PLEASE SEE FGMK'S UPDATE TO THIS POST (CLICK HERE), BASED ON THE PASSED FAMILIES FIRST CORONAVIRUS RESPONSE ACT.
On Tuesday, March 17, 2020, details of the “technical corrections” to the Families First Coronavirus Response Act (the “Act”) became public. Upon review of the revised legislation, also known as H.R. 6201, it is apparent that the “technical corrections” are comprised of some significant modifications. This Tax Alert focuses on the modified definitions under the Emergency Family and Medical Leave Expansion Act set forth in Division C of the House bill and the Emergency Paid Sick Leave Act set forth in Division E of the House bill, as well as the tax credits provided in Division G of the House bill.
Overview of Technical Corrections
The technical corrections significantly narrowed the definition of “qualifying need related to public health emergency” under the Emergency Family and Medical Leave Expansion Act (“EFMLEA”) and caps the amount of compensation an employer must pay a qualifying employee. The revised Emergency Paid Sick Leave Act (“EPSLA”) also places caps on compensation for paid sick leave, as well as modifies the reasons an employee may qualify to receive such payment.
The updated legislation also made three key changes to the tax credits provided by the Act.
Common Features of the EFMLEA and EPSLA
Both the EFMLEA and EPSLA pertain to private entities with fewer than 500 employees. In effect, the Act does not apply to private employers with 500 or more employees. The EFMLEA provides this element by modification the of § 101(4)(A)(i) of the Family Medical Leave Act (“FMLA”). The EPSLA defines “employer” in detail, including the definition of “covered employer” which includes not only a private entity with fewer than 500 employees but also government agencies and “a public agency or any other entity that is not a private entity or individual” that employees one or more employees.
Both the EFMLEA and EPSLA provide the Secretary of Labor with authority to exempt small businesses with fewer than 50 employees if the imposition of the required compensation would jeopardize the viability of the business as a going concern.
Additionally, both the EFMLEA and EPSLA would take effect not later than 15 days after enactment of the Act. Pursuant to the provision that the EFMLEA adds to the FMLA (§ 102(a)(1)(F)), the period of effect would end December 31, 2020. Similarly, the EPSLA is set to expire on December 31, 2020.
EFMLEA (Division C of the Act) As Modified
The EFMLEA retains the requirement that an “eligible employee” means an employee that has been employed for at least 30 calendar days by the employer. However, it narrows the definition of “qualifying need related to a public health emergency” for which such an employee may seek family leave.
Prior to the technical corrections, an eligible employee had the right to take up to 12 weeks of job-protected leave for any of the following reasons:
The technical corrections eliminate the first two reasons. As amended, a “qualifying need related to a public health emergency” means the employee is unable to work (or telework) due a need for leave to care for a son or daughter under 18 years of age if the school or place of care has been closed or the child care provider is unavailable due to a public health emergency. A “public health emergency” is defined as “an emergency with respect to COVID-19 declared by a Federal, State, or local authority.”
As originally presented, the Act provided that the first 14 days for which an employee takes leave under the EFMLEA may consist of unpaid leave (since the EPSLA provides two weeks paid leave). The technical corrections update this to the first 10 days. After the initial 10-day period, the employer is required to compensate an employee at not less than two-thirds of such employee’s regular rate of pay.
However, the technical corrections establish a pay cap of $200 per day per eligible employee. Moreover, the changes establish an overall per eligible employee cap of $10,000.
As prior to the technical corrections, an employee may elect to substitute accrued vacation leave, personal leave, or medical or sick leave for unpaid leave. However, the technical corrections removed the provision that an employer may not require an employee to substitute such existing leave for any public health emergency leave.
As an expansion of the FMLA, the EFMLEA is aimed at protecting the employment of affected employees. However, the technical corrections retain the provision that excludes the application of § 104(a)(1), which governs employee restoration to a position, to an employer with fewer than 25 employees if economic conditions require the elimination of such position and the employer makes reasonable efforts to restore the employee to an equivalent position, and if such efforts fail makes reasonable efforts to contact the employee within one year if an equivalent position becomes available.
Finally, the House’s technical corrections adds a provision with respect to healthcare providers and emergency responders. Effectively, the provision allows a health care provider or emergency responder to exclude employees from receiving leave under the EFMLEA.
EPSLA (Division E of the Act) As Modified
The technical corrections update the reasons for which an employer must provide an employee paid sick leave. Specifically, such paid sick leave is required to the extent an employee is unable to work (or telework) due to a need for leave because:
The last reason is clearly aimed at providing the flexibility of the application of the EPSLA for any circumstances that evolve from mutations of the existing COVID-19 illness.
As existed prior to the technical corrections, paid sick leave would be available for immediate use by an employee regardless of the length of employment, which contrasts with the 30-calendar day requirement of the EFMLEA.
Similar to the EFMLEA, an employer of an employee who is a health provider or an emergency responder may elect to exclude such employee from the application of this provision.
As prior to the technical corrections, an eligible employee may receive paid sick leave for up to two weeks. The two-week period is calculated as 80 hours for a full-time employee and for a part-time employee is based on the number of hours such an employee works on average over a two-week period.
While the technical corrections seemingly increase the scope of reasons for paid sick leave, they place caps on the amount of such required compensation. The compensation caps align with the corresponding tax credits so that an employer is not required to compensate affected employees in an amount that exceeds a corresponding tax credit.
The EPSLA requires compensation based on the number of hours an affected employee would normally be expected to work and a rate of pay not less than the greater of:
However, as noted above, the technical corrections establish per employee caps on a per day basis and cumulative basis. If an employee must take leave due to his or her health (first three noted reasons for sick paid lave), then the employer need not compensate the employee any more than $511 per day and $5,100 overall (10 days X $511). If an employee must take leave for any of the other listed reasons, then the employer need not compensate the employee any more than $200 per day and $2,000 overall (10 days X $200).
Importantly, the technical corrections remove the language regarding employers with existing policies. Prior to its removal, that provision required employers to provide paid sick leave in addition to existing paid leave. Therefore, rather than adding more paid leave, the EPSLA simply ensures that an employee receives at least 10 days of paid sick leave if affected by COVID-19. However, as before the technical corrections, an employer may not require an employee to use other paid leave provided by the employer before the employee uses the paid sick leave under the EPSLA.
Tax Credits (Division G) as Modified
The Act retains payroll tax credits and self-employment income tax credits as originally provided prior to the technical corrections. As mentioned above, the technical corrections resolution does add the ability to use payroll tax credits against the “Tier 1” RRTA tax under IRC § 3221(a), as well as the OASDI excuse tax under IRC § 3111(a). Both payroll and self-employment credits remain refundable.
The payroll credit for any amounts paid under the EFMLEA are capped at $200 per day per employee and in aggregate are capped with respect to an employee at $10,000 for all calendar quarters. With respect to the credit for any amounts paid under the EPSLA, wages taken into account for the credit are capped $511 per day per employee if paid sick leave is due to the firs three reasons listed or $200 per day per employee if paid sick leave is due to another listed reason.
For self-employed individuals, the credit under the EFMLEA is calculated based on the number of days (not to exceed 50) during the tax year that individual is unable to perform services in his or trade or business multiplied by the lesser of $200 or 67 percent of his or her average daily self-employment income for the taxable year. Under the EPSLA, the self-employment credit is computed based on the applicable number of days (no more than 10) that an individual is unable to perform services in his or trade or business multiplied by the lesser of $200 (or $511 if due to one’s own health) or 67 percent (100 percent if reasons four through six) of his or her average daily self-employment income for the taxable year.
The technical corrections also add an element to the payroll tax credits in that the amount of such credits resulting from compensation required under the EFMLEA and EPSLA are increased by so much of the employer’s qualified health plan expenses as are properly allocable to such qualifying wages. “Qualified health plan expenses” means amounts paid or incurred to provide and maintain a group health plan. However, such amounts only qualify if excluded from the gross income of employees pursuant to IRC § 106(a). Treasury will need to provide regulations governing the allocation of such expenses. Until such issuance, pro rata allocation among covered employees on the basis of the period of coverage shall be treated as properly made.
The Act retains the prohibition against taxpayers receiving a double benefit for such credits. For employers who receive either or both payroll tax credits, they must increase gross income for the taxable year in which such credits are received by the amount of such credits. This ensures the employer does not receive an income tax deduction for the wages giving rise to such credits. Additionally, self-employed individuals must continue to reduce any self-employment credits by the amount of any wages received from another employer under the EFMLEA or EPSLA.
Wages required to be paid under the EFMLEA or EPSLA continue to be excluded from the definition of “wages” for purposes of the excise tax under IRC § 3111(a), as well as now the “Tier 1” tax under IRC § 3221(a). The technical corrections also increase the payroll tax credits by the amount of hospital insurance excise tax imposed by IRC § 3111(b) and on wages required to be paid under the EFMLEA or EPSLA.
As of this publication, the bill resides with the Senate. If the Senate were to make additional modifications, the bill would have to go back to the House for approval. However, Senator Majority Leader Mitch McConnell is pushing Senate colleagues to pass the bill “as is” so that Congress can focus on the next phase of coronavirus legislation.
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