April 10, 2020

In an effort to incentivize businesses to retain employees during the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law by President Trump on March 27, 2020, offers incentives to businesses in the form of fully refundable tax credits.

The Internal Revenue Service has provided guidance on the new credits through Notice 2020-22 (the Notice) and through Frequently Asked Questions (FAQs). In this client alert, we have synthesized in a question-and-answer format information from the CARES Act, the Notice and the FAQs.

What are the eligibility requirements for employee retention credits?

To be eligible to receive employee retention credits, employers must satisfy the following requirements:

• Cannot have obtained a Paycheck Protection Program (PPP) “forgivable” loan;
• Must be carrying on a trade or business during 2020; and

Either:

• Operations of the employer are fully or partially suspended as a result of a governmental order that limits commerce, travel or group meetings (for commercial, social, religious or other purposes) in any calendar quarter as a result of the pandemic ; or
• The employer experiences a “significant decline in gross receipts” during the calendar quarter.

Nonprofit organizations are eligible for this relief and are also not subject to the significant decline in gross receipts requirement.

Neither governmental employers nor self-employed individuals, with respect to their own self-employment income, are eligible for employee retention credits.

How is a “significant decline in gross receipts” measured?

To meet this standard, gross receipts in the first calendar quarter of 2020 must have decline by at least 50% of the gross receipts for that same calendar quarter of 2019. The business is no longer considered to have a significant decline in gross receipts after a 2020 calendar quarter in which gross receipts are in excess of 80% of the gross receipts for that same calendar quarter in 2019.

How are employee retention credits claimed?

Employers may claim employee retention credits for an applicable quarter by not depositing the employer portion of Social Security taxes (6.2% of wages up to the 2020 Taxable Wage Base of $137,700) in an amount equal to 50% of an employee’s “qualified wages.” (Note: employers must still deposit the employer share of Medicare taxes, and federal income and Social Security and Medicare taxes withheld from the employee.)

The maximum amount of qualified wages that an employer can take into account for all quarters is $10,000 per employee. As a result, the maximum credit available to an employer with respect to any individual employee is the lesser of $5,000 or 50% of the employee’s qualified wages.

If the amount of employee retention credits that an employer is entitled to is more than the corresponding quarterly employer portion of Social Security taxes, the excess is treated as an overpayment. An employer can obtain a refund of this amount, after first applying any excess to the employer’s remaining quarterly employment tax liability, by filing new Form 7200. Form 7200 is the same form that is used to obtain a refund for the new Emergency Family and Medical Leave and Paid Sick Leave credits that were enacted as part of the Families First Coronavirus Response Act (FFCRA).

Alternatively, the Notice provides that an employer can use all withheld amounts within a quarter (including the employer share of Medicare taxes, and federal income and Social Security and Medicare taxes withheld from employees) to fund qualified wages so long as those wages are paid prior to the time the deposit of the withheld amounts would otherwise be required without any failure to deposit penalty provided the requirements of the Notice are satisfied.

What are qualified wages?

The starting point for qualified wages is the definition of wages used for purposes of the Social Security tax (Box 3 of Form W-2). The following adjustments are then made –

Only amounts paid after March 12, 2020 and before January 1, 2021 may be included.

“Qualified health plan expenses,” such as the employer’s cost of coverage, are included (or, stated differently, added back to the Box 3 amount).

An employer must exclude any wages taken into account for purposes of determining Emergency Family and Medical Leave and Paid Sick Leave tax credits under FFCRA. (An employer can benefit from employee retention credits and the tax credits provided in FFCRA, but, not surprisingly, not for the same wages. Other limitations also exist, such as the prohibition of the credit with respect to wages for which the Work Opportunity Credit is claimed.)

For employers who employed on average 100 or less full-time employees in 2019 (full-time meaning for this purpose that the individual was employed on average at least 30 hours per week), the qualified wages of all employees are available for purposes of claiming the credit.

For larger employers, only the qualified wages of employees who are not providing services as a result of a suspension of the employer’s operations resulting from the pandemic or due to a significant decline in gross receipts are available for purposes of claiming the credit, and in this situation the amount cannot exceed what the employee would have been paid for working for an equivalent duration during the 30 days immediately preceding the economic hardship.

In determining whether an employer is small or large for this purpose, an expansive aggregation rule applies that can result in parent-subsidiary and brother-sister affiliations using a more than 50% ownership test (rather than an at least 80% ownership test). The affiliated service group rules of Internal Revenue Code § 414(m), as well as the anti-abuse rules of Internal Revenue Code § 414(o), also apply.

The following chart may be helpful in determining whether and how employee retention credits might apply.

Employee Retention Credits Chart

The PPP authorizes up to $349 billion in forgivable loans to small businesses with 500 employees or less. All loan terms will be the same for everyone. Loans carry a fixed rate of 1%, and are payable in 2-years unless forgiven.

Who can apply? All businesses – including nonprofits, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply. Businesses may begin applying for loans on April 3, 2020.[1] Businesses in certain industries may have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.

Payroll Costs. Payroll Costs generally include:

1. Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee).
2. Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit.
3. State and local taxes assessed on compensation.
4. For sole proprietors or independent contractors: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
5. Payroll Costs exclude certain items from calculation(s).

Cap on “Payroll Costs.” In determining both the loan amount and the forgiven amount, “Payroll Costs” are capped at $100,000 on an annualized basis for each employee.

Loan Amount. Loan amounts are determined by multiplying 2.5 x Average Monthly Payroll Costs from the last year, with a cap of $10-million.

Use of Loan Proceeds. Borrower may use the proceeds for (i) Payroll Costs, including benefits; (ii) Interest on certain mortgage obligations, incurred before February 15, 2020; (iii) Rent under a lease agreement in force before February 15, 2020; and (iv) Utilities, for which service began before February 15, 2020.

Loan Forgiveness. To be forgiven, loan proceeds must be used in the 8-weeks after receiving the loan for (a) Payroll Costs (capped at $100,000 on an annualized basis for each employee), (b) Mortgage Interest, (c) Rent, and (d) Utilities Payments.

• The Department of Treasury (“Treasury”) is requiring that Payroll Costs account for, at least, 75% of the Amount Forgiven.
• Borrowers may submit a request to the lender servicing the loan. Requests will include documents that verify (i) the number of full-time equivalent employees and pay rates, (ii) payments on eligible mortgage interest, lease or rent payments, and utility obligations during the 8-week period after receiving the loan. Borrower must certify to the truth and accuracy of documents submitted and use of the loan. Lender will make a decision within 60-days of Borrower’s request.
• If 100% of the Loan is forgiven, the accrued interest is also forgiven.

Reduction in Amount Forgiven (retention of employees). According to Treasury, a Borrower will owe money if staff and payroll are not maintained.

• Number of Staff: Amount Forgiven will be reduced if Borrower decreases full-time employee headcount.
• Level of Payroll. Amount Forgiven will also be reduced by any decrease in salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
• Borrowers have until June 30, 2020, to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

Are there Fees or Prepayment Penalties?  No.

All Payments Deferred for Six (6) Months. All payments are deferred for 6 months. However, interest will continue to accrue over that period.

Will the Borrower be required to pledge collateral or personally guarantee the loan? No.

Call a Templeton partner today for more details or assistance applying for a PPP loan, or with related questions about PPP Loans.

[1] Except for Self-Employed Individuals and Independent Contractors who may apply beginning April 10, 2020.

Background

In light of the novel coronavirus (COVID-19) global pandemic, many small-to-medium sized businesses are struggling to manage revenue losses amid prolonged economic uncertainty.

To offset the pandemic’s financial impacts, Congress has passed several stimulus bills, including the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes provisions that can provide for increased cashflow as well as tax savings.

Businesses should quickly consider how these provisions could help their companies during this uncertain time to ensure they are maximizing available benefits.

SBA Paycheck Protection Program (“PPP”)

See Templeton’s PPP article for more information and call a Templeton partner with any questions.

Employee Retention Credit

The CARES Act provides eligible employers with a refundable credit against payroll tax liability.

How much does the credit cover?
The credit is equal to 50% of the first $10,000 in wages per employee (including value of health plan benefits).

Who is eligible for the credit?
Eligible employers must have carried on a trade or business during 2020 and satisfy one of two tests:

• Business operations are fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings.
• A year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50% – until gross receipts exceed 80% year-over-year.

For employers of more than 100 employees, only wages for employees who are not currently providing services for the employer due to COVID-19 causes are eligible for the credit. For employers of 100 or fewer employees, qualified wages include those for any, regardless of if the employee is providing services.

Employers receiving a loan under the SBA Paycheck Protection Program are not eligible for this credit.

Delay of Employer Payroll Taxes

The CARES Act postpones the due date for employers and self-employed individuals for payment of the employer share of taxes related to Social Security.

When are the deferred payments due?
The deferred amounts are payable over the next two years – half due December 31, 2021, and half due December 31, 2022.

Who is eligible for the deferral?
All businesses and self-employed individuals are eligible. However, employers who receive a loan under the SBA Paycheck Protection Program and whose indebtedness is forgiven are not eligible for the payroll tax deferral.

How We Can Help

Small to medium-sized businesses have many potential avenues—including the SBA loan program and payroll tax incentives—to help offset costs during this uncertain time. However, navigating the complex loan application process is a daunting task. The payroll tax provisions in the CARES Act interact with the SBA loan provisions, adding to the complexity.

In the immediate term, we can assist in analyzing which approach will be the most beneficial for your employees and your company. Those seeking SBA loans will need to move quickly to get their loans approved and funded. We can help you navigate the required paperwork and help organize the necessary information in an expedited manner—so you can boost your cashflow ASAP.

In addition to maximizing these available options, there are also beneficial income tax provisions to claim on income tax returns, including 2019 returns. We can assist companies in determining possible cash tax refunds through net operating loss (NOL) carrybacks and quick refunds of 2019 taxes already paid.

Families First Coronavirus Response Act – Guidance Related to Required Paid Sick Leave, Extended FMLA Requirements and Payroll Tax Credits Designed to Fund These Required Payments

Introduction

Please note that the items discussed in this memo should be discussed with legal counsel.  We are attempting to provide a summary of the rules based on our understanding of them but we are not a law firm and we cannot provide legal advice. Also, please note that the Department of Labor, at the time of this writing, has issued limited guidance on this act and we have incorporated that guidance into this memo. Additional guidance from the DOL will be critical in fully understanding the act in more detail.

The provisions discussed below become effective April 1, 2020 and extend through the end of 2020.  These rules apply to employers with fewer than 500 employees.  This is not retroactive and the paid leave and payroll tax credits discussed in this memo cannot be taken until April 1, 2020.  April 1^st  is a new date that was clarified by the DOL. It is also our current understanding that this act and the related credits are only available for paid leave for time paid starting April 1^st or after and is not based on the pay date but is based on the date the time was taken off and paid.  The check date does not appear to be the relevant date to focus on but the date that the leave is taken and paid for under this act.  Example:  If someone is off on March 29^th March 30^th and March 31st and the employer chooses to pay them for that time and that payroll is paid on April 2^nd, that time from March 29^th through March 31^st  is not eligible for this act and no payroll credits would be applied to it and those amounts paid would be taxed like normal paid leave.

Based on current materials available, we have created this guidance to help you understand these rules. This may be modified at a future time as more information becomes available. The Families First Coronavirus Response Act recently signed into law by President Trump is designed to do two primary things:

1. Provide a safety-net for employees of companies with fewer than 500 employees who cannot work due to Coronavirus related situations. The Department of Labor is using language pointing to FLSA and regular FMLA rules for determining which employers need to be aggregated for purposes of this determination. We recommend consulting a labor attorney for assistance with this determination if there is any question.  Please note that this determination is not based on tax code controlled group rules and the rules for aggregating employers for this purpose is different so please consider that.

• • Please note that this act does NOT require employers to pay employees if they are not working due to a business closure, lay-offs due to slow business or furloughs.

2. Provide employers a mechanism to be reimbursed via payroll tax credits to be claimed by reducing otherwise due and payable federal payroll and federal withheld income taxes as you submit them each pay cycle. This is the mechanism you will use to fund these new required payments to employees. An employer does not have to wait until they file their quarterly Form 941 to claim the credit but instead, it is immediately available as a reduction in otherwise payable taxes.

Safety Net for Employees Portion of Law

This summary will first focus on item one above. This act addresses providing a safety net to employees in two primary ways. They are the “Emergency Paid Sick Leave” component and the “Emergency Family and Medical Leave Expansion” component of the act, each to be discussed now.

Emergency Paid Sick Leave Component

This provision provides for up to 2 weeks of fully paid leave for the reasons discussed below for any employee of the company, and there is no waiting period to be eligible for this portion of the law. This portion of the act requires employers to provide:

1. 80 hours of fully paid sick leave to full-time employees or
2. Two weeks of fully paid sick leave to part-time employees, based on the average hours that the part-time employee works.

This paid leave requirement would be triggered if an employee were unable to work for one of six reasons:

1. To self-isolate due to federal, state or local requirements. There are some unknowns in this category as to what rises to this level. If a governor of a state issues an order to close certain businesses, do the employees of that business fall into this category at that time?  We need additional guidance on this and this is a common question that is being asked.
2. To quarantine due to COVID-19 concerns on the advice of a health care provider.
3. To obtain medical diagnosis or medical care if the employee has COVID-19 symptoms. Please note these first three categories are referred to as “Self-Care Leave” to be discussed further below.
4. To care for someone (very broad definition, such as Parent, Spouse, Child, Sibling, Next of Kin, Grandparent, Grandchild, Senior Citizen, Individual with Disabilities) experiencing one of the first two situations listed above.
5. To care for the employee’s son or daughter (under age 18) if the school or daycare provider has closed or if the daycare provider is no longer available due to COVID-19.
6. The employee is experiencing another substantially similar condition to those above. Please note these last three categories are referred to as “Family Care Leave” to be discussed next.

Leave in the first three categories, called “Self-Care Leave,” has to be paid at the employee’s full normal rate of pay but that is capped at $511 per day or $5,110 total for each employee. Leave in the last three categories, called “Family Care Leave,” has to be paid at 2/3’s of their normal rate of pay but that is capped at $200 per day or $2,000 total for each employee. It is important to note that an employer CANNOT require an employee to use any existing paid leave provided by an employer before using this newly required paid leave.

The DOL can exclude certain healthcare workers and emergency responders from having to comply with this act. At this time, the definition of what qualifies as a healthcare worker is not clear. Based on what we have read, the entire company that is a health care provider is not exempt from this act, only the employees that work for that employer as a health care provider are exempt.  Support employees not in the field of providing health care are required to be covered by this act.

The DOL MAY also exempt small businesses from portions of this act with fewer than 50 employees if complying would put the business in jeopardy.  At this time, the DOL has said they will be issuing more guidance on this under 50 employee exemption but in general it only applies if following this acts rules would jeopardize the viability of the business.

PAYROLL TIP: It is important to note that from a payroll logistics standpoint, new and separate earnings codes will need to be set up in the payroll system to be able to track each of these newly required types of payments. That will be critical to effectively quantify the dollars paid for these types of leave and will make it possible to claim the payroll tax credit to be discussed later in this article.  Do not lump this pay in with any other PTO or sick leave payments that you might otherwise make.

Emergency Family and Medical Leave Expansion Component

This provision requires employers (even those with less than 50 employees who are not normally subject to normal FMLA rules) to protect an employee’s job and pay compensation after the first two-week period has lapsed as discussed below.

This new category of leave under FMLA rules is referred to as “Public Health Emergency Leave” and requires employers to pay employees who are unable to work due to a need to care for a child under age 18 if school or daycare is unavailable due to Covid-19.  Under this rule, employers are required to:

1. Provide “Public Health Emergency Leave” as part of FMLA leave.
2. Provide “Public Health Emergency Leave” if needed by ANY employee who has been employed for at least 30 calendar days.
3. Pay eligible employees at a leave rate of NO LESS than 2/3’s of their normal rate of pay. This kicks in after 10 days have passed.  Please note that this portion of the law is intended to run concurrent with the emergency paid sick leave component just discussed.  If an employee qualifies for this portion of the act based on the same event that qualified them for the emergency paid sick leave pay, this portion is an additional 10 weeks.  The total would be 12 weeks of protected leave and 12 weeks of pay.  This pay is capped at $200 per day and $10,000 in total per each employee.

The DOL can exclude certain healthcare workers and emergency responders from having to comply with this act.  At this time, the definition of what qualifies as a healthcare worker is not clear. Based on what we have read, the entire company that is a health care provider is not exempt from this act, only the employees that work for that employer as a health care provider are exempt.  Support employees not in the field of providing health care are required to be covered by this act.

 The DOL MAY also exempt small businesses from portions of this act with fewer than 50 employees if complying would put the business in jeopardy.  At this time, the DOL has said they will be issuing more guidance on this under 50 employee exemption but in general it only applies if following this acts rules would jeopardize the viability of the business.  Employers with fewer than 25 employees do not have to comply with the job protection aspect of this bill, but do have to provide the pay.

It is important to note that this provision is in addition to all normal FMLA rules that already exist for employers that must comply with the existing FMLA rules.

PAYROLL TIP: It is important to note that from a payroll logistics standpoint, new and separate earnings codes will need to be set up in the payroll system to be able to track each of these newly required types of payments. That will be critical to effectively quantify the dollars paid for these types of leave and will make it possible to claim the payroll tax credit to be discussed later in this article. Do not lump this pay in with any other PTO or sick leave payments that you might otherwise make.

Funding Mechanism Available to Employers to Pay These New Wages

Now that we have addressed the safety-net components set in place to protect employees, let us turn our attention to the second component of this act, which is the mechanism put in place to fund these payments for the employer.

Any wages paid as a result of the provisions discussed above are not subject to the Employer portion of Social Security Tax (the 6.2% payroll tax). They are subject to the Employee portion of this tax, however – that must be withheld from the payments made to the employee. Because these wages are not taxed the same as normal sick pay or PTO pay, you must segregate these wages in your payroll system.

In addition to these new wages not being subject to the employer portion of Social Security tax as they are paid, this law also provides a refundable credit to be applied to reduce otherwise due and payable federal social security, Medicare and federal income tax withholdings on normal wages paid each pay period.  In essence, a credit is given to the employer that allows them not to have to pay otherwise required payroll taxes and that is the mechanism to quickly reimburse the employer for having to pay wages under this act.  If the amount of the credit is more than otherwise due and payable taxes for a pay period, there is going to be a process (not yet defined) to allow the employer to get a refund check mailed to them within 2 weeks of that submission.   Also, the process to claim the credit at the time of submitting otherwise due and payable payroll taxes is not yet defined. Finally, there is a component to this credit also for health insurance costs paid on behalf of an employee on leave under this act as well.  We need additional guidance on that at this time. As we mentioned earlier in our PAYROLL TIP sections, this is why it is important for employer to be able to separately identify compensation paid to employees as a result of this act. The amount of the credits available are as follows:

1. For the wages paid as a result of the “Emergency Paid Sick Leave Component” (first two weeks) of the act, the credit is equal to the amount of the wages paid required by this act.
2. For the wages paid as result of the “Emergency Family and Medical Leave Expansion Component” (after first two weeks) of the act, the credit is equal to the amount of wages paid required by this act and is capped at $10,000 per employee.
3. In the aggregate, the sum of the credits available in number 1 and 2 can be as much as $15,100 per employee. (Up to $5,100 in wages for the first two weeks + $10,000 for the FMLA portion). Given that the employer’s share of social security tax on any individual employee is limited to $8,537.40 ($137,700*6.2%), this credit is meaningful and actually can exceed the actual social security tax paid for an individual.
4. As mentioned earlier, there is also a component of this credit that is tied to the amount of health insurance paid by the employer on behalf of an employee out on leave under this act. At this time, we need more clarification on this part of the credit. One unknown is does it go above and beyond the caps discussed in number 3 above or is that cap inclusive of this portion for the credit?

We feel it is important that employers that may be potentially impacted by these new rules work now with their payroll systems to create the earnings codes necessary to track and tax these new types of wages correctly.

On March 18, the President signed the Families First Coronavirus Response Act (FFCRA).  The signed bill scaled back the version of the law that passed the House on March 14.

The FFCRA will become effective on April 1, according to guidance issued on March 24 by the U.S. Department of Labor (DOL). The FFCRA contains a number of major provisions concerning paid leave, job protection and tax implications that will affect employers nationwide.  The FFCRA “sunsets” on December 31.

Importantly, the FFCRA only applies to employers with fewer than 500 employees. The threshold for coverage is tied to the Fair Labor Standards Act, which means that all but the smallest employers with 500 or fewer employees will be covered. Tax credits are available to help employers defray the costs for paid sick leave, and employers with less than 50 employees may apply for an exemption. The DOL’s guidance, FAQ’s and Factsheets will help employers better understand if they are covered by the FFCRA.

Overview of the Important Points for Employers

Changes to FMLA to Include Paid Leave When Child’s School or Child Care Provider is Closed FMLA Protections. The bill expands FMLA and provides paid leave for “Qualifying need related to a public health emergency.”

• Covered Employers. This law covers employers with fewer than 500 employees.  According to the recently released DOL guidance, the headcount is taken at the time the employee’s leave is to be taken.  Employers should include employees on leave, temporary employees (if the employer is a joint employer with another entity), and day laborers supplied by a temporary agency. Independent contractors are not part of the headcount for the 500-employee threshold.
• Joint employers may aggregate common employees to reach the 500-employee threshold.  Entities will be considered joint employers if (as to common employees) the same group of people (1) hires or fires the employees; (2) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (3) determines the employee’s rate and method of payment; and (4) maintains the employee’s employment records. See the most recent joint employer guidance from the DOL. Entities will be considered a single integrated enterprise if there is (a) common management, (b) interrelation between operations, (c) centralized control of labor relations, and (d) degree of common ownership or financial control.
• Reduced Threshold for Eligible Employees. Employees are eligible to receive leave from an employer if they have been employed by that employer for at least 30 calendar days.  This is lower than the general FMLA threshold of 12 months and 1250 hours worked.
• Qualifying Need Related to a Public Health Emergency Defined. Eligible employees will have the right to take up to 12 weeks of FMLA to care for a child under 18 years old if the child’s school or place of care has been closed, or the paid childcare provider is unavailable due to a public health emergency; provided thatthe employee is unable to work or telework.
• Job Protection. FMLA job protections still apply, but employers with less than 25 employees do not have to return the employee to the previous position if that position no longer exists, but employers must make reasonable efforts to place the employee into an equivalent position.

Paid FMLA Leave.

• Limited to certain circumstances. Paid leave only applies to “qualifying needs related to a public health emergency.” Other FMLA leave remains unpaid.
• First 10 days. The first 10 days of leave may be unpaid but employees can choose to use accrued paid leave.
• Subsequent Leave Paid at Two-Thirds of the Regular Rate. The leave must be paid at no less than two-thirds of the employee’s regular rate of pay (note that this may be greater than an employee’s hourlyrate, see the Department of Labor’s regular rate guidance for more information). The daily rate of paid leave cannot exceed $200, and aggregate leave shall not exceed $10,000.
• Calculating Number of Hours. Generally, employers must use the number of hours the employee would otherwise be normally scheduled to work. Special rules apply, however, for employees with varying schedules.
• Mandatory Substitution Prohibited. Employers cannot require employees to use other paid leave in lieu of leave granted under the FFCRA.

Exemptions. The U.S. Department of Labor will develop rules exempting certain healthcare providers and emergency responders from taking leave under the bill. Rules will also exempt businesses with fewer than 50 employees from the requirements of the bill if it jeopardizes the viability of the business.

Federal Paid Sick Leave (PSL)

Qualified PSL Reasons. Employers with fewer than 500 employees must provide all employees with PSL when an employee is unable to work (or telework) due to a need for leave because of the following six reasons:

1. The employee is subject to a Federal, State or local quarantine or isolate order related to COVID-19;
2. The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
3. The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
4. The employee is caring for an individual who is subject to an order as described in reason 1 (above) or has been advised as described in reason 2 (above);
5. The employee is caring for their child if the school or childcare has been closed, or the childcare provider is unavailable, due to COVID-19; or
6. The employee is experiencing any other substantially similar COVID-19 condition as specified in rules from the Department of Health and Human Services.

Amount of PSL. Full-time employees are entitled to up to 80 hours of PSL. For part-time employees, they are entitled to a pro-rata share of hours worked, on average, over a two-week period.

PSL Payments. PSL will be paid at the regular rate of pay for reasons 1, 2 or 3 (above). PSL for reasons 4, 5 or 6 (above) will be paid at two-thirds the regular rate of pay.

Daily PSL Payments and Caps. Employers provide PSL based on the number of hours the employee would otherwise be normally scheduled to work. However, the FCCRA sets caps of $511 per day (and $5110 maximum) for PSL taken for reasons 1, 2 or 3 (above), and $200 per day (and $2000) maximum for PSL taken for reasons 4, 5 or 6 (above).

No carryover. There is no carryover of PSL from one year to the next.

Eligibility. Paid sick leave under FFCRA shall be provided regardless of how long the employee has been employed.

Interaction with Existing Paid Leave Benefits. Employers may not require an employee to use any other type of paid leave before the employee uses PSL under the FFCRA. Thus, employees are entitled to use PSL under the FFCRA prior to using any employer-provided vacation, PTO or paid sick leave under state or local law.

Employer Notice. Employers are obligated to post a PSL notice to employees, and by March 25, the DOL will provide a model notice.

Multi-Employer CBAs. Employees covered by a multi-employer collective bargaining agreements who receive paid leave benefits from a trust arrangement are entitled to receive leave benefits commensurate with the above requirements.

DOL Rules. The DOL will issue PSL guidelines to assist employers by April 2.

Non-Discrimination, Non-Retaliation

It shall be unlawful for any employer to discharge, discipline or, in another manner discriminate against any employees because they have taken leave provided under FFCRA, or filed any complaint, instituted any proceeding, or testified or is about to testify in any proceeding relating to FFCRA.

Remedies for Violations

Employers are liable for unpaid benefits, liquidated damages of 100 percent, injunctive relief, fines of up to $10,000 along with criminal penalties and attorney’s fees for a violation of the FFCRA.

Unemployment Compensation, Coverage for COVID-19 Testing

FFCRA provides for increased funding for state unemployment programs and requires a waiver of co-pays for COVID-19 testing by health care plans and insurers.

Tax Considerations

Employers required to pay workers can offset some of the financial impact through refundable employment tax credits. The tax credit equals 100 percent of qualified sick leave and qualified paid FMLA paid by employers. A credit would also be available for self-employed taxpayers.

Credits for both qualified sick leave and qualified family leave wages are subject to caps. The credit for qualified sick leave is limited to $511 per day for employees when an employee is taking care of themselves or $200 per day for employees caring for a family member – both with an aggregate cap of 10 days. This effectively caps the qualified sick leave credit between $2,000 and $5,110 per employee. The credit for qualified FMLA wages is limited to $200 per day and $10,000 aggregate for any employee. The FFCRA would prevent double benefits by increasing an employer’s gross income by the amount of credits received (i.e., the payroll credit is offset by an equal income item which results in a net-zero effect on taxable income, though of course the credit is more valuable than the income tax deduction). It would also prevent a credit for wages where a credit is allowed under section 45S (employer credit for paid family and medical leave).

The FFCRA leaves out many details. These may be covered through future regulations issued by the Internal Revenue Service. One important detail is what happens when businesses lack cash to pay employees for payments subject to the refundable credit. According to the Wall Street Journal, “Treasury Secretary Steven Mnuchin has said the government is prepared to advance the funds to businesses that can’t cover the costs now.” The budgetary impacts of the FFCRA would not impact budget limitations imposed by pay-as-you-go requirements.

HR Considerations

Covered employers should strongly consider implementing COVID-19 policies, which should include a discussion about the interaction with state and local paid sick leave laws. Many states, including

Businesses should also consider the impact of PSL on businesses that close due to lack of work or because of a state or local order to close non-essential businesses. There is no question that businesses and employees are facing a significant impact because many people are self-isolating or quarantined. As written, the FCCRA does not cover employees who are sent home by their employers due to a COVID-19 related decrease in business. But it may cover employees who are sent home due to a “shelter-in-place” or related order public health order. Again, we recommend working with counsel to discuss your businesses’ individual circumstances.

 Treasury, IRS and Labor announce plan to implement Coronavirus-related paid leave for workers and tax credits for small and midsize businesses to swiftly recover the cost of providing Coronavirus-related leave. 

IRS Statements and Announcements

 IR-2020-57, March 20, 2020

The U.S. Treasury Department, Internal Revenue Service (IRS), and the U.S. Department of Labor (Labor) announced that small and midsize employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees. This relief to employees and small and midsize businesses is provided under the Families First Coronavirus Response Act (Act), signed by President Trump on March 18, 2020.

The Act will help the United States combat and defeat COVID-19 by giving all American businesses with fewer than 500 employees funds to provide employees with paid leave, either for the employee’s own health needs or to care for family members. The legislation will enable employers to keep their workers on their payrolls, while at the same time ensuring that workers are not forced to choose between their paychecks and the public health measures needed to combat the virus.

Key Takeaways

Paid Sick Leave for Workers

For COVID-19 related reasons, employees receive up to 80 hours of paid sick leave and expanded paid child care leave when employees’ children’s schools are closed or child care providers are unavailable.

Complete Coverage

Employers receive 100% reimbursement for paid leave pursuant to the Act.

• Health insurance costs are also included in the credit.
• Employers face no payroll tax liability.
• Self-employed individuals receive an equivalent credit.

Fast Funds

Reimbursement will be quick and easy to obtain.

• An immediate dollar-for-dollar tax offset against payroll taxes will be provided
• Where a refund is owed, the IRS will send the refund as quickly as possible.

Small Business Protection

Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed, or child care is unavailable in cases where the viability of the business is threatened.

Easing Compliance

• Requirements subject to 30-day non-enforcement period for good faith compliance efforts.

To take immediate advantage of the paid leave credits, businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes. If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form that will be released next week.

Background

The Act provided paid sick leave and expanded family and medical leave for COVID-19 related reasons and created the refundable paid sick leave credit and the paid child care leave credit for eligible employers. Eligible employers are businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under the Act. Eligible employers will be able to claim these credits based on qualifying leave they provide between the effective date and December 31, 2020. Equivalent credits are available to self-employed individuals based on similar circumstances.

Paid Leave

The Act provides that employees of eligible employers can receive two weeks (up to 80 hours) of paid sick leave at 100% of the employee’s pay where the employee is unable to work because the employee is quarantined, and/or experiencing COVID-19 symptoms, and seeking a medical diagnosis. An employee who is unable to work because of a need to care for an individual subject to quarantine, to care for a child whose school is closed or child care provider is unavailable for reasons related to COVID-19, and/or the employee is experiencing substantially similar conditions as specified by the U.S. Department of Health and Human Services can receive two weeks (up to 80 hours) of paid sick leave at 2/3 the employee’s pay. An employee who is unable to work due to a need to care for a child whose school is closed, or child care provider is unavailable for reasons related to COVID-19, may in some instances receive up to an additional ten weeks of expanded paid family and medical leave at 2/3 the employee’s pay.

Paid Sick Leave Credit

For an employee who is unable to work because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis, eligible employers may receive a refundable sick leave credit for sick leave at the employee’s regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days.

For an employee who is caring for someone with Coronavirus, or is caring for a child because the child’s school or child care facility is closed, or the child care provider is unavailable due to the Coronavirus, eligible employers may claim a credit for two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Child Care Leave Credit

In addition to the sick leave credit, for an employee who is unable to work because of a need to care for a child whose school or child care facility is closed or whose child care provider is unavailable due to the Coronavirus, eligible employers may receive a refundable child care leave credit. This credit is equal to two-thirds of the employee’s regular pay, capped at $200 per day or $10,000 in the aggregate. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Prompt Payment for the Cost of Providing Leave

When employers pay their employees, they are required to withhold from their employees’ paychecks federal income taxes and the employees’ share of Social Security and Medicare taxes. The employers then are required to deposit these federal taxes, along with their share of Social Security and Medicare taxes, with the IRS and file quarterly payroll tax returns (Form 941 series) with the IRS.

Under guidance that will be released next week, eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.

The payroll taxes that are 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 with respect to all employees.

If there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less. The details of this new, expedited procedure will be announced next week.

Examples

• If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.
• If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.
• Equivalent child care leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax return and will reduce estimated tax payments.

Small Business Exemption

Small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or child care unavailability where the requirements would jeopardize the ability of the business to continue. The exemption will be available on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer’s business as a going concern. Labor will provide emergency guidance and rulemaking to clearly articulate this standard.

Non-Enforcement Period

Labor will be issuing a temporary non-enforcement policy that provides a period of time for employers to come into compliance with the Act. Under this policy, Labor will not bring an enforcement action against any employer for violations of the Act so long as the employer has acted reasonably and in good faith to comply with the Act. Labor will instead focus on compliance assistance during the 30-day period.

For More Information

For more information about these credits and other relief, visit Coronavirus Tax Relief on IRS.gov.