Effective April 1, the Families First Coronavirus Response Act (FFCRA or Act) requires certain private sector employers with fewer than 500 employees and governmental employers of all sizes to provide their employees with emergency paid sick leave and emergency paid medical leave. More information about the FFCRA is available here.
Given the current unknowns, many employers are evaluating the financial implications of the Act's expansive mandatory paid leave and making difficult decisions, including reducing head count.
To incentivize employers (in particular, those deemed essential under various shelter orders) to retain their employees and bear the costs of emergency paid leave, the FFCRA offers covered employers a refundable payroll tax credit. This tax credit offsets the cost of the paid leaves required under the Act, and could make all the difference for certain businesses concerned that the cost of these paid leaves will run them out of business. Here's how it works.
Which employers are eligible for the tax credit?
The tax credit is available to employers with fewer than 500 employees who provide emergency paid sick leave or emergency paid family and medical leave as required under the FFCRA. Whether an employer employs fewer than 500 employees is determined on a "snapshot" basis; that is, if, after April 1, the employee head count drops below 500, the employer will be required to comply with the Act as of that date and will become eligible for the credit. Self-employed individuals can also receive the tax credit.
How much is the tax credit?
The tax credit is equal to 100 percent of the amount the employer pays in emergency paid sick leave and emergency paid family and medical leave, including a portion of the costs of providing group health plan coverage that are allocable to such leave payments, up to the FFCRA-established per-employee caps.
What are the per-employee caps?
The amount of the per-employee cap depends on the circumstances triggering the emergency paid leave. In each instance, the employee must be unable to work remotely (either because the employer or the job does not permit it, or because the employee is unable to accomplish such telework due to the COVID-related leave reason).
- If an employee takes emergency paid sick leave because:
a. The employee is subject to a government quarantine or isolation order related to COVID-19;
b. The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
c. The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis, then the tax credit is equal to the employee's regular rate of pay, up to $511 per day, for a maximum of 10 days, or $5,110 in the aggregate per employee.
Example 1: Employee takes emergency paid sick leave because he has coronavirus symptoms and is awaiting a medical diagnosis. Employee is a full-time employee who works eight hours per day, with a regular rate of pay of $40 per hour. Employee misses work for 10 days, and receives 10 days of emergency paid sick leave. Therefore, Employer will receive a $3,200 tax credit (8 hours per day x $40 per hour x 10 days).
2. If the employee takes emergency paid sick leave because:
a. The employee is caring for an individual who is subject to a government quarantine or isolation order related to COVID-19, or who has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
b. The employee is caring for a child whose school or place of care is closed or whose childcare provider is unavailable due to COVID-19 precautions,
then the tax credit is equal to two-thirds of the employee's regular rate of pay, up to $200 per day, for a maximum of 10 days, or $2,000 in the aggregate per employee.
Example 2: Employee takes emergency paid sick leave because he must stay home to care for his spouse who has been advised by a health care provider to self-quarantine due to COVID-19 concerns. Employee works eight hours per day, with a regular rate of pay of $30 per hour. Employee misses work for 10 days and receives 10 days of emergency paid sick leave. Therefore, Employer will receive a $2,000 tax credit (8 hours per day x $30 per hour x 10 days = $2,400, but the amount is subject to the $2,000 cap).
3. If the employee takes emergency family or medical leave (or both) because the employee is unable to work due to the need to care for a child whose school or place of care has been closed or whose childcare provider is unavailable due to COVID-19, then the tax credit is equal to two-thirds of the employee's regular rate of pay, up to $200 per day for a maximum of 10 additional weeks, or $10,000 in the aggregate per employee.
Because an employee may use both emergency paid sick leave and emergency paid family and medical leave to care for a child whose school or childcare provider is closed due to COVID-19, the total tax credit cap for such an employee is $12,000 in the aggregate.
Example 3: Employee's child's day care closes because of COVID-19, and Employee cannot find anyone to take care of her child, nor can Employee work remotely. Employee misses work for 12 weeks. Employee's regular rate of pay is $70 per hour, and she works eight hours per day. Because Employee is eligible for both the 10 days (two workweeks) of emergency paid sick leave as well as 10 weeks of emergency paid family and medical leave, she may receive paid leave for a total of 12 weeks. Therefore, Employer will receive a $12,000 tax credit (($200 per day cap x 2 weeks (10 days)) + ($200 per day cap x 10 weeks)).
What must an employer show to receive the tax credit?
In order to claim the tax credit, employers must be able to demonstrate that the amounts paid to employees for emergency paid sick leave and emergency paid family and medical leave were for qualifying reasons under, and subject to the limits of, the FFCRA. Any leaves provided over and above the requirements of the FFCRA are not eligible for the tax credit, so employers being more generous (whether as an assistance to their employees or due to confusion about the Act's requirements) are not eligible to recoup those costs. The following types of documentation are sufficient to demonstrate FFCRA-qualifying leave:
- A notice of closure from a child's school, place of care, or childcare provider, including a notice posted on a government, school, or day care website;
- A notice of closure of a child's school, place of care, or childcare provider published in a newspaper;
- An email from an employee or official of the school, place of care, or childcare provider;
- A government shut-down or "stay at home" order (which is typically available on the local or state government's website); or
- Written documentation from a health care provider recommending the employee self-quarantine.
At minimum, documentation should include the employee's name, the qualifying reason for leave, a statement that the employee is unable to work (including telework) because of the qualifying reason, the name of the employee's health care provider (if applicable), and the dates for which leave is requested.
This documentation should be kept in a separate, confidential file for each employee for record-keeping purposes. Additionally, employers should establish separate leave codes to assist in tracking FFCRA-specific leave for timekeeping purposes, and should partner with their payroll providers if applicable.
Although the FFCRA technically expands the circumstances under which an employee may take FMLA leave (to care for a child whose school or place of care is closed due to COVID-19), a signed third-party certification is not required for FFCRA paid leave. However, if an employee taking FFCRA leave develops a need to take traditional FMLA leave (for example, the employee develops a serious health condition), then the employee must provide the medical certifications required under the FMLA.
The IRS is expected to release guidance, including forms, instructions, and information, relating to any additional information or documentation to substantiate the credit, as well as the procedures to claim the tax credit.
What kind of documentation should an employee provide if they cannot see a doctor?
In some circumstances, an employee may not be able to go see a doctor who can provide certification of a COVID-19 diagnosis or documentation regarding a recommendation to self-quarantine. In those cases, the employee should be asked to sign a statement attesting to their efforts to seek a medical consult, the doctor's name, the reason the employee was not able to see the doctor, and the FFCRA-qualifying reason for which the employee needs to take leave.
Can an employer still claim the tax credit if an employee supplements FFCRA leave with paid time off?
The FFCRA allows employees to use existing paid vacation, personal, medical, or sick leave already provided to them under their employer's paid leave policy to supplement their leave under the FFCRA. Some employees may choose to do this if, for example, they would normally receive more under their employer's paid time off (PTO) policy than they would under emergency paid sick leave or emergency paid family and medical leave. Employers can pay their employees in excess of the FFCRA's requirements; however, they cannot claim a tax credit for those amounts in excess of the FFCRA's statutory limits. Employers are not required to allow employees to supplement their paid sick leave or expanded family and medical leave with PTO.
How does an employer recover the tax credit?
Tax credits are claimed on the employer's quarterly Form 941, which is used to report and deposit required tax withholdings. The employer is eligible to offset the eligible credit amount against any federal tax obligation it otherwise has on such Form 941 (that is, federal income tax withheld from employee paychecks and the employer's and employee's portion of Social Security and Medicare taxes with respect to all employees, not just those on leave). This eliminates the lag that would otherwise be required if the employer were obligated to pay such wages and applicable withholdings, and then wait for the government to process a credit. If the amount of the credit exceeds the amount the employer is otherwise required to deposit with Form 941, a refund will be issued promptly.
Because the tax credits are against payroll tax liabilities, even employers that are not subject to income tax may obtain government funding of FFCRA-required leave, and the above-referenced expedited procedures will dramatically reduce the cash flow concerns associated with employers being obligated to pay wages currently but having to wait for reimbursement from the government.
This article is presented for informational purposes only and is not intended to constitute legal advice.