COVID-19 & Your Business: Frequent Questions

What records must an employer maintain in order to claim the tax credit for the EPSLA or EFMLEA leaves?

According to the U.S. Department of Labor, in order to claim tax credits from the Internal Revenue Service (IRS), an Employer is advised to maintain the following records for four years:

(1) Documentation to show how the Employer determined the amount of paid sick leave and expanded family and medical leave paid to Employees that are eligible for the credit, including records of work, Telework and Paid Sick Leave and Expanded Family and Medical Leave- watch for the final IRS Form 7200 and other IRS guidance such as the IRS FAQs on their website (and updates to such FAQs).

(2) Documentation to show how the Employer determined the amount of qualified health plan expenses that the Employer allocated to wages (this requires a specified calculation that will require significant data to be gathered and maintained – see the JW alert on the IRS Guidance from April 3, 2020 on the JW website.

(3) Copies of any completed IRS Forms 7200 that the Employer submitted to the IRS;

(4) Copies of the completed IRS Forms 941 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 IRS Form 941, and

(5) Other documents needed to support its request for tax are described below.

Record Retention Requirements for Claiming the Credit for Paid Sick Leave– An employer claiming the credit for the paid sick leaves needs to retain substantiation of the credit claimed, which should include documentation related to and supporting each employee’s leave and paid leave, health plan costs for the period of the leave, including the Forms 941 for each calendar quarter, each Form 7200 filed and the documentation reconciling the amount of the credit taken and the deposits of payroll taxes offset. This means that to claim the cost of the health plan as part of the credit, employers need to retain documentation of how they calculated the cost of their health plan coverage for each of the various tiers of coverage for each plan year.

An employer needs to be able to prove it did not use the employment tax deposit offset for paid leave wages and also file for an advance credit on those same paid leave wages for that employee because this is an employee by employee calculation.

Employee Certification Requirements as Part of the Record Retention Requirements.  An employer needs to retain the written request for the leave provided by the employee which includes: employee’s name, date or dates for which leave is requested, a statement of the COVID-19 related reason the employee is requesting leave and written support for the reason, and a statement that the employee is unable to work, including by means of telework, for such reason.

If the paid sick leave is based on a quarantine order or self-quarantined advice, the statement from the employee must include the name of the governmental entity ordering the quarantine or the name of the health care professional advising self-quarantine, and if the person subject to such quarantine is not the employee , the person subject to such advice and his or her relation to the employee.

If the paid sick leave is based on the closing of a school or child care provider being unavailable, then the employee’s statement must include the name and age of the child to be cared for, the name of the school that closed or the place of care that is not available and a representation that no other person will be providing care for the child during the period for which the employee is receiving the FMLA expansion leave.

If the FMLA expansion leave is requested for a child who is over 14 years during daylight hours because the employee is unable to work or telework, the statement must state that special circumstances exist requiring the employee to provide the care for the child over 14 years.

Calculation of the Additional Credit Due to Health Plan Cost Related to the Paid Sick Leave. The health plan costs are not subject to the dollar cap of wages for which the credit is available each day $200 or $511. The health plan costs are allocated on a pro rata basis among covered employees, for example, the average premium for all employees covered by a policy, pro rata based on the periods of coverage  relative to the time periods of leave to which such wages relate. (So if the EPSLA leave lasted 14 days and this included 1 weekend, then 16/30th of the average premium for all employees covered would be the cost allocated to the credit.)

Health Plan Cost Inclusion Calculation of the Average Premium.  The average premium is calculated by the separate benefit option and calculated for each separate option. The cost of each plan is allocated to the employees participating in that plan.  The costs that go into the average premium include both the employer and the employee’s pre-tax share of the premium, but not any employee post tax payments for the premium. An employer may use any reasonable method to allocate the health plan expenses, including using the COBRA applicable premium from the insurer, an average premium rate for all employees or a substantially similar method that takes into account the average premium rate for employees with self-only coverage as one group and the other group at the other than self-only coverage rate.

Calculation of the Average Premium for a Self-Insured Health Plan. For employers with self-insured group health plans, they may use any reasonable method to determine and allocate the plan expenses including using the COBRA applicable premium, or any reasonable actuarial method to determine the estimated annual expenses of the plan.  The estimated annual expense would be divided by the number of employees covered and then again by the average number of work days during the year by the employees, treating days of paid leave as work days and this leaves with an amount  allocated to each day of leave.  Employer contributions to an HSA or Archer MSA are not included in the calculation of the qualified health plan costs.  Employer contributions to an HRA or ICHRA  or health FSA are included in costs, but employer contributions to a QSEHRA are excluded from such costs.

Calculation Records to be Retained. Records demonstrating how the employer determined the amount of qualified sick or family leave wages were paid to each employee, the employee’s eligibility for the credit, including records of work, telework and the two types of qualified leave, Records of how the qualified health plan expenses for which the credit is requested must be maintained. Completed forms 7200 and 941.

Record Retention Duration. An employer claiming the credit should retain any other filings or communications regarding the credit claimed. The Department of Labor regulations and IRS Q&As indicated these records should be retained for 4 years after the date the tax became due or is paid, whichever is later.  Since many tax records are maintained for three years after the return is filed, it is important to note that these records require a longer retention period.

Last updated April 9

These materials are made available by Jackson Walker for informational purposes only, do not constitute legal or medical advice, and are not a substitute for legal advice from qualified counsel. The laws of other states and nations may be entirely different from what is described. Your use of these materials does not create an attorney-client relationship between you and Jackson Walker. The facts and results of each case will vary, and no particular result can be guaranteed.