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    IRS Releases FAQs on COVID-19-related Tax Credits

    IRS website, "COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs"

    On its website, the IRS has released a series of frequently asked questions regarding credits for wages paid for family and medical leave and for emergency paid sick time.

    Background. The Families First Coronavirus Response Act (P.L. 116-127, the FFCRA or the Act), which is intended to ease the economic consequences stemming from the novel coronavirus disease (COVID-19) outbreak, provides family and medical leave, and sick leave, to employees and providing tax credits to employers providing the leave.

    Family and medical leave. The Act includes the Emergency Family and Medical Leave Expansion Act (EFMLEA) (Division C of the Act), which requires employers with fewer than 500 employees ("Eligible Employers") to provide both paid and unpaid public health emergency leave to certain employees through December 31, 2020. The first 10 days of leave may be unpaid and then paid leave is required, calculated based on an amount not less than two-thirds of an employee's regular rate of pay and the number of hours the employee would otherwise be normally scheduled to work, not to exceed $200 per day and $10,000 in the aggregate.

    Emergency paid sick time. Under the Emergency Paid Sick Leave Act (EPSLA) (Division E of the Act), private employers with fewer than 500 employees, and public employers of any size, must provide 80 hours of paid sick time to full-time employees who are unable to work (or telework) for specified virus-related reasons.

    For more information on EFMLEA and EPSLA, see Coronavirus information relevant to tax professionals - a summary, Federal Tax Update (03/20/2020).

    Employer tax credits. The Act provides tax credits to employers to cover wages paid to employees while they are taking time off under the EPSLA and EMFLEA (referred below as "qualified leave wages"). (Act Sec. 7001; Act Sec. 7003) The credits have three components:

      1. The EPSLA credit for each employee is equal to the lesser of the amount of his leave pay or either

        1. $511 per day while the employee is receiving paid sick leave to care for themselves, or
        2. $200 if the sick leave is to care for a family member or child whose school is closed.

         

        An additional limit applies to the number of days per employee: the excess of 10 days over the aggregate number of days taken into account for all preceding calendar quarters. (Act Sec. 7001(b))

         

      2. The EMFLEA credit for each employee is the amount of his leave pay limited to $200 per day with a maximum of $10,000. (Act Sec. 7003(b)(1))

       

    1. The amount of the EPSLA and EMFLEA credits are increased by the portion of the employer's "qualified health plan expenses" that are properly allocable to qualified sick leave wages or qualified family and medical leave wages. Qualified health plan expenses means amounts paid or incurred by the employer to provide and maintain a group health plan (as defined in Code Sec. 5000(b)(1)), but only to the extent that such amounts are excluded from the gross income of employees by reason of Code Sec. 106(a). (Act Sec. 7001(d); Act Sec. 7003(d))
    2. In addition, the credits allowed to employers for wages paid under the EPSLA and EFMFLEA are increased by the amount of the tax imposed by Code Sec. 3111(b) (the 1.45% hospital insurance portion of FICA) on qualified sick leave wages, or qualified family leave wages, for which credit is allowed under Act Sec. 7001 or Act Sec. 7003. (Act Sec. 7005(b))

    IRS FAQs. The IRS has issued a series of FAQs regarding the credits.

    General issues. FAQ 4 says that Eligible Employers claiming the credits for qualified leave wages (and 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, and retain 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.

    FAQ 16 explains that a business is considered to have fewer than 500 employees if, at the time an employee's leave is to be taken, the business employs fewer than 500 full-time and part-time employees within the US, which includes any State of the United States, the District of Columbia, or any Territory or possession of the US. Department of Labor (DOL) guidance provides a more detailed summary of which workers must be taken into account for purposes of the fewer than 500 employee threshold. DOL guidance also explains when business entities should be treated as separate employers and when they should be aggregated as a single employer for purposes of determining their total number of employees. For more information, see the Department of Labor's Families First Coronavirus Response Act: Questions and Answers.

    FAQ 18 asks whether an Eligible Employer can receive both the tax credits for qualified leave wages under the FFCRA and the employee retention credit under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)?

    The IRS says yes. If an Eligible Employer also meets the requirements for the employee retention credit, it may receive both credits, but not for the same wage payments.

    For more information about the employee retention credit, see Business tax provisions in Senate-passed third coronavirus relief package (03/27/2020).

    Qualified health plan expenses. FAQ 31 says that the amount of qualified health plan expenses taken into account in determining the credits generally includes both the portion of the cost paid by the Eligible Employer and the portion of the cost paid by the employee with pre-tax salary reduction contributions. However, the qualified health plan expenses should not include amounts that the employee paid for with after-tax contributions.

    FAQ 32 asks, for an Eligible Employer that sponsors more than one plan for its employees (e.g., both a group health plan and a health flexible spending arrangement (health FSA)), or more than one plan covering different employees, how are the qualified health plan expenses for each employee determined?

    The IRS says that the qualified health plan expenses are determined separately for each plan. Then, for each plan, those expenses are allocated to the employees who participate in that plan. In the case of an employee who participates in more than one plan, the allocated expenses of each plan in which the employee participates are aggregated for that employee.

    FAQ 33 and FAQ 34 ask, for an Eligible Employer who sponsors a fully-insured group health plan (FAQ 33) or a self-insured group health plan (FAQ 34), how are the qualified health plan expenses of that plan allocated to the qualified sick or family leave wages on a pro rata basis?

    The IRS says that an Eligible Employer may use any reasonable method to determine and allocate the plan expenses, including

    1. The COBRA applicable premium for the employee typically available from the insurer,
    2. One average premium rate for all employees, or
    3. A substantially similar method that takes into account the average premium rate determined separately for employees with self-only and other than self-only coverage.

     

    FAQ 35 asks, for an Eligible Employer who sponsors a health savings account (HSA), or Archer Medical Saving Account (Archer MSA) and a high deductible health plan (HDHP), are contributions to the HSA or Archer MSA included in the qualified health plan expenses?

    The IRS says that the amount of qualified health plan expenses does not include Eligible Employer contributions to HSAs or Archer MSAs. Eligible Employers who sponsor an HDHP should calculate the amount of qualified expenses in the same manner as an insured group health plan, or a self-insured plan, as applicable.

    FAQ 36 asks, for an Eligible Employer who sponsors a health reimbursement arrangement (HRA), a health flexible spending arrangement (health FSA), or a qualified small employer health reimbursement arrangement (QSEHRA), are contributions to the HRA, health FSA, or QSEHRA included in the qualified health plan expenses?

    The IRS says that the amount of qualified health plan expenses may include contributions to an HRA (including an individual coverage HRA), or a health FSA, but does not include contributions to a QSEHRA. To allocate contributions to an HRA or a health FSA, Eligible Employers should use the amount of contributions made on behalf of the particular employee.

    Wages and credits included and deducted from employer income. An Eligible Employer must include the full amount of the credits for qualified leave wages (and any allocable qualified health plan expenses and the Eligible Employer's share of the Medicare tax on the qualified leave wages) in gross income. (FAQ 49)

    In addition, generally, an Eligible Employer's payments of qualified leave wages (and any allocable qualified health plan expenses and the Eligible Employer's share of the Medicare tax on the qualified wages) are deductible by the Eligible Employer as ordinary and necessary business expenses in the tax year that these wages are paid or incurred.

    An Eligible Employer may deduct as a business expense the amounts paid to an employee for qualified leave wages (and any allocable qualified health plan expenses and the Eligible Employer's share of Medicare tax on the qualified leave wages) for which the Eligible Employer expects to claim the tax credits under sections 7001 or 7003 of the FFCRA, if the Eligible Employer is otherwise eligible to take the deduction. (FAQ 50)

    The IRS continues that, generally, an employer's payment of certain federal employment taxes is deductible by the employer as an ordinary and necessary business expense in the tax year that these taxes are paid or incurred, and the amount deductible is generally reduced by credits allowed. Although the tax credits under Sec. 7001 and Sec. 7003 of the FFCRA are allowed against the Eligible Employer's portion of the social security tax, the credits are treated as government payments to the employer that must be included in the Eligible Employer's gross income. If the employer is otherwise eligible to deduct its portion of the social security tax on all wages, the proper amount deductible by the employer is the amount of federal employment taxes before reduction by the tax credits. (FAQ 51)

    Other issues for employers. FAQ 54 asks whether employees can make salary reduction contributions from the amounts paid as qualified leave wages for their employer sponsored health plan, a 401(k) or other retirement plan, or any other benefits?

    The IRS says that the FFCRA does not distinguish qualified leave wages from other wages an employee may receive from the employee's standpoint as a taxpayer; thus, the same rules that generally apply to an employee's regular wages (or compensation, for RRTA purposes) would apply from the employee's standpoint. To the extent that an employee has a salary reduction agreement in place with the Eligible Employer, the FFCRA does not include any provisions that explicitly prohibit taking salary reduction contributions for any plan from qualified sick leave wages or qualified family leave wages.

    FAQ 55 asks whether Eligible Employers should withhold federal employment taxes on qualified leave wages paid to employees?

    The IRS says yes. Qualified leave wages are wages subject to withholding of federal income tax and the employee's share of social security and Medicare taxes. Qualified leave wages are also considered wages for purposes of other benefits that the Eligible Employer provides, such as contributions to 401(k) plans.

    FAQ 56 asks whether a tax-exempt employer can receive the credits?

    The IRS says yes. Tax-exempt organizations that are required to provide such paid sick leave or expanded paid family and medical leave may claim the tax credits.

    Special issues for employees. Qualified sick leave wages and qualified family leave wages are taxable to employees. (FAQ 57) And they are not excluded from gross income as "qualified disaster relief payments." (FAQ 58)

    An employee can receive both "qualified sick leave wages" and "qualified family leave wages," but at different times. Qualified sick leave wages are available for up to 80 hours during which an employee cannot work or telework for any of six reasons related to COVID-19, including because the employee must care for his or her child whose school or place of care is closed, or whose child care provider is unavailable, due to COVID-19 related reasons. By contrast, qualified family leave wages are available only because the employee must care for his or her child whose school or place of care is closed, or because the employee's child care provider is unavailable, due to COVID-19 related reasons, and only after an employee has been unable to work or telework for this reason for 80 hours. (FAQ 59)

     

    Example. Your child-care provider is unavailable indefinitely due to the COVID-19 outbreak, leaving you unable to work or telework to care for your child. For up to the first 80 hours of any period of leave to care for your child, you are entitled to qualified sick leave wages, up to $200 per day and $2,000 in the aggregate. After that, you are entitled to qualified family leave wages for up to ten weeks of additional leave you need, up to $200 per day and $10,000 in the aggregate.