After months of stalemate, the House and Senate passed another round of COVID relief laws (HR 133) on December 21. The 5,593-page bill, which has gained momentum following the introduction of the bipartisan compromise legislation, offers an improved employee loyalty loan (“ERC”) that is easier for employers to qualify as part of the first six months of 2021 compared to the enacted ERC Coronavirus Law on Help, Assistance and Economic Security (“CARES”).
The bill also includes extensions of a number of labor tax credits, including the Job Opportunities Tax Credit (“WOTC”), the Family Paid Vacation and Medical Leave Tax Credit included in the Tax Reduction and Employment Act as a two-year pilot program, and the Paid Vacation Credits that enacted under the Family First Coronavirus Response Act (“FFCRA”). The bill would also extend the length of time employers can make student loan payments or reimbursements under an educational assistance program under Section 127 of the Internal Revenue Code, allow employers additional flexibility in flexible spending accounts, and allow employers a longer period of time to collect social security tax for employees, which was delimited in 2020 according to IRS Notice 2020-65.
The bill would also add a skilled wage tax credit for workers in skilled disaster areas in 2020 for disasters other than COVID-19. Finally, the bill deals with the deductibility of expenses paid with PPP loans issued.
Changes in employee retention
The ERC, passed under the CARES Act, provides for a credit of 50% of the qualifying wage to the employer’s social security tax until December 31, 2020. The bill would extend the availability of the credit until June 30, 2021. The bill will make various improvements to how the credit works.
First, the credit is increased from 50% of the qualified wage to 70% of the qualified wage. Second, the bill increases the cap on qualified wages per employee from a total of $ 10,000 in 2020 to $ 10,000 per quarter for the first two quarters of 2021. Accordingly, the maximum ERC an employer can receive in relation to an individual employee in 2021 is , $ 14,000.
Under the CARES Act, employers could qualify for the credit if their business was suspended in whole or in part due to an applicable governmental order, or if the employer saw its quarterly gross earnings more than 50% year-over-year. Under the law, employers would be eligible for the ERC in the first two quarters of 2021 if they saw gross quarterly earnings decrease more than 20% year over year. In addition, employers can use the year-on-year decrease in the previous quarter to determine eligibility.
The legislation would also confirm the existing IRS guidance that group health plan expenses paid for employees on leave and not earning any other wages are qualified wages for the purposes of the ERC. Initially, the IRS said such spending was not qualifying wages but was being tracked after heavy bipartisan criticism.
According to the CARES Act, employers with an average of 100 or fewer full-time equivalents (pursuant to Section 4980H) were allowed to use the ERC in 2019, regardless of whether the employee provided services. Larger employers were only allowed to apply for the credit for wages that were paid for hours not worked. The bill would increase this threshold to 500 employees for the first two quarters of 2021. For example, employers with an average of up to 500 full-time equivalents in 2019 can claim qualified wages from the ERC that were paid in the first two quarters of 2021, regardless of whether the employees provide services.
Crucially, the legislation would retrospectively allow employers to apply for the ERC even if they had received a Paycheck Protection Program loan. Under the CARES Act, an employer who received a PPP loan was not eligible for the ERC. As the aggregation rule (see previous coverage) was broad for ERC purposes, many employers who had not received a PPP loan were also ineligible due to PPP loans taken out by affiliates. Under the law, an employer can obtain the ERC even if they have a PPP loan, but cannot claim the credit in relation to wages paid with issued PPP loan proceeds. These employers can use the ERC on their current quarter’s Form 941 to reflect qualifying wages paid in previous quarters. It remains to be seen how the IRS will implement this change once the legislation is enacted.
Section 45S Extension of the paid vacation credit
The paid family and sick leave credit under Section 45S, which was passed in 2017 as a two-year pilot program under the Tax Reduction and Employment Act and expires at the end of 2020, has been extended by five years to December 31, 2025.
FFCRA Paid Leave Credit Extension
Although the bill does not extend the FFCRA’s paid vacation mandate for small employers with 500 or fewer employees, the bill would extend the availability of the FFCRA’s paid vacation credits until March 31, 2021, allowing employers with 500 or fewer workers to provide the amount of paid vacation that would be required if the FFCRA mandate were extended and receive a tax credit that fully offsets the cost of such vacation.
Tax-free student loan payments
The CARES Act included a provision that would allow employers to exclude the repayment of student loans of up to $ 5,250 per year from a worker’s income in 2020. This provision was passed as part of Section 127 so all non-discrimination, dismissal and other rules related to educational assistance apply to plans. Legislation would extend the provision by five years to December 31, 2025. Employers who are already providing a student loan repayment benefit should consider adopting changes to an existing educational assistance program or a new plan to provide these benefits tax-free.
Flexible changes to the expense account
The bill would also allow employers to extend unused FSA funds for health care and dependent care from 2020 to 2021 and 2021 to 2022. Many workers who contributed to FSAs for dependent care were unable to use those funds in 2020, allowing rollover employees to use the pre-tax funds they put aside. Employers can also provide for a grace period of 12 months from the end of the plan years until 2020 and 2021. The bill would also allow employers to allow workers to use unused care products from the last plan year for which the enrollment is made, until the period ended before February 1, 2020 for children who were older (13 years old) the child is 14 years old.
The bill would allow employers to allow laid-off workers to use funds that have contributed to their FSAs in 2020 through the end of the grace period for the year they left employment. Therefore, an employee who ended their employment relationship in 2020 could still use FSA funds that were allocated in 2020 until the end of 2021.
Finally, the bill would allow employers to allow changes to mid-year elections for plan years through 2021 without considering a status change. In other words, employees will be allowed to adjust their mid-year contributions based on the vaccination process and its impact on the pandemic.
These rules are optional, and employers who typically receive forfeited money if attendees don’t use it before the deadline can choose not to change their cafeteria plans to allow these changes. Employers who choose to take advantage of the increased flexibility of the bill are likely to see fewer losses and higher costs for the plans.
Additional time for collecting the 2020 deferred social security tax for employees
Earlier this year, the 2020-65 Notice allowed employers to postpone withholding and filing social security taxes for employees. (See previous reporting.) According to the notice, employers are required to file these deferred taxes before April 30, 2021, otherwise interest and penalties will apply.
The bill would extend the time for employers to collect deferred taxes from employees by the end of 2021 rather than April 30, 2021. Although employers other than the federal government have taken steps to defer employee social security taxes, this extension may also increase the risk that deferred taxes will not be fully recovered. A longer period of time to collect deferred taxes also gives workers a longer period of time to get out of employment in 2021 before the tax is collected. As explained in our recent article, an employer who pays the employee’s 2020 social security tax for the employee in 2021 must treat that payment as an additional wage payment to the employee in 2021.
Qualified employee loyalty loan for disaster cases
Legislation provides for a 40% employee retention credit against income tax (not against income tax, with the exception of certain nonprofits), up to $ 6,000 in qualifying wages per employee for employers operating a trade or business in a disaster area. that has become non-functional. The employee must have a primary job in the disaster area, but credit is available regardless of whether the employee is providing services. For example, the credit is available for qualified wages paid to an employee who provides services in a neighboring area that is not inoperable. The credit is available until the earlier of the date on which material operations resume at the employee’s primary workplace or 150 days after the last day of the Qualified Disaster Incident Period.
Deductibility of costs paid with PPP loans
In the 2020-32 Notice, the Treasury Department and the IRS held that expenses paid with issued PPP loan proceeds were not deductible under Section 265 because the issuance of a PPP loan did not constitute a cancellation of debt income. Despite bipartisan criticism of the IRS’s position, the Treasury and IRS have recently doubled in size and taken the same position in Rev. Rul. 2020-27. The bill would override this item and make such expenses fully deductible.
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