House taxwriters approve tax- and pension-focused COVID relief measures

The House Ways and Means Committee began to flesh out the tax title of President Biden’s proposed $1.9 trillion American Rescue Plan this week as it approved a package of tax relief provisions intended to help businesses and individuals address the economic impact of the coronavirus pandemic, along with a separate set of provisions intended to shore up financially struggling multiemployer pension plans and single-employer plans.

The tax relief provisions cleared the panel by a vote of 24-18 on February 11 and the pension package was approved the same day by a vote of 25-18. In both cases, all the ‘yea’ votes came from Democrats and all the ‘nays’ from Republicans.

The committee also approved – again with only Democratic votes – a series of nontax bills during a mark-up that stretched out over two days. Those nontax proposals are intended to address other pandemic-related issues under the panel’s jurisdiction, including emergency support for children, the elderly, and low-income households; COVID-related protections for employees and residents of long-term care facilities; expanded unemployment benefits; and provisions to enhance access to health care insurance and ensure continuity of coverage.

Debate during the mark-up fell along largely familiar partisan lines. Ways and Means Chairman Richard Neal, D-Mass., and Democratic taxwriters contended that the measures would provide security to individuals and businesses facing financial hardship as a result of the pandemic. They also defended the scope of their proposals by echoing President Biden’s argument that the risk of doing too little to address current economic conditions outweighs the risk of doing too much.

Ranking member Kevin Brady, R-Texas, and the panel’s Republicans countered that the majority is rushing to move relief bill through Congress and did not seek GOP assistance in the drafting process, that the proposals are poorly targeted to the needs of individuals and small business and in some cases address issues that are unrelated to the pandemic, and that the overall size of the president’s proposed relief package would boost the federal deficit to unacceptable levels.

What follows here is a high-level discussion of the tax and pension provisions reported out by panel, which the Joint Committee on Taxation (JCT) staff estimates will reduce federal receipts by $593.5 billion over 10 years. Detailed descriptions of the tax and pension provisions are also available from the JCT staff.

Business tax provisions

The Ways and Means bill would extend and expand certain business-related tax incentives that were originally enacted under the Families First Coronavirus Response Act (Families First Act; P.L. 116-127) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), both of which were signed into law last March. (For prior coverage of the Families First Act, see Tax News & Views, Vol. 21, No. 11, Mar. 18, 2020. For details on the CARES Act, see COVID-19 response: A taxpayer guide to the CARES Act from Deloitte Tax LLP.)

Employee retention tax credit: The employee retention tax credit (ERTC) was enacted in the CARES Act as a temporary refundable tax credit, computed on a calendar-quarter basis, against the 6.2 percent employer-side Social Security payroll tax for certain employers carrying on a trade or business that either fully or partially suspended operations due to a government order or that sustain a significant decline in gross receipts. The credit initially applied to wages paid after March 12, 2020, and before January 1, 2021. It was extended through June 30, 2021, and expanded in the Consolidated Appropriations Act, 2021, the omnibus tax-and-spending package that was signed into law late last year. (For details on those changes, see Tax News & Views, Vol. 21, No. 55, Dec. 21, 2020.)

The Ways and Means bill would further extend the ERTC through December 31, 2021. It also would structure the ERTC as a refundable payroll credit against the employer’ share of the hospital insurance (HI) tax beginning after June 30, 2021. (The JCT staff explains that as a result of this change “the credit is not reduced by any credits allowed for the employment of qualified veterans, for research expenditures of a qualified small business, or for wages paid by certain tax-exempt organizations affected by qualified disasters in 2020.”)

Credits for paid sick and family leave: The Families First Act created refundable tax credits for certain employers who provide COVID-related paid sick leave and paid family leave to their employees under a federal mandate that was also created in that legislation. Those credits were set to expire on December 31, 2020, but were extended through March 31, 2021, under the 2020 year-end omnibus legislation. The Ways and Means bill would further extend the credits through September 30, 2021.

Other proposed changes in the legislation would:

• Increase the amount of wages for which an employer may claim the paid family leave credit in a year from $10,000 to $12,000 per employee and increase the number of days for which self-employed individuals may claim the credit from 50 to 60.
• Expand the list of reasons that an employer may provide paid family leave (and thus claim the paid family leave credit).
• Allow employers to claim the paid sick leave and paid family leave credits for leave taken to obtain a COVID-19 vaccine or to recover from an injury, disability, illness, or condition related to a COVID-19 immunization.
• Prohibit employers from claiming the credits if their leave policy discriminates in favor of highly compensated employees, full-time employees, or based on an employee’s length of service.
• Reset the 10-day limitation on the maximum number of days for which an employer can claim the paid sick leave credit with respect to wages paid to an employee. The current limitation runs from the start of the credit in 2020 through March 31, 2021. The new limitation would apply to sick days after March 31, 2021. The limitation for self-employed individuals resets on January 1, 2021.
• Restructure the credit for paid family and medical leave as a refundable credit against the hospital insurance payroll tax beginning after March 31, 2021.
• Allow state and local government employers as well as tax-exempt entities under section 501(c)(1) to claim both credits.
• Increase the value of the credits by the amounts equal to the employer share of the Social Security and Hospital Insurance tax imposed on qualified paid family and medical leave wages for purposes of this credit.

These provisions generally would be effective for amounts paid with respect to leave taken after March 31, 2021. The provisions related to self-employed individuals would be effective after December 31, 2020.

Tax treatment of grant and loan proceeds: Under the Ways and Means legislation, Economic Injury Disaster Loan (EIDL) grants and Restaurant Revitalization grants would be exempt from tax. These exclusions would not result in a denial of business deductions, a reduction of tax attributes, or a denial of increase in tax basis.

The Treasury Department would be directed to prescribe rules for determining a partner’s distributive share or shareholder’s pro rata share of amounts received through an EIDL grant and a Restaurant Revitalization grant.

These provisions generally would align the treatment of proceeds from EIDL and Restaurant Revitalization grants with proceeds received under a Paycheck Protection Program loan.

Repeal of worldwide interest allocation election: The legislation also includes a revenue-raising provision that would repeal the election for US affiliated groups to allocate interest expense on a worldwide basis, effective for taxable years beginning after 2020.

The election, which was enacted as part of the American Jobs Creation Act of 2004 (AJCA), permits taxpayers to allocate interest expense between US and foreign sources for purposes of determining their foreign tax credit limitation. As enacted in the AJCA, the election was scheduled to take effect for taxable years beginning after December 31, 2008, but that effective date was delayed several times in subsequent legislation, most recently until taxable years beginning after December 31, 2020, in the Hiring Incentives to Restore Employment Act, which was signed into law in 2010. Thus, the optional election became effective six weeks ago – on January 1, 2021 – but would be repealed retroactively under this provision.

The JCT staff estimates that repealing the election would increase federal receipts by $22 billion over 10 years.

No changes to loss rules: The Ways and Means package as released did not include revenue-raising provisions sought by some Democrats that would retroactively reverse some of the taxpayer-favorable changes to the net operating loss rules and excess business loss rules that were enacted in the CARES Act last year. Democratic taxwriters did not offer those provisions as amendments during the mark-up, but the issue remains a source of concern for Democrats in both chambers. (For prior coverage, see Tax News & Views, Vol. 22, No. 5, Feb. 5, 2021.)

Tax relief for individuals

Proposed tax relief for individuals under the Ways and Means bill includes another round of direct payments for certain households, along with temporary enhancements to the child tax credit (CTC), the earned income tax credit (EITC), the child and dependent care tax credit, and the health insurance premium tax credit.

Recovery rebate payments: The legislation would boost the $600 direct recovery rebate payments to individuals enacted in the 2020 year-end omnibus legislation to $2,000 by providing plus-up payments of $1,400 ($2,800 for joint filers) to eligible recipients. The increase would address a concern raised by then-President Trump – and echoed by President Biden and some congressional lawmakers in both parties – that the payment amount Congress approved in the omnibus package was inadequate for individuals facing financial hardship stemming from the COVID pandemic.

The additional $1,400 payment, which would be paid out as an advanceable refundable tax credit, would be available to adult taxpayers as well as children and adult dependents. The payment amount would begin to phase out when adjusted gross income (AGI) reaches $75,000 for single taxpayers, $112,500 for heads of household, and $150,000 for joint filers. It would be fully phased out when AGI reaches $100,000 for single taxpayers, $150,000 for heads of household, and $200,000 for joint filers without children. (Families with children could have higher AGI levels before being fully phased out of these payments.)

Under the legislation, a taxpayer is eligible for a payment with respect to any individual in the household, provided the income tax return on which the payment is claimed includes that individual’s valid Social Security Number. Individuals who died before January 1, 2021, are not eligible to receive a payment.

The measure would authorize the Treasury Department to issue payments based on the information on a taxpayer’s 2019 or 2020 tax returns. Treasury also would have broad authority to issue payments to nonfilers based on information available to the Secretary.

Taxpayers who receive an advance payment that exceeds their maximum eligible payment amount based on 2021 tax return information would not be required to reimburse the government for any overpayment. If the payment amount based on 2020 information exceeds the amount of the advance payment, taxpayers would be allowed to claim the difference on their 2021 tax returns.

Payments generally would not be subject to administrative offset for past-due federal or state debts, including past-due child support.

Child tax credit: For 2021, the Ways and Means bill would make the child tax credit fully refundable and advanceable, increase the credit amount to $3,000 per child ($3,600 for a child under age 6), and increase the age limit for a qualifying child to 17. (Under current law, a partially refundable credit of $2,000 is generally available for each of a taxpayer’s qualifying children under age 17, and the credit is claimed when a taxpayer files his or her return.)

The legislation provides that the increased per-child credit amounts would be reduced by $50 for every $1,000 of modified AGI exceeding $150,000 for joint filers, $112,500 for heads of household, and $75,000 for other filers. Once the increased credit amount phases out completely, the credit would plateau at the current-law level of $2,000 and then phase down to zero for taxpayers whose modified AGI exceeds current-law thresholds of $400,000 for joint filers and $200,000 for all other filers.

In a notable change from current law, the Ways and Means bill would direct the Treasury Department to pay the credit to taxpayers in advance (based on 2019 or 2020 tax return information), either on a monthly basis or as frequently as Treasury determines is feasible. The advance installment payments would begin on July 1, 2021 and would cover 50 percent of the credit amount to which a taxpayer is entitled for 2021. The remaining credit amount would be claimed on a taxpayer’s 2021 tax return.

The child tax credit claimed on a taxpayer’s 2021 return would be reduced by the aggregate of advance payments paid. If a taxpayer receives advance payments in excess of his or her allowable child tax credit during a taxable year, the taxpayer’s tax liability for the taxable year would be increased by the excess amount. However, for taxpayers that have modified AGI below certain thresholds, that excess may be reduced by a safe harbor amount that would limit the increase in tax liability and allow the taxpayer to retain a portion of the excess amount. (The safe harbor amount is $2,000 for each child incorrectly taken into account in determining the advance payment amount for taxpayers with modified AGI of up to $60,000 for joint filers, $50,000 for heads of households, and $40,000 for all other filers. The safe harbor amount would be reduced ratably as modified AGI increases and would be reduced to zero when modified AGI reaches double the threshold amount for the taxpayer’s filing status.)

The Ways and Means bill would direct the Treasury Department to establish an on-line portal that would allow taxpayers to opt out of receiving advance payments and to provide information regarding changes in income, marital status, and number of qualifying children for purposes of determining each taxpayer’s maximum eligible credit.

The legislation also would direct the Treasury Department to make payments to each “mirror code” US territory for the cost of each territory’s child tax credit.

Earned income tax credit enhancements: The Ways and Means bill would expand eligibility for and the amount of the earned income tax credit for taxpayers with no qualifying children (the “childless EITC”) for 2021. Under this proposal, the minimum age to claim the childless EITC would be reduced from 25 to 19 (except for full-time students) and the upper age limit would be eliminated. The proposal also would increase childless EITC credit percentage and phase-out percentage from 7.65 to 15.3 percent, increase the earned income limit for the maximum credit amount to $9,820, and increase the income threshold at which the credit begins to phase out to $11,610 for non-joint filers. Special rules would govern the application of the credit to former foster youths and homeless youths

In addition, the proposal would permit a taxpayer to elect to calculate the EITC for taxable years beginning in 2021 using 2019 rather than 2020 earned income, if the taxpayer’s earned income in 2021 is less than in 2019.

The bill also includes permanent provisions that would:

• Repeal the current-law rule prohibiting an EITC-eligible taxpayer with qualifying children from taking the childless EITC if he or she cannot claim the EITC with respect to qualifying children due to failure to meet child identification requirements (including a valid Social Security Number for qualifying children);
• Allow a married but separated individual filing a separate return to claim the EITC (subject to certain conditions); and
• Increase the limitation on disqualified investment income for purposes of claiming the EITC from $3,650 (the limit in place for 2020) to $10,000 and index it to inflation going forward.

The measure would instruct the Treasury Department to make payments to the territories that relate to the cost of each territory’s EITC.

These provisions would take effect upon enactment.

Dependent care assistance: The Ways and Means bill would make the child and dependent care tax credit fully refundable for 2021 and increase the maximum credit rate to 50 percent. It also would amend the phase-out threshold to begin at $125,000 of AGI instead of $15,000 and would increase the amount of child and dependent care expenses that are eligible for the credit to $8,000 for one qualifying individual and $16,000 for two or more qualifying individuals.

The 50 percent credit rate would begin to phase-out at AGI of $125,000 and would plateau at 20 percent for taxpayers with AGI greater than $183,000. Under a second phase-out, the 20 percent credit rate would begin to decline for taxpayers with AGI greater than $400,000 and would be reduced to zero once AGI exceeds $438,000.

Mirror code territories would be reimbursed for the costs of the refundable credit in 2021. Non-mirror code territories would be eligible for reimbursement of the aggregate value of such a credit, provided the territory develops a plan, approved by the Secretary, to distribute these amounts to its residents.

A separate provision would increase the exclusion for employer-provided dependent care assistance from $5,000 to $10,500 ($2,500 to $5,250 in the case of a separate return filed by a married individual) for 2021.

Health care tax credits: For 2021 and 2022, the legislation would reduce an individual’s or family’s share of premiums used in determining the amount of the premium assistance credit under the Patient Protection and Affordable Care Act and make the credit available to taxpayers with incomes above the present-law limitation of 400 percent of the federal poverty line for the applicable family size.

For tax year 2020, the measure would modify the repayment obligations for taxpayers receiving excess premium tax credits so that those payments would not be subject to recapture.

For 2021, the bill would provide advanced premium tax credits as if the taxpayer’s income was no higher than 133 percent of the federal poverty line for certain individuals receiving unemployment compensation.

No SALT provisions: The bill as released did not include, and Democrats did not offer as an amendment, a proposal to repeal, suspend, or relax a provision enacted in the 2017 tax code overhaul that limits the deduction for state and local taxes (SALT) to $10,000. (Some congressional Democrats had recently indicated that they were eyeing the COVID package as a vehicle for advancing a repeal of the SALT deduction limitation.)

Pension plan changes

The Ways and Means legislation includes proposals intended to stabilize financially troubled multiemployer pension plans and single-employer plans, and would expand special funding rules available to certain community newspaper plans.

Funding assistance and other relief for multiemployer plans: The Ways and Means bill would create a special assistance program that would allow the Pension Benefit Guaranty Corporation (PBGC) to make direct cash payments to financially troubled multiemployer pension plans to ensure that they can remain solvent and continue to pay benefits to retirees. (PBGC would make the payments using amounts transferred from the Treasury general fund.)

Eligible plans generally would include plans in critical and declining status and plans that are significantly underfunded and have more retirees than active workers in any plan year beginning in 2020 through 2022. Plans that have suspended benefits, and certain plans that have already become insolvent also would be eligible.

The Ways and Means bill would allow plans to become eligible to apply for funding assistance through December 31, 2025. Once an application is approved, a plan would receive a single, lump-sum payment in an amount sufficient to keep it solvent and well-funded through the last day of the plan year ending in 2051, generally with no cuts to the earned benefits of participants and beneficiaries. Plans would be required to invest the funds received in investment-grade bonds or other investments permitted by the PBGC.

The legislation also would increase the premium rate for multiemployer plans to $52 per participant beginning in calendar year 2031 and index that rate to inflation in subsequent years.

Other relief provisions for multiemployer plans in the Ways and Means bill would:

• Permit a plan to retain its funding zone status as of a plan year beginning in 2019 for plan years that begin in 2020 or 2021;
• Permit a plan in endangered or critical status for a plan year beginning in 2020 or 2021 to extend its rehabilitation period by five years, giving it additional time to improve its contribution rates, limit benefit accruals, and maintain plan funding (effective for plan years beginning after December 31, 2019); and
• Permit plans to amortize investment losses in plan years beginning in 2019 and 2020 over 30 years to spread out those losses over time (generally effective for the first day of the first plan year ending on or after February 29, 2020).

Reforming multiemployer pension rules has been a priority for Ways and Means Committee Chairman Richard Neal since he took the gavel in 2018. The House approved similar provisions as part of the Heroes Act (H.R. 6800), the expansive COVID relief package that cleared the chamber last May, and in a narrower version of that legislation that was passed in October. (For prior coverage, see Tax News & Views, Vol. 21, No. 27, May 15, 2020, and Tax News & Views, Vo. 21, No. 44, Oct. 2, 2020.) Neither version of the Heroes Act was taken up in the Senate during the 116th Congress. The House also approved a freestanding measure in 2019. (For prior coverage, see Tax News & Views, Vol. 20, No. 25, July 26, 2019.)

Relief for single-employer pension plans: For single-employer pension plans, the Ways and Means bill provides that all shortfall amortization bases for 2019 or 2020 (at the election of the plan sponsor) and all shortfall amortization installments determined with respect to those bases would be reduced to zero. For all plan years beginning after December 31, 2019, all shortfalls would be amortized over 15 years (compared to 7 years under current law). A plan sponsor also may elect to apply this provision for the 2019 plan year.

The measure also would delay the scheduled phase-out of current-law pension “smoothing” provisions that modify the interest rate that employers must use to calculate their pension plan liabilities for purposes of determining their annual minimum funding obligations. Both provisions would be effective for plan years beginning after December 31, 2019.

Special funding rules for community newspapers: The legislation would modify the special funding rules for pension plans sponsored by financially struggling community newspapers in the Setting Every Community Up for Retirement Enhancement Security (SECURE) Act to make that relief available to additional community newspaper plans. (The SECURE Act was incorporated into an appropriations package that cleared Congress and was signed into law at the end of 2019. For additional discussion, see Tax News & Views, Vol. 20, No. 42, Dec. 19, 2020.)

Cost-of-living adjustment freeze for qualified plan limitations: The legislation also provides that certain qualified retirement plan limitations that currently are indexed for inflation – specifically, the annual contribution limit for defined contribution plans under section 415(c), the maximum annual benefit for a defined benefit plan under section 415(b)(1)(A), and the annual compensation limit under section 401(a)(17) used in determining contributions and benefits and in applying deduction rules and nondiscrimination testing rules – would be frozen permanently beginning in 2030.

Next steps

All of the Ways and Means-approved measures now advance to the House Budget Committee, which will be responsible for folding them, along with pandemic-related emergency provisions from other House panels with jurisdiction, into one bill. (The other committees of jurisdiction responsible for drafting sections of the relief package are Agriculture, Education and Labor, Energy and Commerce, Financial Services, Oversight and Reform, Small Business, Transportation and Infrastructure, and Veterans Affairs.)

The Budget Committee is expected to complete its work during the week of February 15, and House leaders plan to bring the combined package to the floor the following week under fast-track budget reconciliation rules that, under certain conditions, will provide procedural protections when it subsequently moves through the Senate. Most notably, the reconciliation rules will allow the relief package to pass in the Senate by a simple majority vote rather than the three-fifths supermajority typically required to overcome procedural hurdles in that chamber – which means that Democrats, who control 50 seats in the Senate plus the tie-breaking vote of Vice President Kamala Harris, would be in a position to advance the legislation without Republican support. (For additional details on the potential benefits – and limitations – of the reconciliation process, see Tax News & Views, Vol. 22, No. 5, Feb. 5, 2021.)

The members of the House Budget Committee (presumably in consultation with House and Senate leaders) will decide whether to strip out any provisions they determine may not comply with the Senate’s Byrd Rule, a limitation of the reconciliation process that can set up 60-vote hurdles in that chamber for provisions that are deemed not to have an impact on the federal budget or for which the budget impact is “merely incidental” to the underlying policy. Alternatively, the Budget Committee could decide to leave any such provisions in place and let the Senate resolve any subsequent challenges. (House Speaker Nancy Pelosi, D-Calif., said February 11 that the House bill will include a provision to raise the federal minimum wage to $15 per hour, but it is still unclear if that provision will be determined to be Byrd Rule-compliant or whether the budgetary effects of the proposal are “merely incidental.”)

The Senate’s schedule is less certain because of the on-going impeachment trial of former President Donald Trump, but Majority Leader Charles Schumer, D-N.Y., has said the relevant Senate committees – including the Finance Committee – will move quickly once the trial has concluded, which could be as soon as February 13 or 14. (Under an alternative scenario reportedly being considered to further expedite passage, the Senate would bypass the committee process and bring the House-passed bill directly to the Senate floor for consideration. Any amendments would be limited to those that House and Senate leaders had negotiated and agreed to in advance. Once approved in the Senate, the amended bill would then go back to the House for a second floor vote.)

Speaker Pelosi has said she expects Congress to send a final bill to the president for his signature no later than March 14, when enhanced unemployment benefits will expire.

Partisan divide

President Biden, Republicans, and some Democrats initially expressed a hope that the pending coronavirus relief package could move through Congress on a bipartisan basis like the relief measures enacted in 2020. However, an opening counterproposal from 10 Republican senators February 1 included less than a third of the tax-and-spending relief the president proposed and there has been no additional news of progress on a potential compromise.

The mark-up in the Ways and Means Committee cast further doubt on the prospect for a bipartisan accord. All of the bills that cleared the committee did so without Republican votes; Democrats rejected all of the amendments offered by the GOP; and based on critical comments Republicans made throughout the process in the hearing room and in the press, it appears unlikely there will be much support, if any, from the minority for the House package when it reaches the floor.

“Whatever this rushed, partisan, special interest ‘stimulus’ package does, it comes with no bipartisan discussion, no opportunity for finding common ground, and no credible estimate of jobs,” said ranking member Kevin Brady in his opening statement February 10.

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