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Tax Credits for Paid Leave Extended by the American Rescue Plan Act

The American Rescue Plan Act expanded and extended the opportunity for employers to claim tax credits for paid leave under the framework of the expired Families First Coronavirus Response Act (FFCRA).
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The American Rescue Plan Act (ARPA), signed into law March 11, 2021, extended and expanded the payroll tax credits for paid leave that were previously available under the Families First Coronavirus Response Act (FFCRA). The FFCRA originally dedicated tens of billions of dollars for paid sick and family leave, unemployment insurance, free COVID-19 testing, and other measures to help Americans impacted by the pandemic. American private employers who had fewer than 500 employees could take the credit under FFCRA for the costs of providing employees with qualifying paid leave taken for specified reasons related to COVID-19.

The federal mandate to provide employee leave expired at the end of 2020, but if a covered employer decides to provide employee paid leave voluntarily under the FFCRA framework, the employer could be eligible to take the tax credits until Sept. 30, 2021. These employers should be aware that the credit might be impacted by state and local COVID-19 leave requirements and how those interact with requirements under FFCRA.

Keep in mind, the only way to qualify for the federal tax credit is if the leave meets the requirements of the original FFCRA mandate that have been amended under the ARPA.

This article highlights the changes under the new law and delineates by date because if you claim the credit through March 31 or after April 1, 2021, there are different requirements.

A few changes effective April 1, 2021 to set the stage:

  • Paid sick leave and family leave wages are now subject to the employer share of Social Security tax. However, the amount of credit being claimed for paid sick and paid family leave may be increased by the employer’s share of Social Security tax (6.2%), as well as the employer’s share of Medicare tax (1.45%) on qualified wages.
  • The credits for leave under the framework of the Emergency Paid Sick Leave Act (EPSLA) and the Emergency Family and Medical Leave Expansion Act (EFMLEA) will be structured as a nonrefundable payroll tax credit against the Medicare tax only (1.45%). Through March 31, 2021, this credit applies against Social Security. This does not change the amount of the credit. It simply reallocates which portion of the credit is nonrefundable from Social Security to Medicare.
  • New non-discrimination rules are put in place that apply to the credit for either leave, disallowing a credit for any employer who discriminates in favor of highly compensated employees, full-time employees or employees based on employment tenure.
  • IRS guidance and updated tax forms required for filing are needed

What is the Purpose of the Tax Credits?

The tax credits are provided to reimburse 100 percent of leave wages paid by an employer who provides employees with qualifying paid leave taken for specified reasons related to COVID-19. Leave can fall under the EPSLA and the EFMLEA.

April 1, 2020 through March 31, 2021

Generally, American private employers with fewer than 500 employees were eligible to claim the credits. Self-employed individuals can now claim the family leave credit for up to 50 days.

April 1, 2021 through Sept. 30, 2021

Now., in addition to private employers, healthcare providers and certain governmental and state/local employers are eligible to claim the credit under the same requirements. The limit on the family leave credit for self-employed individuals increases to 60 days.

How is the Employee Threshold Determined?

Employers should count the following employees when determining their count:

  • Full-time employees
  • Part-time employees
  • Employees on leave
  • Temporary employees who are jointly employed under the Fair Labor Standards Act (FLSA) by the employer and another employer
  • All employees of integrated employers
  • Day laborers supplied by a temporary placement agency

Note: Individuals who are independent contractors under the Fair Labor Standards Act do not count toward the employee threshold.

Calculation of Maximum Hours

April 1, 2020 through March 31, 2021

  • Full-time employees are entitled to 80 hours of leave under the EPSLA if they are normally scheduled to work at least 40 hours each workweek.
  • Part-time employees who work less than 40 hours per week are entitled to EPSL in the amount up to the number of hours that an employee works, on average, over a two-week period.

The U.S. DOL included additional guidance in its Temporary Final Rule for the calculation of maximum EPSL if a traditional weekly schedule does not exist or if a schedule varies.

Under the EFMLA, calculate hours of leave based on the number of hours the employee is normally scheduled to work. If the normal hours scheduled are unknown, or if the part-time employee’s schedule varies, you may use a six-month average to calculate the average daily hours.

April 1, 2021 through Sept. 30, 2021

The maximum number of days for which qualified sick leave wages can be paid and the number allowed for an employer to get a credit will be reset to 10 days. Hours would be calculated as noted above. However, employees cannot carry over unused hours. If an employer chooses to provide leave under the EPSLA or EFMLEA, they would be eligible to claim the credit again.

What Are the Qualifying Reasons for Taking Leave?

April 1, 2020 through March 31, 2021

An employee qualifies for EPSL leave if unable to work (including unable to telework) related to COVID-19 because the employee:

  1. Is subject to a federal, state, or local quarantine or isolation order
  2. Has been advised by a health care provider to self-quarantine
  3. Is experiencing COVID-19 symptoms and is seeking a medical diagnosis
  4. Is caring for an individual subject to an order (described in 1) or self-quarantine (described in 2)
  5. Is caring for his or her child whose school or place of care is closed (or childcare provider is unavailable)
  6. Is experiencing any other substantially similar condition specified by the U.S. Department of Health and Human Services

Part-time employees would generally be eligible for Emergency Paid Sick Leave in an amount equivalent to their regularly schedule hours for a two-week period.

Under the EFMLEA, an employee would only qualify for leave under No. 5 above.

April 1, 2021 through Sept. 30, 2021

The American Rescue Plan Act changed leave under the EFMLEA. Employees qualify for all six reasons to take leave that are available under the EPSLA, plus both leaves gain additional reasons under No. 3 (above), as follows:

  • Employers may now claim the credit for sick leave wages paid for employees taking leave while they await the results of a diagnostic test for COVID-19 after being exposed to the virus or because their employer requests the test.
  • Leave taken for the employee to obtain a COVID-19 vaccine or to recover from any health issues resulting from the vaccine.

What Are the Wage Calculations for Paid Sick Leave?

Employees are to be paid based on:

  • For reasons Nos. 1 to 3 above, the higher of the employee's regular rate of pay, or the applicable state or federal minimum wage, up to $511 per day
  • For reasons Nos. 4 to 6 above, the higher of 2/3rds of the employee's regular rate of pay, or the applicable state or federal minimum wage, up to $200 per day

What Should Businesses Know About the Emergency Paid Sick Leave Act?

The IRS specifies that covered employers who pay qualifying emergency sick leave wages under the FFCRA framework will be able to retain an amount of their payroll taxes owed equal to the amount of qualifying sick leave that they paid, and not have to deposit those payroll taxes with the IRS.

Payroll taxes available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes.

Employers can take advantage immediately of the paid leave credits and retain the funds normally paid to the IRS. However, if those funds are not sufficient to cover the paid leave tax credits, IRS Form 7200 can be used by employers to apply for an advance payment of any excess credit.

Employees are eligible for EPSL hours immediately upon starting employment.

April 1, 2020 through March 31, 2021

  • Employees may not be required to use other available paid time off before using paid sick time under this Act.
  • Employers will be required to post a notice of employee rights.
  • Exemptions apply for employers of healthcare workers and emergency responders at their election.
  • If the credit exceeds the employer’s total liability of the portion of Social Security in any calendar quarter, the excess is refundable to the employer.

April 1, 2021 through Sept. 30, 2021

The first two bullets immediately above still apply. The third bullet is voided by changes in the American Rescue Plan Act and the fourth bullet will be changed as follows:

  • If the credit exceeds the employer’s total liability of the portion of Medicare in any calendar quarter, the excess is refundable to the employer.

There is an additional change:

  • The credit is increased by the cost of the employer’s qualified health plan expenses and by the certain employer’s collectively bargained contributions to a defined benefit pension plan and certain amounts of collectively bargained apprenticeship program contributions.

Paid sick time provided under this Act is not preempted by other federal, state, or local laws. The IRS has created FAQs that provide an overview of the tax credits, but they have not updated the page to reflect the changes made by the American Rescue Plan Act.

What Should Businesses Know About the Emergency Family and Medical Leave Expansion Act?

Under the EFMLEA:

Through March 31, 2021

  • Employees who have worked at least 30 calendar days for a covered employer would be eligible for qualifying leave.
  • Employers with fewer than 25 employees may be exempt from certain provisions related to job protection.
  • Eligible employees who qualify for leave under for caring for his or her child whose school or place of care is closed (or childcare provider is unavailable) would be paid by their employer after the first 10 days of leave at a rate of not less than two-thirds of their current rate of pay for the number of hours the employee would otherwise be scheduled to work, up to a maximum of $200 per day or an aggregate of $10,000, for up to 12 weeks in a 12-month period. 
  • Employees taking leave under the EFMLEA must be permitted to elect to use any available paid time off including vacation, personal time, medical leave and/or sick leave during the first 10 days of their FMLA leave.
  • Exemptions apply for employers of healthcare workers and emergency responders.

April 1, 2021 through Sept. 30, 2021

Under the American Rescue Plan Act, the 10-day waiting period will be waived, thus voiding the need for employees to be able to elect the use of other available paid time off (e.g., vacation) during the first 10 days of FMLA leave. Other changes are an increase in the maximum aggregate amount to $12,000 for up to 12 weeks in a 12-month period and the expansion of eligibility to include employers of healthcare workers and emergency responders.

Notices

Under EFMLEA:

  • Up through Dec. 31, 2020, all covered employers were required to post the DOL’s model notice in a conspicuous place. Employers could satisfy the requirement via email, direct mail, posting on internal or external employee information website. It was available in other languages on the DOL’s COVID-19 and the American Workplace website. There is no indication that a poster exists for voluntary leave that began Jan. 1, 2021.
  • Employees may provide oral or written notice of their need for leave. It must provide enough information to inform the employer of the need for leave.
    • Employers can ask for requested dates of leave and qualifying reasons for leave

Small Employer Exemption

Until Dec. 31, 2020, small business with fewer than 50 employees could claim exemption from providing leave under the EPSL and EFMLEA if in providing such leave jeopardized the viability of the business.

Recordkeeping

Employers must retain documents and information regarding leave for a period of four years, regardless of whether the decision was made to grant or deny the request for leave.

For tax credit purposes, the U.S. DOL requires employers to maintain the following for four years:

  • Documentation to show how the employer determined how much paid leave the employee was eligible for (e.g., records of work performed, telework, and paid leave credits)
  • Documentation to show how the employer determined the amount of qualified health plan expenses that were allocated to wages
  • Copies of any completed IRS Forms 7200 and 941 that the employer submitted to the IRS (or provided to a third-party payer to meet an employer’s employment tax obligations).

How Paychex Can Help

This article details changes to federal COVID-19 leave made under the American Rescue Plan Act. These changes have created additional complexities for businesses owners who want to take advantage of the paid leave tax credits. However, employers must review their obligations under existing state and local COVID-19 leave laws, as well as any other federal, state or local laws related to an employee’s right to leave.

This is a good time to re-evaluate your HR needs. Consider how our HR Services, tax services and payroll solutions could save you time by helping alleviate extra work and the potential risk of non-compliance.  

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Laurie Savage is Senior Compliance professional, leading robust legislative research efforts analyzing intricate policy, including the Affordable Care Act (ACA), paid leave, tax reform and recently, legislation responding to the COVID-19 pandemic.
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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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