March 18, 2020 Families First Coronavirus Response Act gives tax relief to employers and employees impacted by COVID-19 Note: President Trump signed the Families First Coronavirus Response Act into law on March 18, 2020. The Families First Coronavirus Response Act (H.R. 6201, Families First Act) was passed by the Senate on March 18, 2020. This Alert outlines the Families First Act and other authorities that provide tax relief for employers and employees as a result of the COVID-19 pandemic. Further legislation, including economic stimulus, in response to COVID-19 is expected imminently and will be covered by subsequent Alerts. Summary The Families First Act would create a new tax credit for employers that must provide paid sick leave as a result of COVID-19 under an expansion of the Family and Medical Leave Act of 1993 (FMLA). The FMLA generally imposes certain unpaid leave requirements on employers with 50 or more employees. The Families First Act would amend the FMLA to mandate paid leave as a result of COVID-19. Employers that provide paid leave would be eligible for a tax credit (as explained later). Both the mandate and the tax credit would be limited to employers with less than 500 employees (Small Employers) and include some other exceptions. Employers not subject to the mandate — e.g., those with 500 or more employees — would not be eligible for the credit. Existing provisions under the Internal Revenue Code (IRC) allow employers to provide certain tax-free payments to their employees who incur unreimbursed expenses as a result of COVID-19. An existing section — IRC Section 139 — applies when the President makes a disaster declaration, which occurred when the President declared a national emergency as a result of COVID-19. The Families First Act would require group health plans to provide full coverage for COVID-19 testing. In addition, the IRS and Treasury previously issued guidance allowing high-deductible health plans (HDHPs) to voluntarily suspend deductibles for COVID-19 testing and treatment (see Tax Alert 2020-0543) without causing covered individuals to lose their eligibility for health savings account (HSA) contributions. Group health plan coverage Division F of the Families First Act would require group health plans and health insurance issuers offering group or individual health insurance coverage to cover COVID-19 testing without cost sharing, even if the plan continues to be grandfathered from certain requirements of the Affordable Care Act. This requirement would extend to related items or services furnished at the health care provider visit that resulted in COVID-19 testing. Earlier in March, the IRS issued administrative guidance in Notice 2020-15 allowing HDHPs to voluntarily provide both testing and care for COVID-19 even if the deductible under the HDHP has not been met (see Tax Alert 2020-0543). The guidance in Notice 2020-15 still applies and will allow covered individuals to continue to make an HSA contribution even if such coverage is provided without regard to the required deductible in the HDHP. Paid leave Emergency Family and Medical Leave Expansion Act (Division C of the Families First Act) Under current law, the FMLA requires employers of 50 or more employees to allow employees with a year of full-time service (at least 1,250 hours) to take up to 12 weeks of leave per year for family and medical reasons. The leave may be unpaid, but the FMLA protects the security of the employee's job during the leave. An employer must maintain the employee's group health plan benefits (if any) during the protected leave. The categories of leave protected by the FMLA include leave taken:
Even before the introduction of the Families First Act, the FMLA protected the job of an employee taking leave for the employee's own serious health condition (which would include COVID-19 to the extent the employee requires hospitalization or ongoing treatment that would cause the illness to be a serious health condition) or that of an immediate family member. These existing protections remain. Division C of the Families First Act, the Emergency Family and Medical Leave Expansion Act (the FMLA Expansion Act), would be effective no later than 15 days after enactment and would amend the FMLA to add a new temporary category of leave, in place through December 31, 2020. This new category of leave (Public Health Emergency Leave) would cover employees who are unable to work (including telework) due to a need to care for a child under age 18 if school or child care is unavailable due to a public health emergency (limited to one declared by a federal, state, or local authority related to COVID-19). Only Small Employers would be subject to the new FMLA requirements for Public Health Emergency Leave. These Small Employers — the smallest of whom (those with fewer than 50 employees) were not previously subject to the FMLA — would be required to:
Small Employers of fewer than 25 employees would be allowed an exception from providing Public Health Emergency Leave if certain conditions were met. Employers of a health care provider or an emergency responder could elect to exclude those employees from the FMLA Expansion Act's requirements. Emergency Paid Sick Leave Act (Division E of the Families First Act) Division E of the Families First Act, the Emergency Paid Sick Leave Act (the Paid Sick Leave Act), which would be effective no later than 15 days after enactment, would impose additional paid sick leave requirements on Small Employers through December 31, 2020. This provision would effectively fill in the initial two-week gap of unpaid leave left by the FMLA Expansion Act. The Paid Sick Leave Act would require Small Employers to provide:
This paid leave requirement would be triggered if an employee is unable to work (or telework) for one of six reasons:
Leave in the first three categories listed (Self-Care Leave) would have to be paid at the employee's regular rate of pay as determined under the Fair Labor Standards Act and no less than minimum wage, capped at $511 per day and $5,110 in the aggregate; leave in the last three categories listed (Family Care Leave) would have to be paid at two-thirds of that amount, capped at $200 per day and $2,000 in the aggregate. An employer could not require an employee to use existing paid leave provided by the employer before using paid leave required by the Paid Sick Leave Act. Paying wages as required by the Paid Sick Leave Act would qualify a Small Employer for a refundable credit (discussed later). Self-Care Leave would be eligible for a higher credit amount than Family Care Leave. The Secretary of Labor could exclude health care providers and emergency responders from the Paid Sick Leave Act requirements. No mandated paid leave would be available under the FMLA Expansion Act, the Paid Sick Leave Act, or any other provisions of the Families First Act solely because a business closes, furloughs, or lays off employees during the COVID-19 pandemic. Payroll and income tax credits Division G of the Families First Act provides payroll and income tax credits that correspond to the FMLA Expansion Act and Paid Sick Leave Act provisions described previously. Any wages required to be paid by reason of the FMLA Expansion Act or Paid Sick Leave Act would not be subject to the employer portion of Old-Age, Survivors, and Disability Insurance Tax (Social Security Tax) or Tier 1 of the Railroad Retirement Tax Act (RRTA). Additionally, the Families First Act provides a refundable credit against the employer's share of Social Security Tax or Tier 1 RRTA Tax in the amount of wages paid to employees for paid leave required by either the FMLA Expansion Act or the Paid Sick Leave Act. Similarly, self-employed individuals could claim a refundable income tax credit in the amount of daily average self-employment income that would be required to be paid as leave wages if the individual worked for an employer (but could not claim the credit to the extent the FMLA Expansion Act or Paid Sick Leave Act required wages to be paid to the individual for the leave days). Each credit would equal 100% of qualified wages (or average daily self-employment income) for qualified leave days up to the caps described later. For the FMLA Expansion Act, the Families First Act provides a credit on wages up to $200 per individual per day, up to a cumulative $10,000 for all calendar quarters. For self-employed individuals, the credit would also be capped at $200 per day for up to an aggregate 50 days during the tax year. That is, for each employee or self-employed individual, a credit of up to $10,000 would apply for qualified wages. For the Paid Sick Leave Act, up to $200 per day for Family Care Leave wages, and up to $511 per day for Self-Care Leave wages would be taken into account. A total of 10 days could be taken into account per employee over all calendar quarters. For self-employed individuals, the Paid Sick Leave Act credit would be subject to corresponding caps. Accordingly, a maximum Paid Sick Leave Act credit of $2,000 or $5,110 for qualified leave wages, depending on the type of leave, could be claimed per employee or self-employed individual. In the aggregate, an employer might claim up to $15,100 in credit for a single employee for qualified leave wages. Given that an employer's maximum Social Security Tax or Tier 1 RRTA Tax liability per employee for 2020 is only $8,537.40 ($137,700 x 6.2%), the refundability of the tax credits is meaningful. In addition to credit for qualified leave wages, the credits could be claimed for qualified health plan expenses to the extent that the expenses are excludable from employee income by IRC Section 106(a) and allocable to the qualified sick leave wages under rules to be issued by Treasury. Small Employers would have to include the amount of the credit in their gross income. Additionally, no credit would be allowed for wages for which a credit is claimed under IRC Section 45S for family and medical leave. The credit would be available only for the period starting on the day designated by the Secretary of the Treasury, which would occur within 15 days of enactment and ending on December 31, 2020. IRC Section 139 IRC Section 139(a) permits individuals to exclude a "qualifying disaster relief payment" from income. IRC Section 139 applies when, among other factors, the President declares a "disaster" within the meaning of IRC Section 165(i), which references a Presidentially-declared disaster under the Stafford Act. Revenue Ruling 2003-29 states that a disaster includes, for purposes of IRC Section 165(i), an event declared a major disaster or an emergency under the Stafford Act. On March 13, 2020, President Trump made an emergency declaration, so these provisions apply. An employer that provides a qualifying disaster relief payment is not required to include those amounts as wages (or as self-employment earnings) under IRC Section 139(d). Thus, these amounts are tax-free for federal tax purposes. The relevant question in light of the COVID-19 pandemic is what constitutes a "qualified disaster relief payment." The category that is likely most relevant to COVID-19 is a payment "to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster," provided that such amount is not reimbursed by insurance or otherwise. The key analysis is whether an expense is "incurred as a result of" the COVID-19 pandemic. Whether any particular payment is a qualifying disaster relief payment will be a factual determination. Under current guidance, voluntarily continuing wages when a retail establishment is closed (by order or otherwise) would not appear to satisfy the statutory standard. While that fact pattern undoubtedly results in hardships, the standard is whether expenses are incurred as a result of the disaster. In contrast, if an employee is teleworking and must incur new expenses, such as childcare as a result of school closures, then such expense likely does meet the qualifying disaster relief definition. Implications The Families First Act provides a safety net to employees of Small Employers if those employees cannot work due to self-isolation requirements or school closures. Small Employers in those instances would be able to access a substantial refundable tax credit to pay for the costs of the mandated leave. Many situations caused by the COVID-19 pandemic are not addressed by this legislation, including:
Some of these situations may be addressed by tax-free payments under IRC Section 139, job protection under the FMLA, or a more limited tax credit under IRC Section 45S. In addition, we do expect additional federal legislation, which may respond to the remaining issues. ———————————————
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