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Selected Tax Provisions of the Families First Coronavirus Response Act
Congress has passed and the President has signed the Families First Coronavirus Response Act that requires certain employers to provide paid leave for employees who have been affected by COVID-19. The requirements for paid leave vary in amount and duration based on a variety of factors, and are intended to be ultimately offset by tax credits claimed on quarterly payroll tax filings. The self-employed were not omitted from potential benefits, as a refundable credit based on similar circumstances is available when triggered subject to certain rules and limitations.
It is imperative that business owners understand what is now required of them, and explore the liquidity, revenue and margin impact of the acts. The cost of non-compliance is high, and the potential impact on the business during these most challenging of times is more significant than many might consider. For employees, this is a straight add as we say. But for applicable employers, this is a new regulatory requirement that must be complied with. The applicable date of the law is no more than 15 days from passage, but as the number of cases mount that employers and employees are experiencing as of March 20th these provisions are needed now.
Please reach out to us at Blankenship CPA Group if you need help understanding and applying these new laws, and planning to take full advantage of the credits while caring for the very real needs of your employees. If you are concerned about the implications of the slowing economy, these added regulatory burdens, or any other financial matters you are facing in these uncertain times, our expert guides and consultants are here to help you. We look forward to helping you navigate these rough waters.
The “Families First Coronavirus Response Act” was signed into law on March 18, 2020 by President Trump. After a hastily prepared version of the original bill was passed by the House of Representatives on March 14th, a significant technical corrections bill overhauled the majority of the most potentially devastating aspects of the proposed bill for small businesses before being considered by the Senate for vote. The final version as approved and signed into law is comprised of Divisions A through H. Those sections most relevant to our clients and to the majority of taxpayers are Division C – Emergency Family and Medical Leave Expansion Act; then skipping to Division E – Emergency Paid Sick Leave Act; and concluding with Division G – Tax Credits for Paid Sick and Paid Family and Medical Leave. This article will focus solely on an overview of these provisions, their application, functionality and ramifications on employees and the employers who are now subject to this new law.
Although all the provisions above are surely good for employees, they could place a significant burden on employers. After all, the employees that are essential to the creation and production of the very revenues that are required to produce the cash flow needed to make these payments are absent. For many small businesses, depending on the depth of disruption to their business model by the novel coronavirus, not only will they be experiencing weakening revenues and consumer demand, but also shortage of production and workers in some industries with more resistant revenues. It is impossible not to imagine a tightening of cash flows and margins for most. In the midst of this tightening, these employers are now required to make substantial payments in many situations for labor that is no longer present.
The original version of the bill not only failed to limit the payments to certain caps as noted, but also failed to match the payments with commensurate credits. The good news is much of this was rectified after significant lobbying attempts. At our firm, we stayed up into the late hours of the night studying the original version of the bill and reached out to every congress person we thought might listen. We are grateful for their response, otherwise business owners would have experienced a very real and terrible loss on this entire act in a time when they are already facing great uncertainty.
In the final bill, for the most part, the amounts of the credits that are available to offset the required payments under the new acts are similar to the newly mandated paid leave related to the public health emergency we commonly refer to as the coronavirus. These required payments find their way into the Family Medical Leave Act we are familiar with as business owners, and into a new requirement for ten days of paid sick leave related to this public health emergency. There are many facts that surround the availability and calculations of these credits and the required payments. For the most part, these figures will run through payroll tax reporting on a quarterly basis. Also, self-employed individuals will be entitled to certain refundable credits related to the outbreak in limited situations.
In all situations, we fear that there could be a short term liquidity impact on any business that does not enjoy recurring monthly revenues not contingent upon the performance of employee, and that fails to make quick adjustments to their internal payroll processing and remittance structures and systems. In the long term, even if the net effect on the expenses for the employer are close to zero, employers must act quickly to protect revenue producing capacity and plan for labor needs if they are fortunate enough to experience continuing demand for their goods or services.
And now, on to highlighted provisions of the act itself.
Division C – Emergency Family and Medical Leave Expansion Act
The Emergency Family and Medical Leave Expansion Act (EFMLEA) amends to the existing Family and Medical Leave Act of 1993 with a new section (F) at the end that invokes the FMLA through the end of 2020. This provides for an employee to have the ability to claim a qualifying need under FMLA if an employee is unable to work (or telework) due to a need for leave to care for a son or daughter under 18 years of age of such employee if the school, place of care, or child care provider of such son or daughter is unavailable to care for such child due to an emergency with respect to COVID-19 declared by a Federal, State, or local authority. Unlike the FMLA we have all known since 1993, the EFMLEA provides for paid instead of unpaid leave.
Paid Leave Requirement
When an employee requests EFMLEA paid leave the first ten days of their leave is unpaid. Should the employee have other benefits as normally provided by the employer under its policy, they may utilize such leave benefits including accrued vacation leave, personal leave, or medical or sick leave instead of unpaid leave during this initial 10 day period. The remaining leave (a total job protected leave of 12 weeks as otherwise applicable under the rest of the FMLA) is required to be paid leave to the employee. The amount of paid leave is calculated as the lesser of two thirds of their regular rate of pay per day (50 days intended), or $200. In no event can the total amount paid as EFMLEA paid leave exceed $10,000 in the aggregate per employee.
For salaried employees this will be a straight forward calculation. For employers who have employees whose schedules vary this will be a little more fluid, especially when the employer is unable to determine with certainty the number of hours the employee would have worked during the paid portion of the 12 week period. For employees that have been employed for six months, the average number of hours they were scheduled per day, including leave, is the amount of paid leave. For those varying schedule hours employees who have been employed for less than six months, the employer must look to the “reasonable expectation of the employee at the time of hiring of the average number of hours per day that the employee would normally be schedule to work.” Though the FMLA generally measures time based on work weeks, the EFMLEA comingles days into the equation. While the credit discussed later surrounding self-employed refers to 50 days (derived from a 5 day work week and ten weeks of paid time after 10 days of unpaid time) one might consider the $10,000 aggregate and the implications of a potential seven day work week if such was the norm for an employee. One would expect clarification around this point.
Employee’s Departure and Return
When the need for leave is foreseeable, the employee should provide notice as is practicable. As in all FMLA matters, no discrimination or retribution for requesting leave is permitted, and restoration of comparable job and pay is required. With the expansion of the EFMLEA application, if the employer (see applicability below) has less than 25 employees and certain conditions are met then Section 104(a)(1) (job position restoration) would not apply. These conditions include that 1) the leave is EFMLEA leave, not normal FMLA leave, 2) the employee’s position no longer exists due to economic or other conditions that affect that employment and have been caused by the public health emergency that is COVID-19, 3) the employer has made reasonable effort to restore the employee to an equivalent position, and 4) those reasonable efforts have failed and should such a position come available over a one year period the employee in essence is required to be contacted and given a first right of refusal for the equivalent position that comes available.
There is broad application of this act to small business employers. Any employer who would fall under the purvey of the FMLA when you substitute the normal FMLA definition for application to employers with “50 or more employees”, with the phrase “fewer than 500 employees”. EFMLEA paid leave can be claimed by any employee who has been employed by the employer for at least 30 days prior to requesting leave under the act. The Secretary of Labor has the authority for good cause to exclude certain health care providers and emergency responders from the requirements in the EFMLEA, and to exempt small businesses of 50 or fewer employees when the imposition of the act would jeopardize the viability of the business as a going concern. There was much discussion around this section of the bill as written not applying to large businesses in general, and this was ultimately not changed as the senate passed the bill upon presentation.
Division E – Emergency Paid Sick Leave Act
The “Emergency Paid Sick Leave Act” (EPSLA) provides for applicable employers to make available for each employee paid sick time to the extent that the employee is unable to work (or telework) due to a need of leave for one, or more, of six different reasons. These reasons include the employee 1) being subject to a Federal, State or local quarantine or isolation order related to COVID-19, 2) being advised by a health care provider to self-quarantine due to concerns related to COVID-19, 3) experiencing symptoms of COVID-19 and seeking a medical diagnosis, 4) caring for an individual who the aforementioned points (1) or (2) apply to, 5) caring for a son or daughter if the school or place of care has been closed, or the childcare provider is unavailable, due to COVID-19 precautions, or lastly 6) is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretaries of the Treasury and Labor. Again, employers with employees who are health care providers or emergency responders may elect to exclude such employees. For full time employees the amount of paid sick time is 80 hours and for part time employees it is the average number of hours such employee works over a two week period. There is no requirement that the employee has been employed for any specific amount of time. Which is to say that the employee could start work and on their first shift seek EPSLA paid sick time within the hour.
Paid Leave Requirement
Should an employee request EPSLA paid sick time for any one of the six reasons noted above, it must be made available for immediate use by the employee. Immediate use is not a defined term in the act, which begs to question if the normal pay cadence is within the parameters. Required documentation is still forthcoming at the time of writing this article. The employee is entitled to the greater of their regular rate or pay or the applicable minimum wage, but the EPSLA paid sick time is potentially limited. If the reason for sick leave is reasons 1), 2) or 3), then the pay is the lesser of the calculated amount or $511 per day, $5,110 in the aggregate. If the reason for sick leave is 4), 5) or 6), then the employee is only entitled to the lesser of two thirds of the calculated amount of their regular pay or $200 a day, $2,000 in the aggregate. For part time employees, similar guidance as set forth in the Emergency Family and Medical Leave Expansion Act as discussed previously would apply.
Employee’s Departure and Return
A peculiar aspect of the act is that the employer is specifically prohibited from asking an employee to “cover their shifts” to use a vernacular term. Interestingly, there appears to be some guidance, though likely impossible to enforce, around the employee utilizing the paid sick time for certain purposes. The employer also may not require the employee to use other paid leave first and must post the availability of EPSLA paid sick time in a conspicuous place on the premises. Failing to pay the EPSLA paid sick time is tantamount to violating minimum wage laws under section 6 of the Fair Labor Standards Act of 1938, (FLSA) and is subject to the penalties therein.
Also of note, the employer cannot discharge, discipline, or in any other manner discriminate against any employee who takes leave under the EPSLA and files a complaint under the EPSLA or is about to or has testified in any such proceeding related to the act. If the employer violates this rule they are considered to be in violation of section 15(a)(3) of the Fair Labor Standards Act and again are subject to the penalties in sections 16 and 17 therein. Though this last reference is titled “Unlawful Termination”, the way the bill is written one might surmise that a claim of employer discipline or discrimination of any type by an employee directly related to an employee exercising the right to receive EPSLA paid sick time could be considered a violation subject to the aforementioned penalties. The right to EPSLA paid sick time is not a portable benefit, or required to be paid out to an employee upon their departure from the company like typical PTO we encounter with most clients.
The term employer for the EPSLA includes, but is not limited to, 1) private entities or individuals that employ fewer than five hundred employees and 2) public agencies or any other entity that is not a private entity that employs one or more employees, that are engaged in commerce or any industry affecting commerce (including government). For all the business owners out there you don’t have to feel alone, as the GAO, public agencies, and the Library of Congress all are subject to EPSLA as well. Commerce is defined as any activity, business, or industry in commerce or in which a labor dispute would hinder or obstruct commerce of the free flow of commerce, and includes commerce and industry affecting commerce as defined in paragraphs (1) and (3) of section 501 of the Labor Management Relations Act of 1947.
The Secretary of Labor has some interesting rights in this act, which include issuing regulations to exclude certain health care providers and emergency responders once again from the definition of employee for these purposes, or allowing the employer of such to opt out. Also, the Secretary has the authority to exempt small businesses with fewer than fifty employees from the requirement to provide EPSLA paid sick time when the employee is claiming such under provision number 5) of this section (providing for the care of their son or daughter for the above reasons) when the imposition of this requirement would jeopardize the viability of the business as a going concern. At the time of writing, we are not aware of this regulation being issued, but such regulations very well may emerge as there was much discussion on Capitol Hill around the hardship this entire act placed on small businesses.
Division G – Tax Credits for Paid Sick and Paid Family and Medical Leave
In sections 7001 and 7003 of the new act, small businesses are entitled to claim tax credits against tax imposed under section 3111(a) [Social Security Tax] or 3221(a) [the total of Social Security and the Medicare excise tax] of the code for both EPSLA paid leave and EFMLEA paid leave. Also, there are similar provisions set forth to allow self-employed individuals to claim refundable credits in sections 7002 and 7004 should they experience circumstances due to the public health emergency comparable to qualifying events for employees under both acts. The credits have some slight differences so we will explore each one separately. Also, before exploring the credits, we need to understand the tax provisions surrounding the payments themselves to arrive at the appropriate applicable amounts.
Special Rules Regarding Taxing the Paid Leave
If you are anything like me, as you have read this you have wondered how are these wages taxable to the employee, and what about the employer’s additional burden for payroll taxes on all this new required paid leave. While the original version of the bill failed to address any of these questions, and by default was resulting in additional losses to the employer over the disparity between the credit cap and the higher potential paid leave amounts plus the cost of Tier 1 taxes, the good news is there is a section 7005 that was added at the very end of the bill that answered this question and solved the issue. Any paid leave wages required to be paid under EPSLA or EFMLEA are not considered wages for purposes of section 3111(a) or compensation for purposes of section 3221(a) of the Code. Also, if the employer is subject to tax on Hospital Insurance (Medicare), the amount of tax under section 3111(b) on qualified sick leave wages or qualified family leave wages is an addition to both the Payroll Credit for Required Paid Sick Leave and the Payroll Credit for Required Paid Family Leave. This additional credit is also to be added back to the income of the employer.
Payroll Credit for Required Paid Sick Leave
A credit is allowed each calendar quarter equal to 100% of the amount of EPSLA paid leave (referred to in this credit section as “qualified sick leave wages”) paid by such employer in the reporting quarter. The credit limit pertaining to the wages is capped at the same dollar amount of $200 a day ($511 in the cases of reasons 1), 2) and 3) as noted above) for any day or portion thereof for which the employee is provided EPSLA paid leave. There can never be more than 10 days taken into account under any circumstances across all quarters and ending before December 31, 2020. The credit is initially limited to certain employment taxes imposed by 3111(a) or 3221(a), less any other credits allowed under subsections (e) [Qualified Veteran Employment] and (f) [Research Expenditures of Qualified Small Businesses] of section 3111. Any excess credit becomes refundable, as it is treated as though there was an overpayment of applicable taxes during the quarter on such payroll tax filing.
A nice addition for employers to the final bill was the inclusion of an allowance for certain health plan expenses. The above credit can be increased by the employer’s qualified health plan expenses that are properly allocable to the qualified sick leave wages. Qualified health plan expenses are amounts paid or incurred by the employer to provide and maintain a group health plan as defined in section 5000(b)(1) of the Code, but only to the extent that the cost of the plan is excluded from the employee’s gross income under section 106(a). The allocation rules are to be written by the Secretary of the Treasury, but in the meantime an allocation of qualified health plan expenses is considered proper if it made pro rata among covered employees and among the time period covered. As with many credits, the credit is added back to the employer’s gross income to prevent a double benefit. An employer is given the choice to not take the credit. The credit does not apply to the US Government, or the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing. Regulations are called for, but are specifically given guidance minimize record keeping burdens under this section.
Credit for Sick Leave for Certain Self-Employed Individuals
Self-employed individuals receive a credit against self-employment taxes for the qualified sick leave equivalent amount with respect to such individual. Eligible individuals include those that regularly carry on a trade or business under section 1402 and would be entitled to receive EPSLA paid leave if they were an employee of an employer. The qualified sick leave equivalent amount is the number of days that the self-employed individual is unable to perform services due to the public health emergency (and they would have been entitled to EPSLA paid leave) in any 1402 trade or business times the lesser of 1) the $200 or $511 amount depending upon the reason for leave as explained above, or 2) 67% for reasons 4) through 6) and 100% for reasons 1) through 3), of the average daily self-employment income of the individual for the taxable year.
The average daily self-employment income of the individual is determined by taking the net earnings from self-employment of the individual for the year and dividing by 260. The applicable number of days again cannot exceed 10 and does not extend past December 31, 2020. The credit is refundable and the refundable amount is treated the same as a refundable credit in subsection (b)(2) of section 1324 of title 31 in the United States Code, which is to say a typical overpayment. Also, the act intends to reduce the availability of this self-employed EPSLA qualified sick leave equivalent credit for any day that the self-employed individual received EPSLA paid leave otherwise as an employee of any employer, though the language surrounding this is wanting. Lastly, we can expect there to be significant documentation requirements around the credit for self-employed individuals to prevent abuses, and the act has called for the Secretary of the Treasury to write regulations herein to ensure eligibility and prevent such claims.
Payroll Credit for Required Paid Family Leave
Employers are again entitled to a credit against taxes under sections 3111(a) and 3221(a) of the Code an amount equal to 100% of the EFMLEA paid leave, referred to within this section 7003 of the act as the qualified family leave wages. These are again calculated quarterly, and will be part of the quarterly payroll reporting process. The credit limitation mirrors the EFMLEA paid leave provisions, and is capped at $200 for any day or portion thereof and no more than $10,000 per employee for all calendar quarters in 2020. The credit is limited to employer payroll taxes and the excess is refundable as an overpayment in the same manner as the Required Paid Sick Leave Credit.
As in the aforementioned payroll credit, there is an increase in the credit allowed for qualified health plan expenses, defined in the same manner as previously discussed. The allocation rules for the qualified health plan expenses are the exact same. The credit is again added back to gross income to prevent a double benefit, and the employer has the choice to not take the credit. The credit is still not available to the US Government, or the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing. Regulations against abuses and to ensure minimized record keeping burdens are called for, as well as waiver of failure to deposit penalties in anticipation of the credit, and recapturing credits when adjustments are made in future periods.
Credit for Family Leave For Certain Self-Employed Individuals
Self-employed individuals are allowed a credit equal to 100% of the qualified family leave equivalent amount with respect to such individual. The definitions in this section largely mirror those of the Sick Leave for Certain Self-Employed Individuals Credit surrounding 1402 trade or business engagement and eligibility to receive EFMLEA paid leave as though they were an employee of an employer. Again, the qualified family leave equivalent amount is similarly conceptually calculated, by multiplying the number of days (50 maximum in this case) the individual is unable to perform 1402 trade or business services when considering EFMLEA paid leave requirements and eligibility for employees, multiplied by the lesser of 1) 67% of the average daily self-employment income of the individual, or 2) $200. Average daily self-employment income is defined the same manner as in the Sick Leave for Certain Self-Employed Individuals Credit section. This section again calls for the credit to be refundable and treated in the same manner, seeks similar documentation standards, and the denial of a double benefit if the self-employed individual received EFMLEA paid leave from an employer.
Accounting for the Cost
The good news for the Social Security Administration is that the lost revenues under these credits are still to be allocated to the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund. The bad news is that the transfers will transpire in a manner that replicates when those funds would have normally otherwise been transferred. And as many of us know, the fund is comprised in large part of the equivalent of IOUs from the Treasury already, so we continue to kick the proverbial can down the road while we grow ever closer to the day where the fund has lost its reserves and the incoming dollars are less than those which are outgoing.
One of the more interesting Divisions of the bill is tacked on to the end at Division H, where we are informed that the cost of this act from Division B forward is not to be counted or added to the PAYGO scorecard pursuant to section 4(d) of the Statutory Pay-As-You-Go Act of 2010. As an accountant, I can’t help but note that we are choosing to make sure and not account for these federal expenditures in the normal course of business. But these days are anything but the normal course of business. As service businesses switch to remote environments, restaurants and entertainment facilities experience mandatory shut-downs, and all signs point to one of the steepest plunges in output and consumption that our country has ever seen, it is no wonder that our government is acting swiftly. We can only hope that the recovery comes quickly, and the economy can ascend as quickly as it has fallen. Though experience warns us that this is not generally the case.
This is the first in what will likely be many efforts by our government to hold together an economy that is being ravaged by the coronavirus. The depth and duration of the trials that we are facing are yet to be determined, but we now have to comply with significant mandated paid leave requirements on many employers across the nation. This is a meaningful benefit for many employees as layoffs, shelter in place orders, quarantines and lack of child care specifically loom. Providing this paid leave is not optional, and compliance needs to be taken seriously and planned for so as to not experience the ramifications of decreased liquidity in a period where many businesses will see cash flows slow and revenue pressures mount. Quick planning should be undertaken to prepare for required outflows, and to model and consider the very real impact that these economic realities will have on your business.
CJ Blankenship, CPA
Blankenship CPA Group, PLLC
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