The IRS and DOL Issue Guidance on Required Documentation for Paid Leave and the Associated Tax Credits under the Families First Coronavirus Response Act

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The Internal Revenue Service (IRS) has issued guidance for employers regarding the required paid leaves and associated tax credits under the Families First Coronavirus Response Act (FFCRA). This guidance takes the form of a news release with 66 frequently asked questions (FAQs) (the “IRS News Release”). The IRS News Release was followed by the Department of Labor’s (DOL) formal rules on the FFCRA, which are substantially similar to the IRS News Release.

Of specific interest to employers is a section of the IRS News Release addressing the question: “How Should an Employer Substantiate Eligibility for Tax Credits for Qualified Leave Wages?” FAQ numbers 44-46 describe what employers will need to obtain in order to be eligible to be reimbursed for paying an employee’s emergency Paid Sick Leave (PSL) or leave under the emergency expansion of the Family and Medical Leave Act (FMLA).[1]

Emergency Paid Leaves Under the FFCRA

Details of the emergency Paid Leaves under the FFCRA can be found here in these DOL regulations and in these previous client alerts: The President Signs the Families First Coronavirus Response Act and The DOL Releases Guidance on the Families First Coronavirus Response Act and the Mandatory Notice Poster.

Tax Credits for Emergency Paid Leave Under the FFCRA

Details of the tax credits for emergency Paid Leave under the FFCRA can be found here: IRS FAQs: “How to Claim the Credits”.

Information an Employer Should Receive from an Employee and Use to Qualify for Paid Leave Tax Credits Under the FFCRA

Employers should obtain a written request from the employee for either the emergency PSL or leave under the emergency expansion of the FMLA. The written request should contain the following information:

  1. The employee’s name;
  2. The date or dates for which leave is requested;
  3. A statement of the COVID-19-related reason the employee is requesting leave and written support for such reason (see below); and
  4. A statement that the employee is unable to work, including by means of telework, for such reason.

In addition:

  • If the leave request is based on a quarantine order or self-quarantine advice, the statement from the employee should include the name of the governmental entity ordering quarantine or the name of the health care professional advising self-quarantine.
  • If the leave request is based on an employee’s need to care for someone who is under a quarantine or isolation order or has been advised to self-quarantine, that person’s name and relation to the employee should be provided in the employee’s statement.
  • If the leave request is based on a school closing or child care provider unavailability, the statement from the employee should include (i) the name and age of the child (or children) to be cared for, (ii) the name of the school that has closed or place of care that is unavailable, and (iii) a representation that no other person will be providing care for the child during the period for which the employee is receiving family medical leave. If applicable, with respect to the employee’s inability to work or telework because of a need to provide care for a child older than fourteen during daylight hours, the employee needs to include a statement that special circumstances exist requiring the employee to provide care to that child.

NOTE: The DOL rule differs slightly and states that the employer may accept an oral statement from an employee with this information, but if it does so, it should document the conversation.

RECOMMENDATION: Obtain a written statement whenever you can. If that is not possible, document the oral statement as well as the reason you were unable to obtain a written statement. Request a written statement from the employee when he or she is able to provide one.

Additional Records Employers Should Maintain to Qualify for Paid Leave Tax Credits Under the FFCRA

In addition to the information set forth above, employers should create and maintain records that include the following information:

  1. Documentation to show how the employer determined the amount of qualified sick and family leave wages paid to employees under the FFCRA, including records of work, telework, qualified sick leave and qualified family leave.
  2. Documentation to show how the employer determined the amount of qualified health plan expenses that the employer allocated to wages. IRS FAQ No. 31 sets forth the methods to compute this allocation.
  3. If an employer applies for advance credits to assist with providing paid leave under the FFCRA, then copies of any completed Forms 7200 that the employer submitted to the IRS. This option is addressed in IRS FAQ No. 40.
  4. Copies of the employer’s completed Quarterly Federal Tax Return (Form 941) that the employer submitted to the IRS (or, for employers that use third party payers to meet their employment tax obligations, records of information provided to the third-party payer regarding the employer’s entitlement to the credit claimed on Form 941).

Records Retention Requirement

The IRS requires that employers keep all records related to employment taxes for at least four years after the date the tax becomes due or is paid, whichever comes later, and the records need to be available for IRS review.

Likewise, the DOL rule states that employers should keep all documentation related to requests for leave under the FFCRA, whether or not the leave is granted, for four years.

Credit Eligibility for Employees Who are Not Working Due to General Stay-At-Home or Shelter-In-Place Orders

The first reason under the FFCRA that an employee may be eligible to take emergency PSL is when an employee “is unable to work because the employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19.” It has been unclear whether general government stay-at-home or shelter-in-place orders fall within this reason, thus allowing employers to automatically pay employees up to two weeks of emergency PSL and obtain the related tax credits. Based on the DOL regulations, the answer is that it depends.

The new DOL rule states that a quarantine or isolation order broadly includes “quarantine, isolation, containment, shelter-in-place, or stay-at-home orders” that cause the employee to be unable to work even though the employer has work for them. The DOL states that this also includes when such orders advise categories of citizens (such as of certain age ranges or of certain medical conditions) to shelter in place or stay at home.

However, the DOL states that an employee may take emergency PSL under the FFCRA for this reason only if “but for being subject to the order,” the employee would be able to perform work that is otherwise available. By contrast, an employee subject to a quarantine or isolation order may not take emergency PSL where the employer does not have work for the employee as a result of the order or other circumstances. This is because the employee would be unable to work even if the employee was not required to comply with the quarantine or isolation order.

The DOL explains that the key question in this analysis is, “would [the employee] be able to work or telework ‘but for’ being required to comply with a quarantine or isolation order?”

Practically, the analysis of whether the stay-at-home order is the “but for” cause of an employee being home without work to do is whether the employee is directly, individually impacted by the order, as opposed to the workplace being impacted.

The DOL rule includes an example to illustrate its point of a coffee shop that closes temporarily or indefinitely due to a downturn in business related to COVID-19. An employee subject to a quarantine or isolation order is not eligible for emergency PSL because his or her inability to work is not due to the need to comply with a stay-at-home order, but rather, due to the closure of his or her workplace. Importantly, the DOL also states that this is true even if the closure of the business is directly related to such an order (the order forced the coffee shop to close) or indirectly related to such an order (the coffee shop closed due to customers being required to stay at home). In both situations, the reason for the employee being unable to work is because the customers or the coffee shop are subject to the order, and not because the employee was subject to the order. Therefore, the employee in that situation would not be eligible for emergency PSL under this qualifying reason.

As the stay-at-home orders begin to be lifted, it is possible that a more limited order may be issued, such as requiring people over 65 to remain self-isolated, while people under 65 are permitted to resume going to work. In such a situation, we can assume the employer will reopen and resume operations. An employee over 65 would otherwise be able to go back to work but could not do so because of the stay-at-home order specific to that employee over 65, so that stay-at-home order is the “but for” cause of the employee’s inability to work. Thus, in this situation, the employee and the employer would likely be eligible for the emergency PSL under the FFCRA.

[1] The DOL addresses this topic in Sections 826.100 and 826.140 of the DOL’s formal rule on FFCRA.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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