Tax and Employee Benefits Aspects of the U.S. Government’s Initial Pandemic Response
March 21, 2020
This week has been filled with updates on the progress of Coronavirus (COVID-19) moving across the globe. Predictions of the severity of the disease’s impact have sent financial markets spinning, causing widespread stockpiling of food and essentials, and sent America’s workforce home to quell the spread of disease. Businesses everywhere are trying to stay afloat while ensuring that employees also have the necessary resources. Meanwhile, Congress continues to work on economic stimulus measures, several of which passed and were signed in to law yesterday. These laws will directly and immediately impact businesses, their employee benefit plans, and regulatory compliance obligations. New requirements addressing COVID-19 include paid leave, mandated testing and treatment, and refundable tax credits that finance these benefits. President Trump signed the Family First Coronavirus Response Act (“FFCRA”) into law on March 18, 2020, and more legislation is being proposed. Below is a summary of the changes through March 20th that have important tax and employee benefits implications.
1. Paid Leave. The FFCRA generally provides that covered employers must provide both emergency leave under the federal Family and Medical Leave Act (“FMLA”) for absence related to the care of an employee’s child and paid sick leave where an employee takes leave in response to one of six qualifying events related to quarantine, illness, or caregiving associated with COVID-19. Employers with 500 or more employees are not affected by the FFCRA. Employers subject to collective bargaining agreements may satisfy these obligations through a multiemployer fund, plan, or program.
A. Emergency Family and Medical Expansion Act Leave. Effective no later than April 2, 2020, through December 31, 2020, the Emergency Family and Medical Leave Expansion Act requires employers with fewer than 500 employees to provide “Public Health Emergency Leave” to employees who have been employed for at least 30 days and who experience a “qualifying need” related to a “Public Health Emergency.” An employee experiences a “qualifying need” if the employee is unable to work or telework due to the need to care for the employee’s child under 18 years of age whose school or place of care has been closed, or if a child care provider is unavailable due to the “Public Health Emergency.” “Public Health Emergency” means an emergency declared by the federal, state or local government due to COVID-19 or similar qualifying events identified by regulation. The U.S. Secretary of Labor may exempt employers with fewer than 50 employees, and certain healthcare providers and emergency responders from the requirements by regulation. Employers of those healthcare providers and emergency responders can also elect to exclude them from coverage. The first 10 days may be unpaid leave, during which employees can apply other available paid leave such as paid sick leave or paid time off. After 10 days of leave, an employee is entitled to be paid while on public health emergency leave at no less than 2/3rds of his or her regular rate of pay based on his or her normal work hours, subject to a daily maximum of $200 per day or $10,000 in the aggregate. Essentially the statue converts FMLA leave, which is normally unpaid to paid leave after the first 10 days in response to a qualifying need due to Public Health Emergency. The Act includes an exception to the FMLA’s traditional return-to-work requirements for companies with fewer than 25 employees whose positions are eliminated due to the financial impact of a Public Health Emergency, so long as the specific requirements for the exemption are met.
B. Paid Sick Leave. Effective no later than April 2, 2020, through December 31, 2020, covered employers must provide paid sick leave for an eligible employee’s absence due to any of six enumerated qualifying events related to a Public Health Emergency. The events include an employee’s quarantine based on government order or medical recommendation, showing COVID-19 symptoms, the need to care for the employee’s child due to the child’s quarantine or illness, the closure of the child’s school, or the unavailability of a caregiver for the child. A maximum of 80 hours of emergency paid sick leave is allowed for full-time employees. For part-time employees, the maximum is the average number of hours worked by an employee over a typical 2-week period. Emergency paid sick leave benefits are based on “Qualified Sick Leave Wages,” which are wages paid during qualifying leave due to a Public Health Emergency. The amount of Qualified Sick Leave Wages is calculated using the greater of (i) an employee’s regular rate of pay or (ii) the minimum wage rate determined under the Fair Labor Standards Act or state law (whichever is higher), and the employee’s regular work schedule. The amount is capped at $511 per day ($5,110 in the aggregate) for personal quarantine or illness related to COVID-19, or, for reasons related to qualifying care of others, at $200 per day ($2,000 in the aggregate) (taking into account 2/3rds of pay rate discussed above). Employers may not require employees to use other available leave before using COVID-19 related paid leave. Presumably, employees can use emergency paid sick leave to cover the 10 days of unpaid FMLA COVID-19 leave if it applies. Employers of emergency responders and healthcare providers may elect to exclude those employees from these benefits. The Secretary of Labor can also exempt these employees by regulation.
2. Health Insurance Benefits.
A. High Deductible Health Plans.
1. COVID-19 Testing and Treatment. As we previously reported, the Internal Revenue Service has issued guidance (see IRS Notice 2020-15) that exempted High Deductible Medical Plans from normal limitations with respect to deductibles and cost-sharing to facilitate such plans providing immediate testing and treatment for COVID-19. Under current law, employees and others may establish health savings accounts (“HSAs”) to save money for future healthcare costs on a tax-advantaged basis, but only if the individual is covered by a High Deductible Health Plan. The Internal Revenue Code provides that such a plan must require participants to pay a higher share of the expenses of medical care through deductibles, out-of-pocket expenses, and co-pays. In order to allow High Deductible Medical Plans to retain that status and to preserve participants’ entitlement to fund HSA accounts, IRS Notice 2020-15 provides that such plans may provide testing and treatment for COVID-19 related illnesses, without requiring the normal cost-sharing. This allows plan participants to immediately receive care without incurring the normal financial burdens associated with High Deductible Health Plans. Note that this coverage is permissive and not mandatory. With the passage of the FFCRA group health plans must cover previously approved in vitro diagnostic products for the detection of SARS-CoV-2 or the diagnosis of the virus that causes COVID-19, together with in-office services and items to the extent needed to determine the need of an individual for such products. Employers should check with their health insurance carrier and review the terms of their plans and insurance policies to determine under what conditions COVID-19 testing and treatment is available.
2. Preventative Care. Effective July 17, 2019, the Internal Revenue Service published IRS Notice 2019-45, which provided a detailed list of chronic conditions for which specified preventative medical treatment and equipment that could be provided by a High Deductible Health Plan without cost-sharing or deductibles. Employers may want to verify whether or not their health plans cover the enumerated conditions as permitted by Notice 2019-45 since many of the listed conditions result in a propensity for illness as a result of COVID-19.
B. Government-Provided Health Plans. Under the FFCRA, cost-sharing also must be waived under Medicare, Medicare Advantage, Medicaid / CHIP, Veterans, and Native American treatment programs for certain COVID-19 related tests and treatment.
C. Coverage Issues. Most health insurance plans provided by employers contain eligibility requirements. Often those requirements are tied to an employee working a minimum number of hours per week or per month. Employers should review their health insurance plans and contact their insurance carriers to determine at what point of absence employees will cease to be covered under those plans. Note that for those employers subject to COBRA, notices must be given once coverage ends. Employers should also consider the extent to which remote work satisfies plan requirements for coverage. We have encountered many employers that are closing storefronts and terminating employees either temporarily or permanently in light of new government restrictions. In particular, restaurants in cities that have declared emergent situations may face this problem. Employers that provide health insurance coverage for their employees should discuss coverage and payment issues with their carriers to ensure that they are aware of, and communicate to employees, the parameters applicable to coverage and how the employer will manage those issues.
D. Temporary Workforce. Some employers may attempt to supplement their workforces with temporary workers in response to employee absences due to COVID-19 on the theory that such workers are not entitled to benefits. However, employers should remember that Arizona’s sick leave benefits begin accruing on the first day of employment. Moreover, temporary employees may work enough to become entitled to benefits or change the employer’s classification under the Patient Protection and Affordable Care Act. Accordingly, we urge employers to carefully analyze and understand the impact of using temporary employees.
3. Tax Relief.
A. Income Tax Deadlines. On March 18, 2020, the Internal Revenue Service issued Notice 2020-54 extending the deadline for U.S. taxpayers to make payment of federal income tax obligations until July 15, 2020, normally due by April 15, 2020. Corporations (other than S-corps) and consolidated groups may defer payment of up to $10,000,000.00 of tax. All other taxpayers may defer payment of up to $1,000,000.00, regardless of filing status. The Notice emphasizes that the extension applies only to income tax liabilities (including self-employment tax) and not to any other type of tax liability. Also, as of March 20th, the U.S. Treasury Secretary announced the extension of federal income tax filing deadlines to July 15, 2020. Late on March 20, 2020, Arizona’s Governor Ducey directed the Arizona Department of Revenue to extend both filing and payment deadlines for Arizona income taxes to July 15, 2020. Thus, Arizona now conforms to the federal income tax payment and filing deadlines.
B. Tax Credits Offsetting Paid Leave Costs.
1. Employers. In order to relieve employers of the financial burden of providing emergency paid leave to employees on account of COVID-19, the FFCRA provides refundable tax credits against social security liabilities of the employer to provide the Emergency FMLA and Emergency Paid Sick leave benefits it requires.
a. Tax Credit for Emergency Paid Sick Leave. The statute allows a credit for 100% of the “Qualified Sick Leave Wages” paid by an employer with respect to a calendar quarter beginning no later than April 2, 2020, (as determined by the U.S. Secretary of the Treasury) and extending through December 31, 2020. “Qualified Sick Leave Wages” include wages that an employer must pay pursuant to the Emergency Paid Sick Leave Act described above. An employer can only claim a credit equal to the benefits payable for up to 10 days per employee, and is further limited to the maximum daily benefit amounts allowable under the statute ($511.00 for quarantine or illness and $200.00 for caregiving absences). The statute as originally passed provides that the credit applies on a quarter-by-quarter basis and is subject to an overall limitation that is equal to the employer’s liability for social security (“FICA”) taxes (generally 6.2% of the taxable wage base, which is $137,700 for 2020). Under the statute as original passed, employee withholdings, employer FUTA, and Medicare taxes were not considered for computing the allowable credit. In a new joint announcement with the U.S. Department of Labor issued late on March 20, 2020, the IRS has announced that all federal income taxes withheld and both employer and employee shares of FICA and Medicare taxes are available to offset benefits paid. To the extent that an employer’s tax credits exceed the employer’s tax liability, the employer can receive a refund of the excess from the federal government. The Joint Announcement indicates that refunds the IRS will process refund claims in two weeks or less. The Joint Announcement indicates that guidance will be forthcoming next week (March 23-27, 2020).
b. Tax Credit for Emergency Family and Medical Leave Extension Act. A similar credit applies with respect to benefits paid under the Emergency Family and Medical Leave Extension Act. As with paid sick leave the FFCRA as originally passed provides that this credit is allowed against an employer’s aggregate social security tax liability during a calendar quarter and is subject to the overall limitation of $200 per day or $10,000 in the aggregate per employee. However, the updated policies that broaden the tax base available for reimbursement and that accelerate refund claims announced by the IRS / DOL Joint Announcement also apply to this credit. Coming guidance will add clarity.
The maximum limits appear to apply separately to each credit and each credit is generally limited to the amount of social security tax paid by the employer with respect to a calendar quarter, but is increased by that portion of the employer’s qualified healthcare expenses that are allocable to the qualified sick leave wages. Qualified healthcare expenses include those incurred by the employer to maintain a health plan covering employees to the extent that the expenses are excluded from the employee’s income for federal income tax purposes. Employers receiving these credits must include that amount in gross income to prevent the employer from receiving both the credit and an income tax deduction for the same amount. Note that an employer may elect not to take advantage of the credits.
2. Self Employed Persons. Self-employed individuals also may receive tax credits in an amount equal to 100% of the qualified sick leave benefit and the qualified family leave act amount that the individual would have received as an employee under the statute. To be eligible a self-employed individual must regularly carry on a trade or business and must be in a situation that would entitle them to benefits if they were employed. The amount of the credit for paid sick leave is the product of (i) the number of days (but not more than 10) that the individual is unable to perform services in his or her trade or business and (ii) the lesser of $200 per day ($511 per day in the case of quarantine or the individual exhibiting symptom). The amount of the credit for FMLA leave is the product of (i) the number of leave days up to 50 and (ii) 67 % (100% in the case of quarantine or the individual exhibiting symptoms) of the individual’s average daily self-employment income for the taxable year up to $200 per day. A self-employed individual must document his or her eligibility, and further regulatory guidance is expected on this point. If a self-employed individual also is an employee of another person or entity, the benefit allowed with respect to his or her self-employment income is limited to the portion of the overall benefit limit not paid by his employer.
3. Upcoming Regulations. However, the statute directs the US Secretary of the Treasury to prescribe regulations to at least accomplish the following:
a. prevent the avoidance of prescribed limitations;
b. minimize compliance and recordkeeping burdens;
c. waive penalties for failure to deposit in anticipation of the allowance of a credit;
d. recapture credits subject to future adjustments; and
e. coordinate wages under the credit provisions with the Emergency Family and Medical Leave Expansion Act.
4. Payroll Tax Relief. The statute provides that benefits payable under the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act are not treated as “wages” for social security tax purposes, and thus are not subject to employer FICA tax. In addition, the statute increases the credits for benefits paid either under both acts by the amount of Medicare tax imposed on those benefits. This all means that employers will pay no social security tax with respect to these payments. However, employee withholdings remain unchanged. Accordingly, employers will need to adjust payroll tax systems to ensure that their payroll tax liabilities and withholdings are correctly calculated.
4. Unemployment Compensation Relief. While not part of the federal response, it is important to mention Arizona’s adjustments to unemployment benefits for employees whose jobs are disrupted by the COVID-19 virus. Late on March 20, 2020, Arizona’s Governor Ducey issued Executive Order 2020-11 which provides unemployment benefits to individuals:
• whose employers have permanently or temporarily ceased or drastically reduced operations due to COVID-19 resulting in a reduction of wages;
• who are not able to work due to quarantine requirements;
• who leave employment due to risk of infection or to care for a family member infected with COVID-19; and
• who are separated from work for COVID-19 related reasons that the Arizona Department of Economic Security (“ADES”) finds to be consistent with U.S. Department of Labor standards for COVID-19.
In addition, the Order indicates that the ADES will waive waiting periods and “able and available to work requirements” for purposes of the COVID-19 emergency. Also, employer contribution rates will not be adjusted based on benefits provided pursuant to Executive Order 2020-11. Employers with employees outside Arizona should review statutes, regulations and administrative / executive action in those states to determine how those states are addressing unemployment compensation issues related to COVID-19.
While all of these measures are designed to inject liquidity into our newly-struggling economy, significant questions remain. Some measures discussed simply provide temporary cash flow assistance by deferring tax payments. The FFCRA seeks a tax-neutral way to provide employees with paid leave for the Coronavirus related emergencies we are experiencing, but places the administrative burden of providing those benefits on smaller employers. It may also impose additional stress on the cash flow of such employers to the extent that benefits they must pay exceed their FICA tax liabilities, requiring them to wait to receive a refund of overpaid taxes. In addition, we continue to analyze how the benefit provisions of the FFCRA will interface with Arizona’s paid leave statute. And Congress is already working on a technical corrections legislation related to the new paid leave requirements. Jennings, Strouss and Salmon, PLC will continue to analyze guidance as it arrives and will provide additional clarification as it becomes available. In addition, the COVID-19 emergency gives rise to a number of issues related to contract liability, small business liquidity, data privacy, and others that are critical to employers everywhere. Our attorneys are prepared to assist you as you try to navigate the uncertainties of the present situation. In coming days, we will be publishing and updating a detailed list of FAQs to assist our clients and others through this difficult time.
For more information on this topic or other labor law matters, please contact Otto S. Shill of the Tax, Estate Planning, and Employee Benefits Practice Group.
ABOUT THE AUTHOR
Otto S. Shill | Read Bio
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