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Highlights of the recently passed paid sick and family leave act: What you need to know

03.20.20

The President signed The Families First Coronavirus Response Act (hereinafter the “Act”) into law on March 18th and the provisions are effective April 2nd. You can read the congressional summary here. There are two provisions of the Act that deal with paid leave provisions for employees. Here are some highlights for employers.

The provisions of the Act are only required for employers with fewer than 500 employees. Employers with over 499 employees are not required to provide the sick/family leave contained in the Act, but could voluntarily elect to follow the new rules. The expectation is that employers with over 499 employees are providing some level of sick/family leave benefits already. In any case, employers with over 499 employees are not eligible for the tax credits. 

Employers with fewer than 500 employees are required to provide employees with up to 80 hours of paid sick leave over a two-week period if the employee:

  • Self-isolates because of a diagnosis with COVID-19, or to comply with a recommendation or order to quarantine;
  • Obtains a medical diagnosis or care if the employee is experiencing COVID-19 symptoms;
  • Needs to care for a family member who is self-isolating due to a COVID-19 diagnosis or quarantining due to COVID-19 symptoms; or
  • Is caring for a child whose school has closed, or childcare provider is unavailable, due to COVID-19.

These rules apply to all employees regardless of the length of time they have worked for the employer. The 80-hours would be pro-rated for those employees who do not normally work a 40-hour week. 

Employees who take leave because they themselves are sick (i.e., the first two bullets above) can receive up to $511 per day, with an aggregate limit of $5,110. If, on the other hand, an employee takes leave to care for a child or other family member (i.e., the last two bullets above), the employee will be paid two-thirds (2/3) of their regular weekly wages up to a maximum of $200 per day, with an aggregate limit of $2,000.

Days when an individual receives pay from their employer (regular wages, sick pay, or other paid time off) or unemployment compensation do not count as leave days for the purposes of this benefit.

Family and Medical Leave Act

Employees who have been employed for at least 30-days also have the right to take up to 12 weeks of job-protected leave under the Family and Medical Leave Act (FMLA). The Act requires that 10 of these 12 weeks (i.e., after the sick leave discussed above is taken) be paid at a rate of no less than two-thirds of the employee’s usual rate of pay. Any leave taken under this portion of the ACT will be limited to $200 per day with an aggregate limit of $10,000.

Exemptions

The Secretary of Labor has the authority to issue regulations exempting: (1) certain healthcare providers and emergency responders from taking leave under the Act; and (2) small businesses with fewer than 50 employees from the requirements of the Act if it would jeopardize the viability of the business.

Expiration

The provisions of the Act are set to expire on December 31, 2020, and unused time will not carry over from one year to the next.

Tax credits 

The Act provides for refundable tax credits to help an employer cover the costs associated with providing paid emergency sick leave or paid FMLA. The tax credits work as follows:

  • A refundable tax credit for employers equal to 100 percent of qualified family leave wages paid under the Act.
  • A refundable tax credit for employers equal to 100 percent of qualified paid sick leave wages paid under the Act. 
  • The tax credits are taken on Form 941 – Employer’s Quarterly Federal Income Tax Return filed for the calendar quarter when the leave is taken and reduce the employer’s portion of the Social Security taxes due. If the credit exceeds the employer’s total liability for Social Security taxes for all employees for any calendar quarter, the excess credit is refundable to the employer.

For more information

We are here to help. Please contact our benefit plan consultants if you have any questions or would like to discuss your specific situation. 

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Read this if you are an employer. 

On March 13th, 2020, the President issued a national emergency declaration due to the novel Coronavirus pandemic (COVID-19). As a result, the COVID-19 pandemic was designated as a federal disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. This designation allows employers to make tax-free payments or reimbursements to employees as “qualified disaster payments” under Section 139 of the Internal Revenue Code (Section 139). 

Overview

Under Section 139, employers can reimburse or directly pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster expenses incurred by the employee as a result of COVID-19 that are not otherwise reimbursed by insurance. The Internal Revenue Service has not provided guidance on what constitutes “reasonable and necessary” expenses with respect to COVID-19; however, such expenses could potentially include:

  • Medical expenses not covered by insurance (e.g., over-the-counter medication and cleaning supplies)
  • Expenses related to child care or tutoring
  • Expenses incurred to allow the employee to work from home (e.g., costs to set up a home office and increased utilities)
  • Lodging if the employee or a family member has to stay at a location besides his/her home to avoid a family member who has been diagnosed with COVID-19
  • Commuting expenses
  • Funeral expenses
  • Caregiver expenses
  • Legal and accounting expenses

Payments not eligible for relief under Section 139 include the following:

  • Non-essential, decorative, or luxury items or services
  • Wage replacement (e.g., paid sick or other leave)
  • Expenses compensated by insurance 

There are no limits on the dollar amount or frequency of qualified disaster payments. However, the payment(s) must be reasonably expected to be commensurate with the amount of unreimbursed reasonable and necessary COVID-19-related expenses. Employers may also provide assistance to any individual employee or to all employees with no discrimination restrictions.

Recordkeeping

Under Section 139, there are no administrative or substantiation requirements for the employee or the employer. While the IRS does not provide guidance on administering a program under Section 139, it is recommended that employers adopt a written policy that specifies the following:

  • The employees eligible under the plan
  • The administrative process and restrictions
  • Start and end date of the program
  • Types of expenses that will be paid or reimbursed on behalf of the employees
  • Amount of expenses that will be paid or reimbursed on behalf of the employees with a defined maximum amount per employee
  • How and when payments will be made

Tax implications―tax-free and fully deductible

The qualified disaster payments are tax-free to the employee and fully deductible to the employer. Additionally, payments are not subject to federal income or payroll tax withholding, and there are no federal disclosure or reporting requirements. While many states follow the federal treatment of qualified disaster payments, employers should determine any income tax or payroll tax withholding requirements on a state-by-state basis with their tax advisor.

Article
COVID-19 and Section 139: Tax-free payments or reimbursements to employees

Read this if you are an employer.

Note: The tax deferral situation is very fluid, and information may change frequently. Please check back for updates.

The Treasury Department and Internal Revenue Service released Notice 2020-65 on August 28th, addressing the following questions highlighted in our earlier payroll tax deferral article.

Does the employer or the employee elect to defer taxes?

Notice 2020-65 provides that Affected Taxpayers are defined for purposes of the Notice as the employer, not employee. Therefore, employers will have to choose whether or not to opt-in and defer taxes. Important to note: while the notice doesn’t specifically state that deferral is optional, the IRS press release implies that it is. 

It is unclear if an employee can elect out of the payroll tax deferral, if their employer elects to defer taxes. Absent guidance, it seems that an employer who elects to defer the payroll tax should apply the payroll tax deferral to all employees and not permit an employee to elect out of the deferral. 

The other question for an employer is whether the payroll software will be able to accommodate the deferral feature as of September 1st. It seems highly unlikely that payroll software will be ready for the September 1st effective date. Employers should reach out to their payroll vendor to determine when the system/software will be ready.

How do bonuses, commissions, or other irregular payroll items impact the $4,000/biweekly compensation limit?

Per the Notice, Applicable Wages include wages as defined in Internal Revenue Code (“Code”) Section 3121(a) (i.e., wages for withholding FICA taxes) or compensation as defined in Code Section 3231(e) (i.e., wages for the Railroad Retirement tax) only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods. Additionally, the Notice states that the determination of Applicable Wages is made on a "pay-period-by-pay period" basis. Therefore, Applicable Wages would include items such as bonuses and commissions. For example, if a bonus of $2,000 caused an employee’s total Applicable Wages to exceed the $4,000 bi-weekly threshold for the respective pay period to which it relates, deferral would not be required for that pay period. In other words, payroll tax deferral applies to Applicable Wages of $4,000 or less for any bi-weekly pay period (or the equivalent threshold for other pay periods) irrespective of amounts paid in other pay periods.

Based on the guidance, an employer’s payroll system will need to be programmed to automatically monitor the $4,000 bi-weekly threshold and accumulate the tax deferral for each employee.

When and how are amounts deferred due to be paid by the employee?

An employer must withhold and pay the deferred taxes ratably from wages and compensation paid between January 1, 2021 and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021 with respect to any unpaid taxes.

This means that employers who elect to initiate the payroll tax deferral will double the Social Security tax withholding during the first four months of 2021. The President’s memorandum issued on August 8th states that Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum. However, only Congress can pass legislation to forgive the uncollected taxes, and has thus far been unwilling to do so.

What happens if an employee who is deferring taxes stops working for the employer? Is the employer responsible for collecting the taxes that were deferred?

This question is not addressed; however, the Notice does provide that an employer may make arrangements to otherwise collect the total taxes from the employee, if other than ratably from wages and compensation.

Employers electing to implement the payroll tax deferral may be assuming unnecessary financial risk related to employees who terminate employment during the period of deferral or during the period of repayment. Prior to initiating the payroll tax deferral, an employer will need to determine (and communicate to employees) how it will collect any unpaid tax deferrals when an employee terminates employment. For example, an employer could decide to withhold the deferred taxes from the employee’s final paycheck, if it can do so legally. Further guidance is necessary so an employer can determine the appropriate way to receive payment from employees who terminate employment.

Notice 2020-65 leaves many questions still unanswered.

Most notably, who is responsible for the taxes if an employer is unable to withhold due to an employee terminating employment? The IRS issued a draft version of a revised Form 941 to take into account the deferred payroll taxes.

Additional guidance will hopefully be forthcoming. Until further guidance is issued and payroll systems are updated, it is difficult for an employer to initiate the payroll tax deferral. 
 
 

Article
Payroll tax deferral update

Read this if you are an employer.

President Trump signed a memorandum on August 8 (hereinafter the “Memorandum”) ordering the Treasury Department to defer the withholding, deposit, and payment of the Social Security portion of the payroll taxes during the period September 1 through December 31, 2020. 

We have heard from a few employers who have employees asking them when the tax withholding will stop since September 1st is right around the corner. The short answer for employers and employees is the withholding deferral will begin “when Treasury and/or the IRS issues guidance”.

“Defer” and “deferral” are underlined for a reason. Employees must understand that the Memorandum provides for a “deferral” of the Social Security tax. The tax is not eliminated for the period September 1st through December 31st. This means that while an employee may enjoy some additional take-home pay during the period of deferral, the amounts deferred must still be paid to the IRS at some point. Only Congress can eliminate the payroll tax.

This is what we know so far:

  • The deferral only applies to the employee’s share of the Social Security taxes. It does not apply to the employee’s share of the Medicare taxes.
  • The deferral is only available to an employee with biweekly income of $4,000 or less, which translates to annual income of $104,000. 
  • Amounts deferred pursuant to the Memorandum shall be deferred without any penalties or interest.
  • For example, an employee earning $40,000 annually could potentially defer approximately $825 in payroll taxes and would need to pay that amount at a future date.

There are many open questions for both employees and employers to consider. Therefore, it is nearly impossible to move forward with the tax deferral guidance outlined in the memorandum. 

So, what are the operations questions that employers and employees need answers to before any deferrals can begin? Here are some that come to mind:

  • Does the employer or the employee elect to defer taxes?
  • If it is an employee election, how is that election made?
  • How do bonuses, commissions, or other irregular payroll items impact the $4,000/biweekly compensation limit?
  • When and how are amounts deferred due to be paid by the employee?
  • Are the amounts deferred repaid in a lump sum or in installments?
  • How does an employer report the deferred taxes to the IRS?
  • What happens if an employee who is deferring taxes stops working for the employer? Is the employer responsible for collecting the taxes that were deferred?
  • How quickly can payroll systems be set up to accommodate the payroll deferral?

At the moment, all employees and employers can do is wait for the relevant guidance. Hopefully, guidance is issued soon but it is unlikely any employees can begin the tax deferral on September 1st. 

As soon as guidance is issued, we will be sure to communicate the requirements and timing.

Article
To withhold or not to withhold payroll taxes―The dilemma facing employers