unemployment benefits are exempt from federal income tax for those earning less than $150,000, and this dates back to the 2020 tax year.  If you have already filed your 2020 return and paid income taxes on unemployment benefits received, you should file an amendment to obtain a refund.

Direct Payments to Individuals

Economic Impact Payments to individuals are again a part of an aid package, as individuals making less than $75,000 will receive checks of $1,400.  Married couples with incomes up to $150,000 will receive payments of $2,800.  These payments are phased out fairly quickly by income level, with a maximum income of $80,000 for eligible individuals and $160,000 for eligible couples.  Additional payments of $1,400 per child (including full time students up to age 24) will also be included. Payments are expected to be sent within just a few days of The Act becoming law, so watch the mail for checks and your bank accounts for deposits.  Note that while filing a tax return is not required for eligibility, the IRS may have has specific instructions to obtain your payment if you have not filed a return.