Planning to Claim the COVID-19-Related Tax Credits

Carlton Fields
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Carlton Fields

This article intends to help your payroll or finance departments prepare to take advantage of the employment tax credits provided by the Families First Coronavirus Response Act (FFCRA), signed into law on March 18, 2020.

What is the credit?

Philosophically speaking, the credit offsets the costs of the emergency paid sick leave and paid FMLA created by the FFCRA.

Why are we getting this?

The credits should help employers recoup their costs for keeping affected employees on the payroll.

Who is eligible for the credits?

Most for-profit business and nonprofit organizations with fewer than 500 employees. These entities must provide leave to employees affected by COVID-19. Governmental entities with fewer than 500 employees must also provide these forms of leave but are not eligible for the credits. Also, any employer receiving credits for the paid FMLA created by the Tax Cuts and Jobs Act of 2017 may not “double dip” and apply for credits under the 2017 and the 2020 legislations for the same leave (although these employers can receive credits for leave that is not credited under the 2017 legislation).

Smaller employers may be entitled to an exemption from the leave provisions. If so, they are not entitled to credits.

Self-employed individuals and independent contractors may be eligible for credits if their condition or situation would have entitled them to leave had they been employed by a for-profit company with between 50 and 500 employees.

Which employees trigger the credits?

Any employee for whom leave under the FFCRA is required. Employers who are more generous may not apply for credits for the portion of leave that exceeds the required minimums of the FFCRA.

Which expenses generate the credit?

Eligible employers receive credits for “qualified wages,” related Medicare taxes, and “qualified health plan expenses.” Qualified wages are the amounts employees receive as leave. “Medicare taxes” are the 1.45% employers pay on employee wages, and this does not include the equal 1.45% paid by employees. “Qualified health plan expenses” are, in essence, the value of the medical insurance premiums paid by the employer and by the employee (if the employee portion is paid on a pretax basis through a cafeteria plan).

What are some of the nuances to the credit for qualified health plan expenses?

Although general guidance does not allow credits on amounts paid by employers that exceed minimum thresholds, it appears that employers can be more generous with medical insurance by paying a larger portion of the premium for employees on leave and receiving credits for those amounts. Since the premiums paid by employers and employees (on a pretax basis) are combined, the credits should be the same without regard to how the premium payments are divided between employer funds and employee pretax payments.

It appears that “health plan” includes most vision, dental, and other group health plans that reimburse or pay for medical expenses. Plans paying a set dollar amount without regard to treatment costs are probably excluded.

We expect that when the value of the premiums “paid” or offset by employers sponsoring self-insured group health plans is unclear, most will use the premium charged to COBRA participants (reduced by any administrative fees) as the applicable total premium that is eligible for the credit.

As for account-based health plans, creditable contributions include amounts paid to health FSAs, standard HRAs, and individual coverage HRAs (ICHRA), but not qualified small employer HRAs (QSEHRA), HSAs, or Archer MSAs.

When and how can I use these credits?

Eligible employers can use these credits when filing Form 941 (“Employer’s Quarterly Federal Tax Return”) for wages paid for applicable leave from April 1, 2020, through December 31, 2020. When an eligible employer files its Form 941 for the second quarter of 2020 (covering April 1 through June 30), for example, it would claim a credit for the amount of eligible leave and related items (like eligible health care costs). If these credits exceed total payroll taxes due, the eligible employer requests a refund for the excess. Employers may also request an advance of these amounts by using a Form 7200 (“Advance Payment of Employer Credits Due to COVID-19”) before the end of the quarter and the filing of the applicable Form 941.

What documentation do I need to support the credits?

Employers should be prepared to prove which employees were entitled to leave, received leave, and how much was paid. Instead of just maintaining records of aggregate amounts, records should show the amount paid on account of each individual employee and why that amount was paid. This means that employers must maintain records of the amounts being paid to employees and their related health insurance before taking leave and why these employees were eligible for leave.

For example, employees claiming to qualify for leave because they have COVID-19 should provide proof, via a doctor’s diagnosis or some other form. Employees claiming to qualify for paid FMLA due to their child’s school closure should provide proof of the closure.

The IRS recommends keeping this information for four years following the date of the filed Form 941. We recommend keeping this information for the next seven years following the filing of your 2020 year-end return.

More information about employment taxes, in general, is available here. More information about the various legal issues surrounding COVID-19 is available at the Carlton Fields Coronavirus Resource Center.

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