The FFCRA provides workers with paid leave for reasons related to COVID-19. The FFCRA covers the costs of this paid leave by providing small businesses with refundable tax credits. Certain self-employed individuals in similar circumstances are entitled to similar credits.

Tax Credit for Employers Providing Leave

In both types of emergency leave, the employer pays for the leave but is entitled to a dollar for dollar reimbursement through a refundable tax credit.  Note, the tax credit is only available to private sector employers employing between 1 and 499 employees who provide the leave. 

The IRS together with the Departments of Labor and Treasury, issued guidance on March 20, 2020 addressing how an employer can get an immediate reimbursement for the emergency paid sick leave and emergency FMLA leave provided to affected employees.  While employers are obligated to compensate employees for the emergency PSL and emergency FMLA leave to which an employee becomes entitled, employers can re-coup, dollar for dollar, amounts paid out, up to the prescribed caps.  According to this guidance, an employer can retain both federal income tax withholding, and the employer and employee share of FICA (Social Security and Medicare) for all employees to compensate itself for disbursement of emergency PSL and emergency FMLA amounts.  On March 27, 2020, the IRS released further guidance (Notice 2020-21) relating to how both types of leave apply to wages and compensation paid for periods beginning on April 1, 2020 and ending on December 31, 2020. 

On March 31, 2020, the IRS released a set of FAQs to assist employers on how to claim tax credit.  If the amount with which the employer can reimburse itself for insufficient, the employer can file a Form 7200, Advance Payment of Employer Credits Due to COVID-19 to claim an advanced refund of the balance.  All amounts taken for emergency leave tax credits are reported on the Form 941. 

These FAQs also clarify what amounts are available for the tax credit.  Of particular note:

• FAQs 20-24 address how to determine amount of tax credit for purposes of emergency paid sick leave wages
• FAQs 25-30 address emergency FMLA wages
• FAQs 31-36 address how to calculate qualified health plans expenses.

The tax credit is based on an individual’s regular rate of pay (or, if higher, the federal minimum wage or any applicable state or local minimum wage), not to exceed the maximum amounts provided under the relevant paid leave laws.  Included in the credit amount is the employer’s portion of Medicare tax imposed on paid leave wages and allocable health plan expenses.  Special rules apply for those subject to the Railroad Retirement Tax Act.

For more details on the Tax Credits, click here to download our Employer Compliance Guide: COVID-19's Impact on Benefits and Employment.

Tax Credit for Providing Health Coverage During Emergency Paid Sick Leave and Emergency FMLA Leave?

A tax credit is available for cost of health coverage continued during a period of leave.

IRS FAQs 31-36 address how to calculate qualified health plans expenses.  An employer can take the tax credit for both the employer and employee share of health coverage.  The employee share taken is based on the amount paid on pre-tax basis through a Section 125 (cafeteria) plan.  Any portion paid by the employee with after-tax dollars cannot be taken as part of the credit. 

Further, amounts paid on behalf of individuals to a health reimbursement arrangement (HRA) including an individual coverage-HRA and a flexible medical spending account (FSA) plan are included.  However, no tax credit is available for employer contributions to an individual’s health savings account (HSA), Archer MSA or a qualified small employer HRA (QSEHRA).

These FAQs provide a couple methods for determining the daily tax credit.  Generally, for both insured and self-funded plans, the IRS indicates that a reasonable method can be used; for example, both types of plans can use the COBRA equivalent rate.  A self-funded plan could use an actuarial determination. 

An insured plan can use a one average premium rate for all employees, or a similar method based on average premium determined separately for employees with single and family coverage.  The pro rata calculation can be based on the employer’s overall annual premium for the employees covered by the policy, divided by the number of covered employees, divided by the average number of work days during the year by all covered employees.  The IRS provides the following example:

• An employer sponsors an insured group health plan covering 400 employees, some with self-only coverage and some with family coverage.  Each employee is expected to have 260 work days a year (5 days a week for 52 weeks.)  The employees contribute a portion of their premium by pre-tax salary reduction, with different amounts for self-only and family.  The total annual premium for the 400 employees is $5.2 million (this includes both amounts paid by the employer and employees salary reduction).
• For an employer using one average premium rate for all employees, the average annual premium rate is $5.2 million divided by 400, or $13,000.  For each employee expected to have 260 work days a year, this results in a daily average premium rate equal to $13,000 divided by 260, or $50.  That $50 is the amount of qualified health expenses allocated to each day of paid sick or family leave per employee.

For part time employees, the IRS guidance indicates that employers can use any reasonable method for calculating their work days.

Records to Request from Employees to Substantiate the Tax Credit

The IRS provides a list of documents that employers can request in FAQs 44 and 45.  Generally, these include:

• The employee’s written request for the leave, the dates and reasons for the leave, and whether the individual is unable to work or telework. 
• If the leave is due to quarantine order or self-quarantine advice, the employee should also 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.
• If the leave request is due to a school closing or child care provider unavailability, the employee should include the name and age of the child(ren) requiring care, the name of the school that has closed or place of care that is unavailable, and a statement that no other person will be providing care for the child during the leave period, and any other statement relating to special circumstances.

In addition, an employer should keep the following records:

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 and submitted Forms 7200; and
4. Copies of the completed and submitted Forms 941

Length of Time Employers Are Required to Keep Records

The IRS requires all records of employment taxes to be kept for at least 4 years following the date the tax becomes due or is paid, whichever comes later.