IRS Guidance for the Families First Coronavirus Response Act

Since our last update on March 26 regarding the Families First Coronavirus Response Act (“FFCRA”), the IRS has provided guidance on the two key provisions of the FFCRA, being the Emergency Paid Sick Leave Act (“EPSLA”) and the Emergency Family and Medical Leave Expansion Act (“EFMLEA”) which amends Title I of the Family Medical Leave Act (“FMLA”).  Below is a summary of the Guidance recently provided by the IRS.  Additionally, the US DOL has provided additions and modifications(several times to date) to the Rules for the FFCRA that I will summarize in another update.

Tax Credits for Eligible Employers

The FFCRA provides small and midsize employers refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19.  The FFCRA gives businesses with fewer than 500 employees (“Eligible Employers”) funds to provide employees with paid sick and family and medical leave for reasons related to COVID-19, either for the employee’s own health needs or to care for family members. Workers may receive up to 80 hours of paid sick leave for their own health needs or to care for others and up to an additional ten weeks of paid family leave to care for a child whose school or place of care is closed or child care provider is closed or unavailable due to COVID-19 precautions. The Act provides that employers subject to the EPSLA and the Expanded FMLA paid leave requirements are entitled to fully refundable tax credits to cover the cost of the leave required to be paid for these periods of time during which employees are unable to work (which for purposes of these rules, includes telework).  Certain self-employed persons in similar circumstances are entitled to similar credits.

Eligible Employers are entitled to receive a credit in the full amount of the qualified EPSLA wages and qualified EFMLEA wages (collectively referred to as “Qualified Leave Wages”), plus allocable qualified health plan expenses and the employer’s share of Medicare tax, paid for leave during the period beginning April 1, 2020, and ending December 31, 2020.  The credit is allowed against the taxes imposed on employers by section 3111(a) of the Internal Revenue Code (the “Code”) (the Social Security Tax) and section 3221(a) of the Code (the Railroad Retirement Tax Act Tier 1 rate) on all wages and compensation paid to all employees.  If the amount of the credit exceeds the employer portion of these federal employment taxes, then the excess is treated as an overpayment and refunded to the employer under sections 6402(a) or 6413(a) of the Code.  The qualified sick leave wages and qualified family leave wages are not subject to the taxes imposed on employers by sections 3111(a) and 3221(a) of the Code and employers (other than those that are subject to the Railroad Retirement Tax Act) are entitled to an additional credit for the taxes on employers imposed by section 3111(b) of the Code (Hospital Insurance (Medicare Tax)) on such wages.

Eligible Employers that pay Qualified Leave Wages will be able to retain an amount of all federal employment taxes equal to the amount of the Qualified Leave Wages paid, plus the allocable qualified health plan expenses and the amount of the employer’s share of Medicare Tax imposed on those wages, rather than depositing them with the IRS.  The federal employment taxes that are available for retention by Eligible Employers include federal income taxes withheld from employees, the employees’ share of Social Security and Medicare Taxes, and the employer’s share of Social Security and Medicare Taxes with respect to all applicable employees.

If the federal employment taxes yet to be deposited are not sufficient to cover the Eligible Employer’s cost of Qualified Leave Wages, plus the allocable qualified health plan expenses and the amount of the employer’s share of Medicare Tax imposed on those wages, the employer will be able file a request for an advance payment from the IRS.  The IRS expects to begin processing these requests in April 2020.

Eligible Employers claiming the credits for Qualified Leave Wages , plus allocable qualified health plan expenses and the Eligible Employer’s share of Medicare Taxes, must retain records and documentation related to and supporting each employee’s leave to substantiate the claim for the credits, as well retaining the Forms 941, Employer’s Quarterly Federal Tax Return, and 7200, Advance of Employer Credits Due To COVID-19, and any other applicable filings made to the IRS requesting the credit.

Qualified Health Plan Expenses

“Qualified health plan expenses” are amounts paid or incurred by the Eligible Employer to provide and maintain a group health plan (as defined in section 5000(b)(1) of the Code”), but only to the extent that those amounts are excluded from the gross income of employees by reason of section 106(a) of the Code.

Generally, the tax credits for Qualified Leave Wages are increased by the qualified health plan expenses allocable to each type of Qualified Leave Wages.  Qualified health plan expenses are properly allocated to the qualified sick or family leave wages if the allocation is made on a pro rata basis among covered employees (for example, the average premium for all employees covered by a policy) and pro rata on the basis of periods of coverage (relative to the time periods of leave to which such wages relate).

Determining Regular Rate of Pay

For paid sick leave at regular rate of pay, the employee is paid regular rate or minimum wage (whichever is higher) up to $511 per day and $5,110 in the aggregate 2-week period.  For leave at two-thirds the regular rate of pay, the employee is paid 2/3 their rate of pay or 2/3 the applicable minimum wage (whichever is higher) up to $200 per day, $2,000 in the aggregate 2-week period or $12,000 in the aggregate 12-week period (two weeks of paid sick leave followed by up to 10 weeks of paid expanded family medical leave).  The reason for the leave (employee is sick as compared to employee is caring for another, determines if it is full pay or two-thirds pay under the EPSLA two-week period.  Overtime wages and certain other forms of wages identified in existing FLSA regulations (i.e., expense reimbursements, discretionary bonuses, etc.) are not included in the regular rate of pay.

Information Employer Must Retain for Credit

An Eligible Employer will substantiate eligibility for the sick leave or family leave credits if the employer receives a written request for such leave from the employee in which the employee provides:

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; and
4. A statement that the employee is unable to work, including by means of telework, for such reason.

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, and, 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 child care provider unavailability, the statement from the employee should include the name and age of the child (or children) to be cared for, the name of the school that has closed or place of care that is unavailable, and 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 and, 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, a statement that special circumstances exist requiring the employee to provide care.

In addition, an Eligible Employer 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 that are eligible for the credit, including records of work, telework and 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.
3. Copies of any completed Forms 7200, Advance of Employer Credits Due To COVID-19, that the employer submitted to the IRS.
4. Copies of the completed Forms 941, Employer’s Quarterly Federal Tax Return, 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).

An Eligible Employer should keep all records of employment taxes for at least 4 years after the date the tax becomes due or is paid, whichever comes later.

Power & Cronin greatly appreciates the opportunity to provide you with the very best legal representation.  Please let us know if you need any further guidance with COVID-19 or any other matter to assist with your business.  Should you have any further questions about the applicability of the PPP or any new legislation to your business, or for guidance on how to implement new policies based on the legislation, please do not hesitate to contact our office at (630) 571-2001.

Very truly yours,

Daniel J. Cronin

POWER & CRONIN, LTD.