April 3, 2020 IRS Issues Q&A Guidance of FFCRA Tax Credits

As we previously reported, the Families First Coronavirus Response Act (the "FFCRA"), which went into effect on April 1, 2020, provides employers with fewer than 500 employees refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19. The IRS has now issued an Overview of COVID-19 Related Tax Credits with frequently asked questions regarding how these tax credits will work. We have summarized some of the key questions and answers from this guidance below.

For more information about an employer’s obligations to provide FFCRA paid leave, you can refer to our guide summarizing the statutory and regulatory guidance under the FFCRA.

1. When can the tax credits be claimed?

Employers may claim tax credits for wages paid to employees on covered FFCRA leaves taken beginning on April 1, 2020, and ending on December 31, 2020. This includes wages paid in arrears after December 31, 2020.

2. What is included in the tax credit?

The tax credits cover: (a) 100 percent of up to ten days of FFCRA Paid Sick Leave wages and up to ten weeks of the FFCRA Paid Family Leave wages; (b) any “qualified health plan expenses” allocable to those wages that an Employer paid during a calendar quarter; and (c) the amount of the employer’s share of Medicare taxes imposed on those wages (1.45% of wages). 

3. What are “qualified health plan expenses” that can be included in the tax credit?

Qualified health plan expenses are the employer’s costs to maintain a group health plan that are allocable to the employee’s FFCRA leave wages. The amount of health plan expenses taken into account in determining the credits generally includes both the employer’s portion of the cost, as well as the employee’s portion of the cost with pre-tax salary reduction contributions. Qualified health plan expenses do not include amounts the employee paid with after-tax contributions.

If an employer sponsors more than one group health plan, the expenses are determined separately for each plan. Then, for each plan, those expenses are allocated to the employees who participate in that plan. In the case of an employee who participates in more than one plan, the allocated expenses of each plan in which the employee participates are aggregated for that employee.

The amount of qualified health plan expenses does not include employer contributions to HSAs or Archer MSAs. Employers who sponsor a high deductible health plan should calculate the amount of qualified expenses in the same manner as an insured group health plan.

The IRS guidance also addresses other more specific scenarios relating to the provision of health coverage by employers.

4. What is the process for receiving the tax credits?

Employers will report their total FFCRA Leave Wages (which includes health plan expenses and the employer’s share of Medicare taxes allocable to those wages) for each quarter on their federal employment tax return (usually Form 941). The Form 941 will provide instructions on how to reduce the tax liability for the quarter based on wages paid for FFCRA Leave.

Employer can fund the FFCRA Leave Wages by using the federal employment taxes related to wages paid between April 1, 2020, and December 31, 2020, including withheld taxes, that would otherwise be required to be deposited with the IRS. This means that in anticipation of claiming the credits on the Form 941, employers can retain the federal employment taxes that they otherwise would have deposited, including federal income tax 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. 

An employer will not be subject to a “failure to deposit” penalty relating to qualified FFCRA Leave Wages if it has complied with applicable requirements for claiming the tax credit.

5. What if the employer does not have sufficient federal employment taxes to cover qualified leave payments under the FFCRA?

The employer should first reduce its remaining federal employment tax deposits for wages paid in the same quarter to zero. If this is less than that quarter’s FFCRA Leave Wages, the employer can file a Form 7200 (Advance Payment of Employer Credits Due to COVID-19), to claim an advance credit for the remaining qualified FFCRA Leave Wages it has paid for the quarter. The completed Form 7200 may be faxed to the IRS at 855-248-0552. The IRS has indicated it will process these requests quickly.

6. What information should an employer obtain from an employee to substantiate eligibility for the tax credit?

To qualify for the tax credits, employers may require a written FFCRA leave request from the employee which includes:

  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. Additionally, if the person subject to the quarantine order or the advice to self-quarantine is not the employee, the employee should include 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 Paid Family Leave. In addition, if the employee claims an inability to work or telework because of a need to care for a child older than age 14 during daylight hours, the employer may require a statement that special circumstances exist requiring the employee to provide care.

7. In addition to documentation from the employee, what other records should the employer maintain to substantiate eligibility for the tax credits?

  1. Documentation to show how the employer determined the amount of wages paid to employees that are eligible for the credit, including records of work, telework and absences from work.
  2. Documentation to show how the employer determined the amount of qualified health plan expenses that the employer allocated to wages.
  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).

These records should be retained for at least 4 years after the date the tax becomes due or is paid, whichever comes later.

8. Are qualified leave payments deductible by the employer as a business expense?

Generally, an employer’s payments of FFCRA Leave Wages are deductible by the employer as ordinary and necessary business expenses in the taxable year that these wages are paid or incurred. An employer may deduct as a business expense the amounts paid to an employee for FFCRA Leave Wages for which the employer expects to claim the tax credits under sections 7001 or 7003 of the FFCRA, if the employer is otherwise eligible to take the deduction.

9. Can employers receive FFCRA tax credits for qualified FFCRA Leave Wages and also receive employee retention credits and Small Business Interruption Loans under the CARES Act?

Yes. However, wages paid for FFCRA leaves do not count in the calculation of qualified wages for the employee retention credit or as “payroll costs” for purposes of loan forgiveness under the CARES Act. The IRS will be issuing more guidance on the CARES Act program later in April 2020.

What This Means

The IRS Q&A provides some welcome guidance on how employers covered by the FFCRA can recoup the cost of the paid leave through use of the tax credits. However, this continues to be an evolving process of guidance and amendments, so employers should be alert for new information regarding this process and other aspects of the FFCRA and the CARES Act.