COVID-19 Paid Leave Tax Credits – An Update
The Families First Coronavirus Response Act (the “FFCRA”), enacted by Congress on March 18, 2020, required most employers to provide employees with paid leave in certain situations connected with the COVID-19 pandemic (the “FFCRA Mandate”). To offset the cost of this leave, the FFCRA permitted employers to take tax credits for wages and other expenses paid as part of this required leave. The FFCRA Mandate expired on December 31, 2020.
Congress extended the paid leave and tax credit rules from January 1, 2021 through March 31, 2021 as part of the Consolidated Appropriations Act of 2021 (the “CAA 2021”), which was enacted on December 21, 2020. The CAA 2021 extension generally kept all of the rules of the FFCRA, except that the extension did not include the FFCRA Mandate. Consequently, employers could elect whether or not to continue to provide this paid leave to employees, with employers who provided the leave being able to claim tax credits with respect to such paid leave. The CAA 2021 extension expired on March 31, 2021.
Recognizing that the US is still in the midst of the COVID-19 pandemic, the American Rescue Plan of 2021 (the “Rescue Plan”), enacted by Congress on March 11, 2021, again extended the paid leave rules from April 1, 2021 through September 30, 2021. Like the CAA 2021 extension, there is no FFCRA Mandate. However, the Rescue Plan did add some additional situations in which an employer may provide paid leave, and implemented a new non-discrimination test which employers must satisfy in order to claim the tax credits.
Emergency Paid Sick Leave
Employers can provide up to 80 hours (10 days) of emergency paid sick leave (“EPSL”) for employees who qualify under any of the following criteria:
- The employee is subject to a government quarantine or isolation order;
- The employee has been advised by a health care provider to self-quarantine;
- The employee is experiencing symptoms of COVID–19 and seeking a medical diagnosis;
- The employee is caring for an individual who is subject to a government quarantine or isolation order or who has been advised by a health care provider to self-quarantine;
- The employee is caring for his or her child if the school or place of care of the child has been closed, or the childcare provider of such child is unavailable, due to COVID–19 precautions;
- The employee is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID–19 and such employee has been exposed to COVID–19 or the employer has requested such test or diagnosis;
- The employee is obtaining immunization related to COVID–19; or
- The employee is recovering from any injury, disability, illness, or condition related to such immunization.
Insight – The Rescue Plan added the last 3 criteria listed above.
- The employer pays 100% of the employee’s wages up to $511 per day if the employee is taking EPSL for his or her own needs. Instead, if the employee is taking EPSL to care for another, the employer pays 2/3 of the employee’s daily wages, up to $200 per day. Note that the EPSL wages are considered “wages” for all purposes, including for tax withholding and benefits (e.g. retirement plan contributions).
Tip – The Rescue Plan reset the 10 day period, so only EPSL starting on or after April 1, 2021 count towards this 10 day entitlement.
Emergency Paid Family and Medical Leave
Similarly, employers can provide up to 12 weeks of emergency paid family and medical leave (“EPFL”) to employees who qualify under any of the EPSL criteria above.
The employer pays 2/3 of the employee’s daily wage, up to $200 per day, and subject to a $12,000 maximum amount. Note that the EPFL wages are considered “wages” for all purposes, including for tax withholding and benefits (e.g. retirement plan contributions).
Tip – The Rescue Plan eliminated the requirement that the first 10 days of EPFL be unpaid, and increased the maximum cap from $10,000 to $12,000 accordingly
Employers eligible to take tax credits for EPSL and EPFL include employers with fewer than 500 employees, self-employed individuals, tax-exempt organizations, and state and local governmental employers (added as part of the Rescue Plan). Employers with over 500 employees or who are Federal governmental employers are not eligible.
Insight – Previously, under the FFCRA Mandate, small employers with fewer than 50 employers could claim an exemption from providing EPSL and EPFL in certain situations. Since the FFCRA Mandate is gone, this is no longer an issue and small employers may choose whether or not to offer EPSL and EPFL, just like all other eligible employers.
Eligible employers who provide EPSL and EPFL to eligible employees may take tax credits equal to 100% of the EPSL and EPFL wages paid. Additionally, such tax credits are increased by the amounts allocable to such wages which are attributable to: (i) qualified health plan expenses paid or incurred by the employer to provide or a maintain group health plan; (ii) the employer’s share of Social Security and Medicare taxes paid on such wages; and (iii) amounts paid by the employer to: (A) a multiemployer defined benefit pension plan; and (B) a collectively bargained apprentice program.
Tip – As noted above, the Rescue Plan reset the applicable time limit for EPSL, so eligible employers may claim tax credits for EPSL taken on or after April 1, 2021 through September 30, 2021, regardless of any EPSL taken by qualified employees prior to April 1, 2021.
Employers claim the tax credits on IRS Form 941 – Employer’s Quarterly Federal Tax Return. To the extent that the EPSL and EPFL tax credits exceed the applicable employment taxes for the quarter, such tax credits will be treated as overpayments and refunded.
Employers may also anticipate claiming the tax credits and keep the federal employment taxes they would have otherwise deposited, up to the amount of the tax credit. These include federal income taxes withheld from employees, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes with respect to all employees.
Finally, employers who do not have enough federal employment taxes to offset these tax credits may file IRS Form 7200 – Advance Payment of Employer Credit Due to COVID-19 to request funds directly from the federal government.
The Rescue Plan added new non-discrimination rules to the requirements for EPSL and EPFL tax credits. No tax credits are available if an employer discriminates in favor of: (i) highly compensated employees; (ii) full-time employees; or (iii) employees on the basis of tenure.
Tip – For 2021, a highly compensated employee is generally one who earned more than $130,000 in compensation in 2020, or who is a 5% owner of the employer.
Employers should confer with their accounting, tax, and legal advisors to decide if offering EPSL and EPFL is appropriate for their situation, and if so, how to utilize the tax credits offered by the Rescue Plan. Also, employers should continue to look for additional guidance from the federal government, with further rules and regulations expected from the Department of Labor and the Internal Revenue Service.
Our attorneys continue to monitor the impact of coronavirus on the markets (including matters related to employee benefits and compensation), and we have developed a dedicated COVID-19 Resource Library to provide insights on regulations and/or changes to the law. Please contact your Pryor Cashman attorney for specific advice or counsel.
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