Employers covered under the Families First Coronavirus Response Act (FFCRA) must provide Paid Sick Leave and Expanded Family Medical Leave to eligible employees. A more robust discussion of this can be found in our COVID-19 Alert 8. The short answer is that all private employers employing fewer than 500 employees are covered and are required to provide paid leave for various COVID-19 related circumstances from April 1 through December 31, 2020. It has been touted that the financial impact to employers would be minimal because the amounts paid to employees would be reimbursed by the federal government through tax credits. This was addressed in the original FFCRA and then again in the recently passed CARES Act. But the practical details were not yet worked out.

Yesterday, the IRS issued its long-awaited guidance. This article will not address the entirety of the guidance but only provide the highlights. (Note: This article will not at all address self-employed individuals.) The guidance should be reviewed by an employer’s HR professionals, payroll professionals, and tax advisors to ensure an integrated approach to document collection, recordkeeping, and submission of information to ensure maximum benefit under the law.

Here is a summary of the benefit provided by the IRS:

Eligible Employers are entitled to refundable tax credits for qualified sick leave wages and qualified family leave wages (collectively “qualified leave wages”), under sections 7001 and 7003 of the FFCRA respectively. These tax credits are increased by the qualified health plan expenses allocable to, and the Eligible Employer’s share of Medicare tax on, the qualified leave wages. Eligible Employers are businesses and tax-exempt organizations with fewer than 500 employees that are required to provide paid sick leave under the EPSLA and to provide paid family leave under the Expanded FMLA (note that although the FFCRA requires most government employers to provide paid leave, it does not entitle those governmental employers to tax credits for this leave). For more information about Eligible Employers, see “What employers may claim the tax credits?” … The refundable tax credits apply to qualified sick leave wages and qualified family leave wages paid for certain periods when an employee is unable to work, as described below, during the period beginning April 1, 2020, and ending December 31, 2020.

The IRS also provides a summary of the manner in which the credit will work. Specifically, the IRS now explains how employers will retain the amounts of the credits rather than make certain deposits with the IRS:

Eligible Employers are entitled to receive a credit in the full amount of the qualified sick leave wages and qualified family leave wages, plus allocable qualified health plan expenses and the employer’s share of Medicare tax, paid for leave during the period beginning April 1, 2020, and ending December 31, 2020. The credit is allowed against the taxes imposed on employers by section 3111(a) of the Internal Revenue Code (the “Code”) (the Old-Age, Survivors, and Disability Insurance tax (social security tax)) and section 3221(a) of the Code (the Railroad Retirement Tax Act Tier 1 rate) on all wages and compensation paid to all employees. If the amount of the credit exceeds the employer portion of these federal employment taxes, then the excess is treated as an overpayment and refunded to the employer under sections 6402(a) or 6413(a) of the Code. The qualified sick leave wages and qualified family leave wages are not subject to the taxes imposed on employers by sections 3111(a) and 3221(a) of the Code and employers (other than those that are subject to the Railroad Retirement Tax Act) are entitled to an additional credit for the taxes on employers imposed by section 3111(b) of the Code (Hospital Insurance (Medicare tax)) on such wages.

Eligible Employers that pay qualified leave wages will be able to retain an amount of all federal employment taxes equal to the amount of the qualified leave wages paid, plus the allocable qualified health plan expenses and the amount of the employer’s share of Medicare tax imposed on those wages, rather than depositing them with the IRS. The federal employment taxes that are available for retention by Eligible Employers include federal income taxes withheld from employees, the employees’ share of social security and Medicare taxes, and the employer’s share of social security and Medicare taxes with respect to all employees.

If the federal employment taxes yet to be deposited are not sufficient to cover the Eligible Employer’s cost of qualified leave wages, plus the allocable qualified health plan expenses and the amount of the employer’s share of Medicare tax imposed on those wages, the employer will be able file a request for an advance payment from the IRS. The IRS expects to begin processing these requests in April 2020.

Eligible Employers claiming the credits for qualified leave wages, plus 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, as well retaining 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. …

The IRS then has sixty-six (66) FAQs addressing many of the questions we know you have. Some of the questions of particular note include:

• How do you claim the tax credits?
• How frequently can you withhold the deposits you believe are “qualified leave wages”?
• Can you get an advance to pay the required Paid Sick Leave or Expanded FML? How?
• Can an eligible employer receive both the tax credit and the Employee Retention Credit under the CARES Act?
• Can an employer receive the tax credit and a Small Business Interruption Loan under the CARES Act?

Because today is the effective date and someone will be requesting leave, we will address the IRS’s FAQ on what documentation is required from the employee in order to later claim the credit.

An Eligible Employer will substantiate eligibility for the sick leave or family leave credits if the employer receives a written request for such leave from the employee in which the employee provides:

1. The employee’s name;
2. The date or dates for which leave is requested;
3. A statement of the COVID-19 related reason the employee is requesting leave and written support for such reason; and
4. A statement that the employee is unable to work, including by means of telework, for such reason.

In the case of a leave request based on a quarantine order or self-quarantine advice, the statement from the employee should include the name of the governmental entity ordering quarantine or the name of the health care professional advising self-quarantine, and, if the person subject to quarantine or advised to self-quarantine is not the employee, that person’s name and relation to the employee.

In the case of a leave request based on a school closing or child care provider unavailability, the statement from the employee should include the name and age of the child (or children) to be cared for, the name of the school that has closed or place of care that is unavailable, and a representation that no other person will be providing care for the child during the period for which the employee is receiving family medical leave and, with respect to the employee’s inability to work or telework because of a need to provide care for a child older than fourteen during daylight hours, a statement that special circumstances exist requiring the employee to provide care.

For those employers who are drafting forms or checklists, this FAQ will provide you an outline of what you must have from the employee.

The IRS also advises that each employer must have the following documentation to support its claimed tax credits:

1. Documentation to show how the employer determined the amount of qualified sick and family leave wages paid to employees that are eligible for the credit, including records of work, telework and qualified sick leave and qualified family leave.
2. Documentation to show how the employer determined the amount of qualified health plan expenses that the employer allocated to wages. See FAQ 31 (“Determining the Amount of Allocable Qualified Health Plan Expenses”) for methods to compute this allocation.
3. Copies of any completed Forms 7200, Advance of Employer Credits Due To COVID-19, that the employer submitted to the IRS.
4. Copies of the completed Forms 941, Employer’s Quarterly Federal Tax Return, that the employer submitted to the IRS (or, for employers that use third party payers to meet their employment tax obligations, records of information provided to the third party payer regarding the employer’s entitlement to the credit claimed on Form 941).

Both categories of the above records must be maintained for at least four (4) years from the date the tax is due or is paid, whichever is later.

By Kristen L. Brightmire, kbrightmire@dsda.com