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April 2, 2020
The IRS has released guidance and sample forms related to the tax credit available to private employers with fewer than 500 employees who are required to provide Paid Sick Leave and Expanded FMLA leave as required by the recently passed Families First Coronavirus Response Act (FFCRA). The tax credits are not available to public entities, even those who are required to provide Paid Sick Leave or Expanded FMLA.
The FFCRA requires certain employers (generally private employers with fewer than 500 employees, and all public employers) to provide Paid Sick Leave and Expanded FMLA leave for certain events related to the COVID-19 pandemic. Private employers can recoup their costs of providing this leave through an advanced payroll tax credit. The credit is designed to reimburse private employers who are subject to the law for the extra cost of compensation and benefits provided to employees entitled to take leave due to one of the reasons defined in the FFCRA.
The IRS provided detailed guidance on the process employers need to follow in order to take advantage of the tax credit. The process permits affected employers to withhold an amount equal to qualified wages and health expenses from payroll taxes that are to be deposited with the federal government. The employer’s qualified costs can be withheld from the employer’s portion of payroll taxes, payroll taxes deducted from the employees’ pay, and federal income tax withheld from employees’ pay. The amounts withheld will then be reported on the employer’s quarterly payroll tax filing. If there are insufficient payroll tax funds available to offset the employer’s qualified wage and health expenses related to providing FFCRA protected leave, the employer can file a Form 7200 to claim an advance credit.
The IRS guidance can be found at https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act. In this summary, we provide details on how to determine the cost of employee benefits that can be applied toward the tax credit and documentation requirements. The employer’s tax advisor and/or payroll provider can provide additional detail on the process for filing for the payroll tax credit.
Employer tax credits to cover the cost of employees taking FFCRA qualified leave include what are referred to as “qualified health plan expenses.” Qualified health plan expenses include plans defined as group health plans in Code section 5000(b)(1). This is a broad definition that includes employer-sponsored medical plans, HRAs, dental plans, vision plans, Rx plans, health FSAs, and others, but does not include employer contributions to a QSEHRA, Archer MSA or HSA.
The amount of qualified health plan expenses generally includes both the portion of the cost paid by the employer and the portion of the cost paid by the employee with pre-tax salary reduction contributions. If an employee participates in more than one eligible plan, the qualified expenses of each plan in which the employee participates are aggregated for that employee.
An employer who sponsors a fully-insured group health plan may use any reasonable method to determine and allocate the plan expenses, including:
Qualified health plan expenses must be allocated on a pro rata basis for the periods of time coverage is provided while an employee is on FFCRA qualified leave. If an employer uses an average premium rate for all employees, the IRS provided the following description of how the daily allocable costs could be determined:
The IRS also provided guidance on documentation employers must obtain from employees who take FFCRA leave. This documentation does not need to be submitted to the IRS but must be maintained to justify tax credits claimed by the employer in the event of an audit.
The employer must require a written request for FFCRA leave from the employee in which the employee provides:
In the case of a leave request 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 person subject to quarantine or advised to self-quarantine is not the employee, that person’s name and relation to the employee.
In the case of a leave request based on a school closing or childcare provider unavailability, the statement from the employee should include:
Employers must also maintain internal records that include the following information:
The implementation of the FFCRA requirements and tax credit is happening at an unprecedented speed due to the nature of the crisis the country is dealing with. Employers should check the relevant IRS and DOL websites often as the agencies are expected to continue to issue additional guidance in many forms, including regulations, FAQs, and agency memos.
The views and opinions expressed within are those of the author(s) and do not necessarily reflect the official policy or position of Parker, Smith & Feek. While every effort has been taken in compiling this information to ensure that its contents are totally accurate, neither the publisher nor the author can accept liability for any inaccuracies or changed circumstances of any information herein or for the consequences of any reliance placed upon it.