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In Notice 2021-24 the IRS extends the guidance in Notice 2020-22 for penalty relief under

IRC Section 6656 to employers that choose to reduce their federal employment tax deposits in anticipation of COVID-19-related refundable employment tax credits available in 2021, rather than request advance payment using Form 7200, Advance Payment of Employer Credits Due to COVID-19. (For more information about Notice 2020-22, see EY Tax Alert 2020-0816.)

The penalty relief in Notice 2021-24 applies to the following 2021 refundable tax credits.

• Paid sick and family leave credits under the Families First Coronavirus Response Act (FFCRA, March 18, 2020), as amended by Consolidated Appropriations Act, 2021 (CAA, December 27, 2020), with respect to qualified leave wages and qualified health plan expenses paid for the period beginning January 1, 2021, and ending March 31, 2021.
  
  These refundable tax credits may be applied to the employer's share of Social Security tax (or the comparable Railroad Retirement Tax Act (RRTA) Tier 1 rate) and are increased by the amount of the employer's share of Medicare tax (or the comparable portion of the RRTA Tier 1 rate) imposed on qualified-leave wages. (See EY Tax Alert 2021-0019.)

• Paid sick and family leave credits under IRC Sections 3131, 3132 and 3133, added by Section 9641 of the American Rescue Plan Act of 2021 (ARPA, March 11, 2021), for qualified leave wages paid for the period beginning April 1, 2021, and ending September 30, 2021.
  
  These refundable tax credits may be applied to the employer's share of Medicare tax (or the comparable RRTA Tier 1 rate) and are increased by: (1) qualified health plan expenses and certain collectively bargained contributions paid by an eligible employer that are properly allocable to the related qualified leave wages (and certain qualified collectively bargained contributions), and (2) both the employer's share of Social Security and Medicare tax (or the comparable RRTA Tier 1 rate) imposed on the qualified leave wages. (See EY Tax Alert 2021-0539.)

• The employee retention credit under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, March 27, 2020), as amended by the CAA for qualified wages paid for the period beginning January 1, 2021, and ending June 30, 2021.
  
  This refundable tax credit may be applied to the employer portion of Social Security tax (or the comparable RRTA Tier 1 rate). (See EY Tax Alert 2021-0019.)

• The employee retention credit under IRC Section 3134, added by Section 9651 of the ARPA, for qualified wages paid for the period beginning July 1, 2021, and ending December 31, 2021.
  
  This refundable tax credit may be applied to the employer portion of Medicare tax (or the comparable RRTA Tier 1 rate). (See EY Tax Alert 2021-0539.)

• The credit for Continuation Coverage Premium Assistance under IRC Section 6432, as added by Section 9501(b) of the ARPA, for COBRA continuation coverage premiums not paid by assistance eligible individuals for such coverage by reason of Section 9501(a)(1) of the ARPA during the period beginning April 1, 2021, and ending September 30, 2021.
  
  This refundable tax credit may be applied to the employer portion of Medicare tax (or the comparable RRTA Tier 1 rate). (See EY Tax Alert 2021-0605.)

Conditions on penalty relief

The relief from penalty in Notice 2021-24 is subject to all of the following conditions.

Reduced deposits for paid sick and family leave credits

• The employer paid to its employees qualified leave wages, qualified health plan expenses or qualified collectively bargained contributions for the period beginning on April 1, 2021, and ending on September 30, 2021, in the calendar quarter prior to the time of the required deposit.
• The amount the employer does not timely deposit is less than or equal to the amount of the employer's anticipated credits under Sections 7001 and 7003 of the FFCRA or IRC Sections 3131 and 3132 for the calendar quarter as of the time of the required deposit.
• The employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of any reduction in any required deposit may not exceed the total amount of the employer's anticipated credit under Sections 7001 and 7003 of the FFCRA or IRC Sections 3131 and 3132 as of the time of the required deposit, minus any amount of the anticipated credits that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain the relief provided by the notice or (2) to seek payment of an advance credit.

Reduced deposits for the employee retention credit

• The employer paid qualified retention wages for the period beginning January 1, 2021, and ending December 31, 2021, to its employees in the calendar quarter prior to the time of the required deposit.
• The amount the employer does not timely deposit, reduced by the amount of employment taxes not deposited in anticipation of the credits claimed under Sections 7001 and 7003 of the FFCRA or IRC Sections 3131 and 3132 is less than or equal to the amount of the employer's anticipated credits under Section 2301 of the CARES Act or IRC Section 3134 for the calendar quarter as of the time of the required deposit.
• The employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of any reduction in any required deposit may not exceed the total amount of the employer's anticipated credit under Section 2301 of the CARES Act or IRC Section 3134 as of the time of the required deposit, minus any amount of the anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain the relief provided by the notice or (2) to seek payment of an advance credit.

Reduced deposits for the COBRA Continuation Coverage Premium Assistance Credit

• The employer is the "person to whom premiums are payable" under IRC Section 6432(b).
• The amount the employer does not timely deposit, reduced by the amount of employment taxes not deposited in anticipation of the credits claimed under Sections 7001 and 7003 of the FFCRA or IRC Sections 3131 and 3132, and the credits claimed under Section 2301 of the CARES Act or IRC Section 3134, is less than or equal to the amount of the employer's anticipated credits under IRC Section 6432 for the calendar quarter as of the time of the required deposit.
• The employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of any reduction in any required deposit may not exceed the total amount of the employer's anticipated credit under IRC Section 6432 in the calendar quarter as of the time of the required deposit, minus any amount of the anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain the relief provided by this notice or (2) to seek payment of an advance credit.

Ernst & Young LLP insights

The IRS has not yet updated the Form 941 and instructions to reflect the refundable tax credit provisions of the ARPA. The draft of the updated Form 941, once available, will be posted here.

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