On March 18, 2020, President Trump signed into law H.R. 6201, the Families First Coronavirus Response Act (“FFCRA”). Among other things, the FFCRA requires employers with less than 500 employees to (i) provide up to 12 weeks of partially-paid leave to parent caregivers of minor children home as a result of COVID-19 related school closures (the “Emergency Family and Medical Leave Expansion Act” or “EFMLEA”) and (ii) provide up to 80 hours of fully-paid sick leave to employees unable to work (or telework) as a result of COVID-19 (the “Emergency Paid Sick Leave Act” or “EPSLA”). The provision of leave under the EFMLEA and EPSLA is subject to enumerated conditions and certain exemptions, caps and other considerations which are discussed more fully here and here. The FFCRA has now been amended in part by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” which was signed into law on March 27th), discussed below in relevant part and more fully here.
The FFCRA contains two related tax and employee benefits considerations for employers.
(1) Group Health Plans must cover COVID-19 related testing expenses without cost sharing.
As we previously discussed in our March 13th post that insurers of fully-insured health arrangements, which are subject to state insurance law, were taking steps to provide full coverage of COVID-19 testing, and that the IRS had cleared obstacles for high deductible health plans to do the same.
The FFCRA mandates that group health plans (whether self-insured by the employer or procured through a health insurance company) provide 100% coverage of (i) all laboratory testing approved by the FDA to detect the virus that causes COVID-19 and (ii) all expenses for provider office visits (including in-person, telehealth, urgent care and emergency room visits) that produce a COVID-19 testing order, without cost sharing (e.g., prior to attainment of the plan’s deductible and without regard to otherwise applicable copays and coinsurance), prior authorizations, and other requirements. Plans must provide such coverage for the duration of the national emergency declared under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. It is important to note that group health plans need only cover expenses in this manner for office visits that produce a testing referral.
The scope of the services required to be covered under the FFCRA was expanded and clarified by the CARES Act. A summary of the FFCRA group health plan requirements, as amended by the CARES Act, is available here.
(2) Some employers and self-employed individuals are eligible for a payroll tax credit to cover EFMLEA, EPSLA and associated health benefit expenditures.
Background. The Federal Insurance Contributions Act (FICA) imposes what are commonly known as payroll taxes on employers. The purpose of FICA tax is to fund the Social Security and Medicare insurance programs. FICA tax is split into a 6.2% portion (imposed separately on both employer and employee on the employee’s wages up to $137,700 in 2020) to cover Social Security (the Old Age, Survivors, and Disability Insurance Tax, or OASDI), and a 1.45% portion (imposed on both employer and employee on all wages) to cover Hospital Insurance (the Medicare Tax).
Explanation of Credit. The FFCRA helps eligible employers (governmental and quasi-governmental employers are ineligible) offset the cost of providing EFMLEA and EPSLA leave compensation, and health benefits during the period of such leave, by providing a dollar-for-dollar credit against the employer’s 6.2% share of OASDI tax for the applicable period. The amount of the credit is also increased by the employer’s 1.45% share of Medicare tax on the leave compensation. If the amount of leave and associated benefits paid during such leave periods exceeds the employer’s OASDI liability for a period, then the employer can file for a refund of the excess amount (see below regarding CARES Act amendment). Group health plan expenses are to be allocated in a reasonable manner to all employees incurring such expenses in the period in which the leaves are taken. The IRS may issue guidance to help employers administer this portion of the credit.
Importantly, the FFCRA requires the amount of the payroll tax credit taken by the employer to be included in its gross income for the taxable year, to prevent the “double tax benefit” that would otherwise arise. However, Section 7005(a) of the FFCRA provides that wages required to be paid pursuant to the EFMLEA and EPSLA will not be considered “wages” for purposes of calculating the employer’s share of OASDI tax in the first place. In addition, leave wages counted towards the credit are excluded from consideration of the credit under Section 45S of the Internal Revenue Code for paid family leave unrelated to the COVID-19 pandemic.
The FFCRA provides similar relief for individuals subject to Self-Employment Contributions Act (SECA) tax. For employment tax purposes, self-employed individuals are not employees of an employer and so are not subject to compensatory leave for time off related to the COVID-19 pandemic. The FFCRA treats eligible self-employed individuals forced to take time off or close their doors as a result of COVID-19 as if they paid themselves the leave provided for under the EFMLEA or EPSLA, as applicable, for purposes of providing a credit against their SECA liability for the applicable period. The self-employed individual’s taking of the credit is conditional on their maintaining adequate documentation substantiating eligibility.
Effective Date of Credit. On Friday, March 27, the IRS issued Notice 2020-21. The Notice coordinates with EPSLA and EFMLEA implementing guidance published earlier in the week by the U.S. Department of Labor (DOL), which provides that in general, April 1 is the effective date of the EPSLA and EFMLEA. Accordingly, the Notice clarifies that the FFCRA’s OASDI and SECA credits apply to leave wages paid during the period beginning April 1 and ending December 31, 2020.
Documentation Required. In Q&A guidance released March 26, the DOL clarified that employers must require employees seeking an EPSLA or EFMLEA leave to support their request with appropriate documentation (such as, for the EPSLA credit, a statement that the employee is unable to work, including telework, for the applicable reason, and the dates for which leave is requested; and for the EFMLEA credit, documentation similar to that collected before an employee takes an FMLA leave). The guidance clarifies that this documentation should be retained by the employer to support a tax credit under the FFCRA.
CARES Act Changes. Under Section 2302 of the CARES Act, employers are deemed to have timely deposited their share of OASDI tax incurred after March 27, 2020 through December 31, 2020, if 50% of such deposits are paid by December 31, 2021, and the other 50% are fully paid by December 31, 2022. There is similar relief for self-employed payors of SECA tax. This deferral means that for eligible smaller employers subject to EFMLEA and EPSLA, the remaining portion of OASDI tax after the credit discussed above would not be due until the applicable extended due date. Section 3606 of the CARES Act also provides that amounts of leave paid in excess of OASDI tax for the applicable period will be subject to advance refunding, in accordance with procedures to be announced by the federal government in subsequent implementing guidance. Section 3606 also provides that penalties on deposits required to be made, but which were not made in anticipation of receiving the credit under the FFCRA, will be waived if the Treasury Department determines the failure to deposit was in anticipation of the FFCRA credit. This may come into play for credits for leaves, and associated OASDI tax, payable for the period prior to April 1 (the effective date of the EPSLA and EFMLEA leaves).
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The CARES Act is the subject of a separate alert, which you can find here. To the extent the IRS releases subsequent administrative guidance regarding claiming the FFCRA payroll tax credit, we will provide an update.
For questions related to the impact of COVID-19 on your tax filings and employee benefit plans, please contact a member of the Shipman & Goodwin Tax & Employee Benefits group.