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December 23, 2020

Consolidated Appropriations Act, 2021 extends many credits and other COVID-19 relief

Update: The President signed the Consolidated Appropriations Act, 2021 on December 27, 2020.

On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021, which includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Disaster Relief Act) and the COVID-related Tax Relief Act of 2020 (COVID Relief Act). The Disaster Relief Act and the COVID Relief Act extend a myriad of credits and other COVID-19 relief, among many other extenders.

This alert will focus on sections 286 to 288 of the COVID Relief Act, which modifies the Families First Coronavirus Response Act (FFCRA), and the following provisions of the Disaster Relief Act:

  • Section 101 — permanently reducing the medical expense deduction floor from 10% to 7.5%
  • Section 119 — extending IRC Section 45S credit for paid family and medical leave
  • Section 120 — extending the addition of student loan payments to IRC Section 127
  • Sections 206 to 207 — extending and expanding the employee retention credit (ERC)
  • Section 208 — allowing certain workers to receive in-service distributions from qualified plans
  • Section 209 — providing partial plan termination relief
  • Section 210 — temporarily allowing for full deduction for business meals provided by restaurants
  • Section 214 — temporarily relaxing flexible spending arrangement (FSA) rules
  • Sections 301 to 303 — providing additional non-COVID-19 disaster relief

ERC provisions

CARES Act section 2301 created the ERC for wages paid from March 13, 2020 to December 31, 2020, by employers that are subject to closure or significant economic downturn due to COVID-19 (see Tax Alert 2020-0761). The CARES Act also created the Paycheck Protection Program (PPP) under which the Small Business Administration and private lenders administer loans available to smaller employers for payroll and other expenses. If certain conditions are met, the debt can be forgiven. The ERC is a refundable employment tax credit for eligible employers paying qualified wages and health plan expenses. Under CARES Act section 2301(j), an eligible employer receiving a PPP loan may not claim the ERC.

The ERC provisions of the CARES Act were due to expire on December 31, 2020. Sections 206 and 207 of the Disaster Relief Act extend and broaden the expiring ERC. Certain changes are retroactive to enactment of the CARES Act, but most apply only with respect to wages paid from January 1, 2021 through June 30, 2021 (the first two calendar quarters of 2021).

The Disaster Relief Act extends the ERC to include wages paid before July 1, 2021 (from January 1, 2021) with the following changes applying to the period after December 31, 2020:

ERC expanded to 70% of qualified wages: The credit amount is 70% (up from 50%) of up to $10,000 per quarter (up from $10,000 total) of qualified wages paid to an employee. Thus, the maximum ERC amount available for 2021 is $14,000 per employee ($7,000 per quarter).

Gross receipts decline decreased to 20%: To be eligible for the expanded ERC, an employer must carry on a trade or business during the first or second quarter of 2021 and experience one of the two following COVID-19-related occurrences: (1) operations were fully or partially suspended due to orders from a governmental authority due to COVID-19 (COVID-19 shutdown), or (2) the business experienced a more than 20% reduction (from more than 50%) in gross receipts (significant decline in gross receipts) when comparing either the calendar quarter or the prior quarter to the corresponding quarter in 2019. Thus, for example, an employer may be an eligible employer for the first quarter of 2021 if either its gross receipts for the first quarter of 2021 fell by more than 20% when compared to the first quarter of 2019 or its gross receipts for the fourth quarter of 2020 fell by more than 20% when compared to the fourth quarter of 2019. Employers that did not exist in 2019 can use the corresponding quarter in 2020.

Large employer requirement changed from 100 to 500 employees: The expanded ERC changes the definition of large employer to those with more than 500 employees (from 100), allowing more employers to utilize a broader definition of qualified wages. Thus, for employers of more than 500 employees, qualified wages remain wages (as defined under the Federal Insurance Contributions Act) paid for services an employee is not providing due to a COVID-19 shutdown or a significant decline in gross receipts. For employers of 500 or fewer employees, however, qualified wages are wages paid to any employee during a COVID-19 shutdown or during a calendar quarter with a significant decline in gross receipts, without regard to whether the employee is providing services.

Elimination of qualified wage limitation for large employers: The CARES Act previously contained a limitation that qualified wages paid or incurred by large employers could not exceed what the employee would have been paid for an equivalent amount of work in the 30 days immediately preceding the period for which the employer claimed the credit. The expanded ERC eliminates this limitation.

Clarification of wages that cannot be taken into account twice: The CARES Act had prohibited employers from receiving the ERC for wages taken into account under sections 7001 and 7003 of the FFRCA, wages taken into account under IRC Section 45S (income tax credit for paid family and medical leave), wages paid to certain related individuals specified in IRC Section 51(i)(1), or wages of an employee for whom a work opportunity tax credit under IRC Section 51 is claimed. As modified, this prohibition is extended to wages taken into account for purposes of IRC Sections 41, 45A, 45P, 51 (but only as to the wages, not all wages paid to an employee for the period) and 1396.

Advance payments: The CARES Act authorized the IRS to allow advance payments of the ERC. For 2020, the IRS permitted employers to reduce deposits of employment taxes in anticipation of claiming credits for qualified wages that had been paid or to seek an advance payment of the credit by filing Form 7200. For 2021, advance payments of the expanded ERC are allowed only in the case of small employers (500 or fewer employees during 2019) and only up to 70% of the average quarterly wages paid by the employer in calendar year 2019.

Expansion to include certain governmental employers: The CARES Act had excluded governmental employers from eligibility for the credit. Although that prohibition remains, the Disaster Relief Act adds an exception. For the first two quarters of 2021, tax-exempt public colleges, universities and hospitals that are described in IRC Section 501(c)(1) may be eligible and are treated as carrying on a trade or business for purposes of the ERC.

In addition to the prospective changes described above, the Disaster Relief Act makes the following changes retroactive to the enactment of the ERC (March 13, 2020):

Qualified wages not paid from forgiven PPP loans can qualify for ERC: As originally enacted,employers who received PPP loans were not eligible to claim the ERC. This mutual exclusivity has created challenges for aggregated employers, particularly in the context of mergers and acquisitions. The IRS recently offered generous administrative relief but did not entirely solve the problem (see Tax Alert 2020-2725). The Disaster Relief Act goes further, retroactively narrowing the limitation such that employers who receive PPP loans may elect to treat payroll costs paid during the loan-covered period as qualified wages to the extent the wages are not paid for with forgiven PPP loan proceeds. As a result, for that portion of wages the employer may claim the ERC.

Health plan expenses may be qualified wages even in the absence of other wages: The statutory text codifies the IRS's interpretation in website FAQs that health plan expenses may be treated as qualified wages even if no wages are paid for the time period.

Definition of gross receipts for tax-exempt organizations: The statutory text codifies the IRS's interpretation in website FAQs that "gross receipts" for a tax-exempt entity are all gross receipts within the meaning of IRC Section 6033 rather than being limited to those from unrelated trade or business activities.

Effective date and special rule: The retroactive changes apply as though included in the original enactment of the CARES Act. In addition, only as to the retroactive changes, certain amounts from earlier quarters may be claimed in the quarter in which the Disaster Relief Act is enacted (i.e., the fourth quarter of 2020 if the legislation is signed by President Trump by the end of the year). This will be relevant only for employers that did not already apply the law consistently with the retroactive changes.

Families First Coronavirus Response Act (FFCRA) credits

Sections 286 to 288 of the COVID Relief Act address credits recently enacted under the FFCRA by extending them from December 31, 2020, until March 31, 2021. The FFCRA imposed paid leave requirements and established corresponding payroll tax credits for employers of fewer than 500 employees (see Tax Alert 2020-0586). Although the COVID Relief Act extends the tax credits, it does not extend the requirement to provide the paid leave.

Health and dependent care FSAs

To qualify as a cafeteria plan under IRC Section 125, health and dependent care FSAs are generally subject to limitations on the ability to modify elections after the start of the plan year and to carry over unused benefits to future plan years.

Notice 2020-29 provided relief by allowing employers to amend their IRC Section 125 cafeteria plans to allow employees to make benefit and coverage changes in response to COVID-19. Notice 2020-29 and Notice 2020-33 further allowed for extended grace periods and increased carryover for unused health FSA or dependent care FSA amounts (see Tax Alert 2020-1290).

Section 214 of the Disaster Relief Act expands on this relief by permitting employers to amend FSAs to allow participants to carry over to the plan year ending in 2021 any unused amounts that would have expired at the end of a plan year ending in 2020. Similarly, any unused amounts that would have expired at the end of a plan year ending in 2021 may be carried over to the plan year ending in 2022. Additionally, the Disaster Relief Act permits employers to amend their FSAs to provide a grace period of up to 12 months after the end of a plan year ending in 2020 or 2021. These rules apply equally to health FSAs and dependent care FSAs and are not subject to dollar limitations.

Under the Disaster Relief Act, a health FSA may be amended to allow employees who cease participating in the plan during 2020 or 2021 (e.g., as a result of termination of employment) to continue to receive reimbursements from any unused amounts through the end of the plan year in which the participation ended, including any grace period or extended grace period. This rule is analogous to the existing rules for dependent care FSAs.

The Disaster Relief Act also provides a temporary rule extending the maximum age of eligible dependents for purposes of determining eligible dependent care FSA expenses from under age 13 to under age 14. The rule applies to the plan year for which open enrollment ended before January 31, 2020, including any unused amounts from that plan year that may be available in the following plan year as a result of a plan's rollover or grace period.

Finally, the Disaster Relief Act extends the relief provided in Notice 2020-29 with respect to 2020, allowing employers to permit employees to modify prospectively the amount of contributions to health and dependent care FSAs, without regard to whether the participant satisfies the normal requirements for mid-year election changes.

Employers have until the last day of the first calendar year beginning after the end of the plan year to adopt plan amendments to reflect the changes in the Disaster Relief Act. The amendments may be effective retroactively if the plan is operated consistently with the terms of the amendment beginning on the effective date of the amendment.

Other provisions

Work opportunity tax credit: The Disaster Relief Act extends through the end of 2025 the Work Opportunity Tax Credit provided by IRC Section 51, which was set to expire at the end of 2020, allowing employers hiring individuals who are members of one or more of ten targeted groups to continue to be eligible for the credit.

Medical expense deductions: Section 101 of the Disaster Relief Act permanently reduces the unreimbursed medical expense deduction floor from 10% to 7.5% of adjusted gross income for tax years beginning after December 31, 2020.

Paid family and medical leave: Section 119 of the Disaster Relief Act extends the IRC Section 45S credit for paid family and medical leave from December 31, 2020, until December 31, 2025.

Employer-paid student loans: IRC Section 127 excludes up to $5,250 per year of employer-provided educational assistance from an employee's income. CARES Act section 2206 previously amended IRC Section 127 to temporarily treat an employer's payment of principal or interest on an employee's student loan as excludable employer-provided educational assistance for payments made after March 27, 2020 and before January 1, 2021, whether paid directly to the lender or as reimbursement to an employee. Section 120 of the Disaster Relief Act extends this expanded definition from January 1, 2021, until January 1, 2026.

In-service distributions: Section 208 of the Disaster Relief Act allows qualified plan participants who have reached age 59 ½ to receive distributions. Additionally, certain multiemployer plans primarily covering workers in the building and construction industry may make these in-service distributions to some participants at age 55 instead of age 59 ½.

Partial plan termination: If more than 20% of the participants in a qualified retirement plan are laid off in a particular year, the plan can experience a partial plan termination, triggering certain rights for affected employees. Section 209 of the Disaster Relief Act provides partial plan termination relief by allowing plans to avoid termination so long as during any plan year including the period from March 13, 2020, to March 31, 2021, the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020.

Business meals: Section 210 of the Disaster Relief Act temporarily allows a full deduction (instead of 50%) for the expense of business meals "provided by a restaurant" if paid or incurred after December 31, 2020 and before January 1, 2023.

Additional non-COVID disaster relief

Sections 301 to 303 of the Disaster Relief Act provide additional non-COVID-19-related disaster relief.

Retirement plan distributions and loans

The CARES Act created a new category of "coronavirus-related distributions" and loans from retirement plans of up to $100,000, which were not subject to early distribution taxes under IRC Section 72(t). For coronavirus-related distributions, the CARES Act allowed income to be spread ratably over three years and allowed repayment to another eligible retirement plan within the same three-year period. If a loan, rather than a withdrawal, were taken, dollar limits under existing law were increased to $100,000 and repayments were not required to begin for one year. This relief was based on similar relief that had been provided for previous disasters. Section 302 of the Disaster Relief Act extends similar relief for disasters declared between January 1, 2020 and 60 days after enactment of the Disaster Relief Act.

ERCs for qualified disasters

Section 303 of the Disaster Relief Act provides a credit of up to $2,400 per employee to employers impacted by qualified disasters if the employer:

  • Had an active trade or business at the time of the disaster, located in a qualified disaster zone and rendered inoperable as a result of the disaster, and
  • Continued to pay wages to eligible employees (i.e., employed at the location immediately before the disaster)

Employers must claim the general business credit for the tax year qualified wages were paid to the employee. This credit equals 40% of wages (maximum of $6,000 per employee) paid to or incurred for an eligible employee:

  • Beginning on the date on which the trade or business first became inoperable as a result of the disaster at the employee's principal place of employment immediately before the disaster and
  • Ending on the earlier of:
    • The date on which the trade or business resumed significant operations at the employee's principal place of employment or
    • 150 days after the last day of the disaster incident period

This credit is similar to credits provided for past disasters. Employers cannot claim the qualified disaster credit for wages for which certain other credits are claimed — including the CARES Act ERC. Non-governmental tax-exempt organizations (with the exception of public colleges, universities and hospitals that are described in IRC Section 501(c)(1)) may claim the credit against Social Security tax.


After many months of uncertainty as to whether or when any additional COVID-related relief would be enacted, employers suddenly have a flood of year-end legislation to digest.

Assuming they are signed into law, the ERC amendments will be welcomed by employers whose businesses may remain disrupted by the pandemic in 2021. In particular, sectors such as hospitality or retail with significant declines in gross receipts as compared to 2019 or locations in states with newer restrictions may benefit. Employers would be well served to conduct a geographic analysis of their locations to evaluate a partial suspension and/or compare their gross receipts to the quarter that provides them the optimal result.

The inclusion of public colleges and universities will also provide valuable relief as these institutions slowly reopen fully to students. The handful of retroactive changes are consistent with positions the IRS has taken in website FAQs but provide greater certainty now that they will have the force of law. Moreover, the legislative fix for the ERC's interaction with PPP loans goes further than the mergers and acquisitions context addressed by the FAQs and allows any aggregated group of employers — and indeed even a single employer — to benefit from both the ERC and the PPP loan program, provided the same wages are not used to support both the ERC and PPP loan forgiveness. As employers can now take advantage of both programs, employers who previously elected to obtain a PPP loan may want to evaluate the ERC as an option for 2020 payroll costs that were not forgiven under the PPP. Additionally, for purposes of reducing payroll costs in 2021, the ERC may be administratively simpler option than the PPP loan process.

Making the greatly expanded credit available only in 2021 allows employers to obtain enhanced benefits without the need to redo credit calculations for 2020. Given how late in the year the legislation may be enacted, this logistical point will be much appreciated by tax practitioners responsible for doing that work. Relatively few taxpayers took advantage of advance payments of the credit (IRS Form 7200), so the new restrictions on advance payments are likely to be of limited practical significance.

The five-year extension of the paid family and medical leave credit now gives employers ample runway to consider enhancing paid leave programs without the concern of standing up a benefit program for a credit that might expire in short order.

The extended and expanded relief for health and dependent care FSAs affords employers and employees the flexibility to make changes necessary to avoid forfeiting benefits, and to manage significant changes and continued uncertainty around anticipated medical and childcare expenses.

The extension of the IRC Section 127 rule allowing student loan principal and interest to count as employer-provided educational assistance may be just the first of many extensions. Employers that were hesitant to act on a temporary partial-year provision may be more willing to act on a five-year one.Allowing a full deduction rather than the longstanding 50% deduction for food or beverages "provided by a restaurant" raises interesting definitional issues. What is a "restaurant," and how does it differ from other sources of food and beverages, such as a caterer, dining hall, cafeteria, etc.? To what extent should the interpretation of "restaurant" depend on one's understanding of the intended beneficiaries of this provision? The IRS will undoubtedly be asked to clarify these sorts of questions in short order.

The additional relief for non-COVID disasters is a somber reminder that 2020 was a difficult year for more reasons than one. The pace of disasters this year has been unrelenting and the volume of disaster relief legislation has been astounding. Even so, there are some notable omissions from the 2020 legislation, such as pension funding relief and COBRA premium subsidies. There is certainly the possibility of more legislation still to come next year.


Contact Information
For additional information concerning this Alert, please contact:
Compensation and Benefits Group
   • Christa Bierma (
   • Stephen Lagarde (
   • Rachael Walker (
   • Bing Luke (
Workforce Tax Services, Indirect Tax
   • Ali Master (
   • Tim Parrish (