On March 18, 2020, the Families First Coronavirus Response Act (FFCRA) was signed into law to administer funds for COVID-19 testing, provide emergency leave benefits, and fund other government programs. This article focuses on how employers should account for the qualified paid sick and family leave benefits.
Generally, FFCRA provides that employees of covered employers are eligible for:
The paid sick leave and expanded family and medical leave provisions of FFCRA apply to certain public employers and private employers with fewer than 500 employees. Small businesses with fewer than 50 employees may qualify for an exemption from the requirement to provide leave due to school closings or child care unavailability if the leave requirements would jeopardize the viability of their businesses as a going concern.
Eligible employers will receive a refundable tax credit from the federal government for the full cost of qualified paid sick and family and medical leave pay provided to eligible employees. These tax credits are in the form of refundable payroll tax credits. A joint statement from the DOL and IRS indicates that the regulations are “designed to immediately and fully reimburse (employers), dollar-for-dollar, for the cost of providing Corona-virus related leave to their employees.”
The above payroll tax credits are in addition to and should not be confused with the employee retention tax credit under Section 2301 of the CARES Act. Borrowers that have received PPP funding can benefit from the FFCRA payroll tax credits, but two restrictions need to be monitored to avoid double-dipping on the benefits:
Division E of FFCRA defines the benefits of qualified paid sick leave for eligible employees. Paid sick leave wages have similar tax characteristics, from both the employer’s and employee’s perspective, as compared to regular wages. Employees pay regular income taxes and employers must still withhold their employee’s share of Social Security and Medicare taxes, as well as any elective deferrals under other fringe benefit programs offered by the employer, including retirement plan contributions.
If employers or plan Sponsors have not made retirement plan deferrals on sick and family leave wages under FFCRA, now is the time to correct this.
Division G of the Act focuses on the tax credits for qualified paid sick and family and medical leave. One of the key elements here is the documentation and segregation of this type of pay (paid sick leave). This burden can be lightened by having your payroll service provider, e.g., ADP, set up a separate wage code to track these wages. Employers are also able to allocate to qualified wages for (i) the employer-paid portion of qualified health plan expenses and (ii) the employer’s share of Medicare taxes on the wages (1.45%). These two items are in addition to the qualified sick and family leave wages that are capped at the amounts above.
Employers must maintain documentation, as provided by the affected individuals, that evidences eligibility. This includes a self-certified statement that the employee is unable to work, the reason why, the dates of the employee’s leave and health care provider information or government entity that issued to the employee orders to self-quarantine. If caring for an individual, such relevant information will be needed in the form of a statement. If child caring providers are closed, the name of the provider (or school) and representation that no other suitable person is able to care for the child.
We remind you that documentation requirements must be maintained for four years to comply with DOL and IRS regulations. The IRS FAQs outline the following documentation to properly document and claim the tax credit:
Eligible employers will claim the credits on their federal employment tax returns (Form 941, Employers’ Quarterly Federal Tax Return). If the amount of the credit is greater than the federal employment taxes to be offset, the employer can submit Form 7200 for an advance payment from the government, as opposed to waiting for the next quarter’s filing of the 941.