On March 31, 2020, the IRS issued guidance on the FFCRA Paid Leave Tax Credits under the Families First Coronavirus Response Act (“FFCRA”). The FFCRA Paid Leave Tax Credits are fully refundable tax credits giving covered employers dollar-for-dollar reimbursements for the costs of providing covered employees paid leave under the FFCRA’s Emergency Paid Sick Leave Act (“EPLSA”) and the Emergency Family and Medical Leave Expansion Act (“Expanded FMLA”). The IRS’s FFCRA Paid Leave Tax Credits FAQs can be found here.
Below is a summary of the key information from those FAQs:
The FFCRA Paid Leave Tax Credit reimburses covered employers for wages paid for leave required under the EPLSA and Expanded FMLA (collectively, “qualified leave wages”). Covered employers are those with fewer than 500 employees, or self-employed individuals carrying on a trade or business within the meaning of Section 1402 of the Internal Revenue Code. The 500-employee threshold accounts for full-time and part-time employees within any State in the U.S., the District of Columbia, or any Territory or possession of the U.S. The U.S. Department of Labor temporary FFCRA regulations provide that joint or integrated employers should apply the integrated-employer test to determine when they should be aggregated as a single employer for purposes of the total number of employees.
Entitlement to Credits and Amount
Once qualified leave wages have been paid under EPLSA or Expanded FMLA, the covered employer is entitled to the tax credit. No tax credits will be available to covered employers who pay amounts above the daily and aggregate caps to employees (which are outlined below), even via employer-provided sick leave. Employers who allow employees to make up the difference to receive their full pay for certain types of leave are not entitled to a credit for amounts paid above the qualified leave wages.
Specifically, EPLSA leave payments are capped (1) at $511 per day ($5,110 in the aggregate), paid at the employee’s regular rate of pay, for an employee (who cannot work or telework but whose employer is not closed) “experiencing symptoms of COVID-19 and seeking a medical diagnosis” or subject to a government quarantine or isolation order or a health care provider’s advice to self-quarantine the employee; and, (2) at $200 per day ($2,000 in the aggregate), paid at 2/3’s the employee’s regular rate of pay, if the employee is caring for his/her minor son or daughter whose school or place of care is closed (or whose child care provided is unavailable) due to COVID-19, is caring an individual subject to a government quarantine or isolation order or a health care provider’s advice to self-quarantine, or is experiencing any “substantially similar condition specified by the Secretary of Health and Human Services.” Expanded FMLA leave payments, paid at 2/3’s the employee’s regular rate of pay, are capped at $200 per day ($10,000 in the aggregate), and are only provided if the employee is caring for his/her minor son or daughter whose school or place of care is closed (or whose child care provided is unavailable) due to COVID-19, the employee cannot work or telework, and the employer’s business is not closed. Thus, these would be the maximum amount of credits available per employee.
Calculation of Credits
Credits are allowed against taxes under Section 3111(a) and Section 3221(a) of the Internal Revenue Code on all wages and compensation paid to all employees, and covered employers are not required to pay the employer portion of the Social Security taxes (or the Railroad Retirement Tax Act Tier 1 rate) on the qualified leave wages. Further, the credits are increased by the qualified health plan expenses and the employer’s portion of the Medicare tax (currently 1.45% of wages) associated with the qualified leave wages—although, that portion of the credit is not available to employers subject to the Railroad Retirement Tax Act.
Example from IRS’s FFCRA Paid Leave Tax Credits FAQs: “An Eligible Employer pays $10,000 in qualified sick leave wages and qualified family leave wages in Q2 2020. It does not owe the employer’s share of social security tax on the $10,000, but it will owe $145 for the employer’s share of Medicare tax. Its credits equal $10,145, which include the $10,000 in qualified leave wages plus $145 for the Eligible Employer’s share of Medicare tax (this example does not include any qualified health plan expenses allocable to the qualified leave wages). This amount may be applied against any federal employment taxes that Eligible Employer is liable for on any wages paid in Q2 2020. Any excess over the federal employment tax liabilities is refunded in accord with normal procedures. Eligible Employer must still withhold the employee’s share of social security and Medicare taxes on the qualified leave wages paid.” (emphasis added).
Credits are allowed for qualified leave wages paid for periods of leave beginning on April 1, 2020, and ending on December 31, 2020, but may be claimed even if the payment is actually made after December 31, 2020.
Qualified Health Plan Expenses
For qualified health plan expenses, the amount for credits includes the amounts paid or incurred by the employer to provide and maintain a group health plan, as defined in Section 5000(b)(1) of the Internal Revenue Code, and the amounts of the employee portion of the cost paid with pre-tax salary reduction contributions. After-tax employee contributions are not included. If a covered employer sponsors more than one plan, qualified health plan expenses are determined separately and allocated to the employees who participate in each plan; amounts for employees participated in more than one plan are aggregated. Employer contributions to an HSA or Archer MSA are not included, but employer contributions to an HRA or health FSA may be (although, not a QSEHRA).
Covered employers sponsoring a fully-insured or self-insured group health plans should use a “reasonable method” to determine and allocate qualified health plan expenses. This might be the applicable COBRA premium typically available from the insurer or administrator. The FAQs have other considerations and examples to reference for these sorts of nuanced issues.
Covered employers are allowed to retain certain taxes equal to the amount of the qualified leave wages paid, plus allocable qualified health plan expenses and employer’s portion of the Medicare tax (as opposed to depositing them). If the credit exceeds certain taxes owed, the excess is treated as an overpayment and refunded to the employer (i.e., the credit is “fully refundable”). The IRS states that employers will incur no penalty for an accurate reduction in the tax deposit in anticipation of the credit for qualified leave wages paid; employers should be aware of the possibility of underpayment of taxes in these circumstances.
Credits are available only for those qualified leave wages paid between April 1, 2020, and December 31, 2020. Employers can benefit most efficiently from the credits by reducing their federal employment tax deposits and claiming the credit on the applicable tax returns (Form 941). If insufficient federal employment taxes are available to cover the amount of the credits through tax deposit reductions, covered employers may file for an advance by filing a Form 7200.
Documenting and Substantiating Credits
Employers should retain appropriate records to document the credits from a tax perspective (Forms 941 and 7200 or other applicable filings), as well as documentation for how the amount of the qualified leave wages and qualified health plan expenses were determined. These records should be maintained for at least 4 years after the later of the date when the taxes are due or paid.
Substantively, the employer should also obtain written requests for leave from employees, containing the employee’s name, the dates for which leave is requested, a statement of the reason the leave is needed, and a statement that the employee is unable to work or telework for that reason. For purposes of a need for leave based on a quarantine or isolation order, the written request should state the name of the government entity or health care provider issuing the order. If the need relates to need to care for a child whose school is closed or child care provider is unavailable, the written request should state the name and age of the child/ren, the name of the school, and a representation that no other person will be providing care. If the child is over fourteen, the request should also contain a statement that special circumstances exist requiring the employee to provide care.
Multiple Avenues to Claim Credits and Government Assistance
Employers can may receive both the FFCRA Paid Leave Tax Credit and the Cares Act Employee Retention Credit. A summary of the IRS’s CARES Act Employee Retention Credits can be found on Foley’s Coronavirus Resource Center. Employers can also receive the FFCRA Paid Leave Tax Credit and the Small Business Interruption Loan under the CARES Act. Note though that covered employers cannot claim a double benefit under the FFCRA and 45S of the Internal Revenue Code.
The FAQs also contain various pieces of information regarding taxation and deductibility of qualified leave wages and other amounts at issue, how a self-employed individual calculates and claims the credit, and use of third-party payers.
For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization.