American Rescue Plan Tax Credit For Employers Who Voluntarily Present Paid Sick Depart And Paid Household And Medical Depart – Employment and HR

On March 11, 2021, President Biden signed into law the American
Rescue Plan Act of 2021 (the “Rescue
Plan“).1 This post reviews Section 9641 of
the Rescue Plan, which makes available tax credits to certain
employers who voluntarily provide paid time sick leave and family
and medical act leave to employees for absences occasioned by the
pandemic, from April 1, 2021 through September 30, 2021.

Section 9641 of the Rescue Plan is based on the paid sick leave
and paid family and medical leave provisions that were effective
April 1, 2020 through December 31, 2020, under the Families First
Coronavirus Response Act (“FFCRA“).2
Although the mandatory paid leave provisions of the FFCRA were not
extended past December 31, 2020, the tax credits available under
Section 9641 of the Rescue Plan are based on the framework of the
FFCRA, with certain modifications.

This post will first review the FFCRA, and then explain how the
Rescue Plan’s tax credits work.

The FFCRA

The FFCRA applied to (i) all public employers, and (ii) private
employers with fewer than 500 employees.

The FFCRA required a covered employer to provide a minimum
amount of paid time off for emergency paid sick leave
(“EPSL“) for one of five
pandemic-related reasons:

1. The employee being subject to a government quarantine or
   isolation order.
2. The employee being advised by a health care professional to
   self-quarantine.
3. The employee experiencing COVID-19 symptoms and seeking a
   medical diagnosis.
4. The employee caring for an individual who is subject to a
   government quarantine or isolation order, or who has been advised
   to self-quarantine by a health care professional.
5. The employee caring for a son or daughter whose school or place
   of care has been closed or whose childcare provider is
   unavailable,

Under the FFCRA, the maximum number of available EPSL hours was
80 hours. A lower threshold applied for part-time employees.

A covered employer was required to pay 100% of the
employee’s daily wages, up to a maximum of $511 per day, to
eligible employees taking EPSL to address their own symptoms,
diagnosis, or isolation orders (reasons 1-3 above). Other eligible
employees (reasons 4 and 5 above) were entitled to payment of
two-thirds (2/3) of their daily wages, up to a maximum of $200 per
day.

The FFCRA also provided up to 12 weeks of emergency paid family
and medical leave (“EPFL“) for employees
who were unable to work or telework due to:

(i) a need to care for a son or daughter under the age of 18,
due to a school or place of care being closed due to a public
health emergency, or

(ii) the child care provider of a son or daughter under the age
of 18 not being available due to a public health emergency.

For this purpose, a “public health emergency” was
defined as “an emergency with respect to COVID-19 declared by
a Federal, State, or local authority”.

The first two weeks of EPFL leave were job-protected but unpaid
(unless they coincided with EPSL). After that time, an employee
would be entitled to two-thirds (2/3) of his or her daily wages, up
to a maximum of $200 per day, subject to a $10,000 maximum per
employee.

To help offset this burden for private sector employers,
Congress provided tax credits equal to 100% of the wages that were
paid by the employer to meet the requirements of the FFCRA. Thus,
essentially, this was intended to be a no-cost obligation of the
employer.

These credits were claimed against an employer’s obligation
to pay the “OADSI” portion of social security taxes for
each calendar quarter in which qualified EPSL or EPFL wages were
paid. The credits were refundable if the credit exceeded the
employer’s OASDI tax obligations and also could be claimed in
advance as an offset to required tax deposits of the employer. No
tax credits were provided for public sector employers.

Extension of the Tax Credits – January 1, 2021 through
March 31, 2021

The FFCRA expired on December 31, 2020. Thus, beginning January
1, 2021, employers were no longer required to provide federal EPSL
or EPFL to employees who might be absent from work due to pandemic
related reasons.

However, Section 286 of the Consolidated Appropriations Act of
2021 (the omnibus budget bill)3 provided that if a covered
employer did provide EPSL and EPFL between January 1, 2021 and
March 31, 2021 (presumably for the same reasons and under the same
conditions as existed when the FFCRA was in effect), the employer
could continue to be entitled to a 100% tax credit for the amount
of those payments, through March 31, 2021.

In other words, even though a covered employer was not required
to provide EPSL or EPFL after December 31, 2020, the employer could
voluntarily do so throughout the first quarter of 2021, and
continue to do so on a no-cost basis due to the available tax
credits.

Extension of the Tax Credits – April 1, 2021 to September 30,
2021

The Rescue Plan did not revive the FFCRA framework. Thus,
employers are still no longer required to provide federal EPSL or
EPFL to employees.

However, Section 9641 of the Rescue Plan once again extends the
100% tax credit to a previously covered employer who voluntarily
provides EPSL and EPFL from April 1, 2021 through September 30,
2021. Specifically, Section 9641 of the Rescue Plan does so in
Internal Revenue Code (the “Code”) Sections 3131, 3132
and 3133.

These credits may be claimed on a quarterly basis against the
employer’s share of the Medicare taxes (i.e., taxes
imposed under Code Section 3111(b)) owed by the employer. Once
again, a refund may be claimed if the amount of the credit exceeds
the employer Medicare taxes due in a calendar quarter. The employer
also is permitted to take an advance against the tax credit when
making employment tax deposits.

In general, in order for an employer to claim the available tax
credits, the employer is required to comply with all of the
obligations that were previously set forth in the FFCRA regarding
the payment of EPSL and EPFL, job protection and restoration, and
non-retaliation. However, Section 9641 of the Rescue Plan has
modified those requirements in certain respects discussed
below.

Modified EPSL Requirements

The following is a summary of the modified EPSL requirements
that must be met in order to claim the tax credits that are
available under Code Section 3131:

Additional time off: The FFCRA required that,
for full-time employees, EPSL be paid for a total of no more than
80 hours from the date of the law’s enactment through the end
of 2020. For part-time employees, EPSL entitlement was based on the
average number of hours the employee worked in a two-week period.
Under the FFCRA, the tax credit was only available to an employer
for a maximum of 10 EPSL days.

These requirements have been retained in Code Section 3131. If
participating in the extended tax credits, employees are permitted
to take an additional EPSL up to 80 hours regardless of how much
EPSL has been used in preceding quarters.

Broader Coverage: The FFCRA only permitted EPSL
to be used for one of the five covered reasons noted above. For
reasons (1)-(3), to obtain the tax credit, an employee is entitled
to full payment (100%) of his or her daily wages, up to $511 per
day. The tax credit will likewise be provided for wages paid up to
$511 per day.

For reasons (4)-(5), an employee is entitled to payment that is
at least two-thirds (2/3) of his or her daily wages, at least up to
$200 per day. The tax credit will likewise be provided for wages
paid up to $200 per day.

Under Code Section 3131, the five original reasons for EPSL
payments continue to be grounds for EPSL eligibility. In addition,
if taking advantage of the tax credit, the employer must make
available EPSL for the following additional reasons:

1. A covered employee is absent from work because the employee is
   seeking or awaiting the results of a diagnostic test for, or a
   medical diagnosis of, COVID-19, provided that the employee has been
   exposed to COVID-19 or the employer has requested that the employee
   obtain such test or diagnosis.
2. An employee is obtaining immunization related to COVID-19.
3. An employee is recovering from any injury, disability, illness,
   or condition related to an immunization for COVID-19.

If EPSL is provided for any of the foregoing reasons, the
employer must pay full (100%) of the employee’s daily wages, up
to $511 per day. Likewise, the tax credit will be provided for the
wages paid up to $511 per day.

It is unclear whether “obtaining immunization” refers
only to the time waiting in line or at a dispensing location for
the vaccination shot(s), or whether it can be interpreted more
broadly to include time spent waiting for an appointment, an
important qualification for employers adopting or considering
mandatory vaccination policies.

Modified EPFL Requirements

The following is a summary of the modified EPFL requirements
that must be met in order to claim the tax credits that are
available under Code Section 3132:

To qualify for the tax credits available under Code Section
3132, EPFL must be paid to employees for all of the following
reasons:

1. All of the original reasons in the FFCRA when it was enacted
   (i.e., to care for children under age 18 whose school or daycare
   was closed or whose day care provider was unavailable due to a
   public health emergency).
2. Any of the three expanded reasons described above that are now
   included as bases for taking EPSL (e.g., COVID-19 testing and
   immunization).

EPFL Payment Amounts: As has been noted above,
EPFL is paid at 2/3 of an employee’s daily wages, up to a
maximum of $200 per day.

To claim the credit under Code Section 3132 for EPFL, the
employer may no longer choose not to pay employees during the first
10 days of the leave, as was originally provided for under the
FFCRA.

Because of the elimination of the 10-day unpaid period, in 2021,
an employer might pay wages to an employee that qualify as both
EPSL and EPFL, resulting in the employer potentially being entitled
to claim credits under both Code Section 3131 (EPSL) and Code
Section 3132 (EPFL) for the same wages. If that should occur, the
employer must claim the credit under Code Section 3131 (EPSL). The
amount of that credit will then reduce any credits that are
available under Code Section 3132 (EPFL).

Increase to EPFL Caps: Under the FFCRA, up to
twelve weeks of job-protected EPFL was available to eligible
employees, and the total EPFL benefit obligation was capped at
$10,000 per employee. Under Code Section 3132, up to $12,000 in
EPFL benefits are available and the maximum tax credit for wages
paid is thus extended to $12,000.

Other Tax Credit Matters under the Rescue Act

Enhancements to the Tax Credits: Code Sections
3131(d)(1) and 3132(d)(1) increase the amount of the tax credit
that is available to an employer by a portion of the employer’s
“qualified health plan expenses” as are properly
allocable to the EPSL and EPFL wages which a tax credit is
allowed.

Essentially, qualified employer health plan expenses are amounts
paid by an employer for coverage under a group health plan, to the
extent excluded from an employee’s gross income under the tax
law (Code Section 106). The IRS is to prescribe methods for
allocating health care costs to employee wages.

Code Sections 3131(e) and 3132(e) also permit an increase in an
employer’s tax credits if an employer is making collectively
bargained contributions to a multiemployer defined benefit pension
plan. The credits are allowable to the extent that those
contributions are properly allocable to EPSL and EPFL wages for
which a tax credit is allowed

A similar increase to the tax credit also is allowed for an
employer’s collectively bargained contributions to certain
“registered apprenticeship programs”.

Exceptions: The Rescue Plan sets forth a number
of exceptions from eligibility for the tax credit. For example,
employers cannot “double dip” by counting EPSL or EPFL
wages toward any employer retention credits credit that are claimed
by the employer under Section 2301 of the CARES Act.

In addition, tax credits are not allowable for EPSL and EPFL
wages paid to the following extent:

• The wage payments are used to provide for loan forgiveness
  under Section 7(a)(37) or 7A of the Small Business Act (the
  Paycheck Protection Program);
• The wage payments are made from grants given to the employer
  under Section 324 of the Economic Aid to Hard-Hit Small Businesses,
  Non-profits, and Venues Act4; or
• The wage payments are made from restaurant revitalization
  grants made under Section 5003 of the Rescue Plan.

Nondiscrimination Rules

Code Section 3131(j) and Code Section 3132(j) add new
nondiscrimination requirements to the law as a condition of
obtaining the tax credits under Code Sections 3131 and 3132 for
EPSL and EPFL payments to employees.

Code Sections 3131(j) and 3132(j), no tax credit is allowable to
an employer for any calendar quarter if, with respect to the
availability of EPSL or EPFL payments, the employer discriminates
in favor of:

• highly compensated employees,
• full-time employees, or
• employees on the basis of tenure.

For this purpose, the term “highly compensated
employee” (“HCE”) is defined in Code Section 414(q).
In general, an employee will be an HCE for calendar year 2020 if he
or she had more than $130,000 in compensation in 2019 or is a 5%
owner of the business.

Although the tax credits that are being made available to
employers are designed to allow an employer to provide the EPSL and
EPFL payments at no cost to the employer, it might be difficult for
an employer to offer additional sick leave or additional family and
medical leave to all employees, including part-time employees,
without incurring at least some additional costs. Thus, these
nondiscrimination rules might be a bit of a red herring that could
dissuade employers from using these provisions. Prompt guidance
form the IRS on these nondiscrimination rules is certainly
desirable.

Like many hastily-drafted laws, Section 9641 of the Rescue Plan
does have some unanswered questions. While it certainly is designed
to provide that employers may extend the payment of additional sick
leave and family leave benefits at no cost to the employer,
employers will still need to weigh the economic and non-economic
costs of doing so. Factors an employer might consider are the needs
of their workforce, the severity of the virus outbreak in the
employer’s area, the demand for labor in the next two quarters,
and the likelihood that risk mitigation strategies such as
environmental and engineering controls, increased vaccination
rates, and dropping infection rates may make it unlikely that
employees have a continuing need for time off related to the
pandemic.

Footnotes

1. P.L.
117-2 (March 11, 2021)

2. P.L.
116-127 (March 18, 2020).

3. P.L.
116-260 (December 21, 2020).

4. This
was part of the Consolidated Appropriations Act of 2021 (the
Omnibus Budget Bill) – P.L. 116-260 (December 21, 2020)

Originally Published 25 March, 2021

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