On March 31, 2020, the U.S. Internal Revenue Service (“IRS”) issued its highly anticipated guidance regarding the tax credits available to employers under the Families First Coronavirus Response Act (the “FFCRA”) and outlined a process by which such credits can be claimed. Additionally, and of particular significance, the IRS also included in its FAQs detail regarding what documentation employers may request to substantiate an employee’s need for leave under the FFCRA.
The FFCRA requires covered employers (those with 500 or fewer employees) to provide Emergency Paid Sick Leave (EPSL) and paid Expanded Family and Medical Leave (EFML) to employees who are unable to work or telework due to certain qualifying reasons related to COVID-19. Payments made under the FFCRA (including costs to maintain health insurance coverage for employees during leave) are 100% reimbursable through refundable tax credits, which may be taken as a dollar-for-dollar offset against withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees.
Highlights from the IRS guidance are below.
Leave Request & Documentation Process
The process for requesting EPSL or EFML starts – as a leave request always does – with the employee. In order to substantiate EPSL or EFML pay, an employer should obtain a written request from the employee that includes the following:
- The employee’s name;
- The date or dates for which leave is requested;
- A statement of the COVID-19 related reason the employee is requesting leave and written support for such reason; and
- A statement that the employee is unable to work, including by means of telework, for such reason.
In addition to the above, employers should seek additional information related to the employee’s specific qualifying reason for leave.
Quarantine | In the case of leave based on a quarantine order or self-quarantine advice, the employee’s written request 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 (i.e., a family member), that person’s name and relation to the employee.
School and Childcare Closures | In the case of leaves based on a school closing or childcare provider unavailability, the employee’s written request 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;
- 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 to the above, employers must maintain and/or create records that include the following information:
- 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.
- Documentation to show how the employer determined the amount of qualified health plan expenses that the employer allocated to wages.
- Copies of any completed Forms 7200, Advance of Employer Credits Due To COVID-19, that the employer submitted to the IRS.
- 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).
Refund Process
Employers will claim the credits on their federal employment tax returns (e.g., Form 941, Employer’s Quarterly Federal Tax Return). If the amount of the credits exceeds their federal payroll tax responsibility, an employer may request an advance payment of the credits from the IRS by submitting a Form 7200, Advance Payment of Employer Credits Due to COVID-19 (which can be found here). The new form’s corresponding instructions can be found here.
Determining The Amount Of The Tax Credit
Tax credits cover 100% of up to ten days of the qualified sick leave wages and up to ten weeks of the qualified family leave wages (and any qualified health plan expenses allocable to those wages) that an employer pays in accordance with the FFCRA requirements. The IRS guidance defines “allocable qualified health plan expenses” as including 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. It does not include amounts that the employee paid for with after-tax contributions.
In order for employers to properly allocate qualified health plan expenses, the allocation must be 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). Additional guidance on determining the amount of allocable qualified health plan expenses can be found in FAQs #31-36 of the IRS guidance.
Payments Considered Wages And Are Taxable | The IRS has decided that EFML and EPSL payments are not excludable from gross income, and are considered wages under the tax code. Consequently, employees must pay social security and Medicare taxes on those amounts.
EFML and EPSL wages subject to salary reduction contributions | Neither the FFCRA nor the tax code distinguishes between these wages from other wages an employee may receive. Accordingly, employees can make salary reduction contributions on these wages for items such as an employer-sponsored health plan, a 401(k) or other retirement plans in accordance with the salary reduction agreements.
Recordkeeping | Employers 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. These should be available for IRS review. The IRS expects to begin processing these requests during April 2020. The full text of the IRS guidance can be found here.
EANE members who have specific questions related to your business on this ever-evolving topic are encouraged to call the member HR Hotline at 877.662.6444 and continue to visit the member-only Coronavirus Toolkit for more resources.