We are back again, with some more answers about the COVID-19 paid leave provisions and some thoughts about how all of this is going to work. This time we are focused on the Internal Revenue Service (IRS) part of the equation. Everybody’s favorite federal agency recently released 66 new FAQs about leave-related tax credits for small and midsize businesses. Also available is the new form employers will use to access advances of the new employer payroll tax credits due to COVID-19, Form 7200, Advance Payment of Employer Credits Due to COVID-19. We are still waiting for revised instructions to Form 941, the Employer’s Quarterly Federal Tax Return to tell us exactly how the IRS will require employers to report on COVID-19 paid leave tax credits. However, now that the sub-regulatory guidance and Form 7200 are out, we have some more information, clarifications and little nuances we picked up on to discuss with friends like you.
Overview of the COVID-19 Paid Leave Tax Credits
As we’ve mentioned a few times before, the Families First Coronavirus Response Act (FFCRA) creates two types of temporary paid leave that qualified employees of businesses with fewer than 500 employees can access between April 1-December 31, 2020. Federal policymakers don’t want economically challenged business owners left holding the bag for these new requirements. So, the law also creates a refundable payroll tax credit to reimburse employers for 100 percent of affected employee’s wages, allocable health insurance costs and the employer’s share of Medicare taxes, attributable to the new emergency paid leave.
According to the law and the new FAQs, employers can access the COVID-19 paid leave credit virtually immediately. Instead of sending the IRS the employer’s share of federal employment taxes equal to the amount of paid leave wages, qualified health plan expenses, and the employer’s share of Medicare tax imposed on those wages, the business just keeps that money. If the amount of the credit exceeds their employment tax liability, then the business can get the rest back right away from the IRS. They just need to file Form 7200, Advance Payment of Employer Credits Due to COVID-19. The IRS expects to begin processing these requests during April 2020.
So, what pot of money does the employer have to draw from? Eligible employers still have to withhold the employee’s federal income tax and share of social security and Medicare taxes on any qualified leave wages paid. They also have to withhold all payroll-related taxes (employee and employer’s share) from all employees that are not taking COVID-19 related paid leave. According to the instructions to page two of the Form 7200 instructions, businesses can draw from ALL of these sources of tax money that typically would need to be delivered to the IRS. Using that money, employers can “pay” themselves immediately for the costs they incur for paying employees and providing them with health benefits when they are out on COVID-19 paid leave. That’s a pretty big pot for employers to draw from. It’s hard for us to envision too many employers even qualifying for an advance credit payment now that we know that they can access an employee’s withheld income tax, as well as their own payroll tax liabilities, to fund their credit.
Qualified group health plan costs that are allocable to any employee taking the leave count when determining the amount of an employer’s tax credit. We’ve had some friends ask us how expansive is the definition of “group health plan.” Some have wondered if it includes dental and vision coverage since those are not explicitly addressed in the FAQs. Our view is that based on the law and the guidance, which both cite the IRC 5100 (b)(1) definition of group health plan, that it includes all plans subject to COBRA, such as medical, dental and vision. It also means that any employer contributions to a traditional health reimbursement arrangement, an individual coverage health reimbursement arrangement, or flexible spending account also count as group health plan expenses. What does not count are employer contributions to an employee’s health savings account, Archer medical savings accounts or qualified small employer health reimbursement arrangements, since all of these are excluded from the definition of a group health plan.
Another important distinction in the FAQs is that employers should generally include both the portion of the cost paid by the employer and the portion of group health plan costs paid by the employee with pre-tax salary reduction contributions. Only employee post-tax contributions do not count qualified group health plan expenses for tax credit purposes.
This information is a little bit different than original guidance about employee health insurance premium contributions, authored by the Department of Labor, which states:
“If your employer provides group health coverage that you’ve elected, you are entitled to continued group health coverage during your expanded family and medical leave on the same terms as if you continued to work…You generally must continue to make any normal contributions to the cost of your health coverage.”
However, the IRS guidance makes it clear that is not the case, and employers can count the amount of employee-paid, pre-tax group health plan contributions in the allocable amount of the employee’s health coverage costs.
The IRS FAQs can be used to guide employers who are trying to figure out how much of their total group health plan costs to allocate to an employee out on COVID-19 paid leave for tax credit purposes. They provide multiple examples of acceptable calculation methods for both fully-insured and self-funded plans. However, to us, the most important nugget in all of the calculation guidance is the statement that “employers may use any reasonable method to determine and allocate the plan expenses.” Two other key nuances are that if averaging costs over the course of the year, an employer should only count workdays, and treat days of paid leave, and any day on which an employee performs any work, as workdays. Also, if a group plan includes multiple options or different choices for an employee to elect, then the employer needs to allocate costs for each plan option. Costs related to each qualified employee’s individual elections need to be factored in on a case-by-case basis.
A bit of good news for employers in the FAQs is that they clearly indicate if businesses access other kinds of federal COVID-19 economic relief, like the Paycheck Protection Program, the Employee Retention Tax Credit, or payroll tax deferral to 2021 and 2022, they can receive tax credits for qualified emergency paid leave wages too. Employers just cannot claim the same paid leave wage or health insurance costs for more than one tax credit or relief program. If an employer claims the Employee Retention Tax Credit, then they have to document that they are doing so for other qualified expenses. Concerning the COVID-19 SBA loan programs, any qualified leave wages and group health plan costs related to a paid leave credit are not eligible as “payroll costs” for purposes of receiving loan forgiveness.
Finally, another item a friend asked us about an employee’s payroll tax and other withholdings when out on COVID-19 paid leave. 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 employer-provided benefits, such as contributions to 401(k) plans. One question we have is whether amounts elected by the employee to be paid on a pre-tax basis towards retirement plans and other qualified benefits (that are not group health plan benefits) are ultimately reimbursable to the employer. This issue is raised in our minds because the definition of qualified paid sick leave and family leave wages in the FFCRA statute is IRC Section 3121(a), which does not include those amounts. We’ll need to wait for the IRS to produce new instruction for Form 941, which is what employers will use to report on their credit reimbursements to the IRS quarterly.
We really mean that, and not in a Joey Tribbiani type of way. The world turning upside down has left us, and many other employee benefits professionals, exhausted. It seems to be particularly hard at times for those of us blessed with little people in our homes. A dear friend and blog reader pointed out to one of us this weekend–we are working three jobs now. Not only are we parents and health insurance nerds, but we are also teachers or “educational consultants” too. Anyway, the two of us find all of the webinars, guidance text, and countless Zoom calls very draining, particularly when combined with the need to constantly feed people who should be eating lunch and snacks at school. If you feel the same, just know that as Medium explains, you are not alone. And if there is anything that we can do to help you to feel less tired–from answering a tough policy question to strategizing about how to contain a toddler during conference calls–shoot us a message or post a comment. However, if you’ve cleared out your attic, caught up on all photo albums and started marathon training during all of this, well then when this is all over, we may need to say “we were on a BREAK!”