As companies of all types and sizes continue to deal with the potential legal implications of the COVID-19 pandemic for their businesses, Jackson Walker provides insights and resources on the COVID-19 Legal Resources & Insights site.
By Greta Cowart
The American Rescue Plan Act (the “Relief Act”) expands dependent care assistance tax credits to 50% from 35% and increases the dollar limitation. While this is an individual income tax question, employers offering dependent care assistance will need to understand the changes to the credit so they can properly answer questions and review any disclosures regarding using the dependent care assistance flexible spending account instead of the dependent care credit.
Per Section 9631 of the Relief Act, the dollar amount of the credit for one child increases from $3,000 to $8,000, and the credit is made refundable if either parent’s principal place of abode for more than half of the tax year is in the United States.
In addition, the amount that is excludable for employer-provided dependent care assistance—for example, dependent care assistance flexible spending accounts—is increased for tax years beginning after December 31, 2020, and before January 1, 2022, meaning this change is effective only for calendar year 2021. During that period, the dependent care assistance is increased to $10,500 for married individuals filing a joint income tax return and to $5,250 for married individuals filing a separate individual income tax return.
An employer may adopt this higher limit for calendar year 2021 if such amendment is adopted by the last day of the plan year in which the increased limit is effective—for calendar year plans, that would be December 31, 2021. For employers that have completed annual enrollment for their 2021 plan year, previously issued relief from the Internal Revenue Service may allow such employers to offer a period during which individuals may make changes to take advantage of the higher limit for 2021.
Extension of Paid Sick Leave Tax Credits From Previous Relief Legislation
The credit for paid sick leave under the Families First Coronavirus Response Act (FFCRA) is extended for absences and paid leaves provided by employers in 2021. In addition to the original three reasons, the Relief Act expands the Emergency Paid Sick Leave Act to also cover time off
- when the employee is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19 because the employee had been exposed to COVID-19 or the employer has requested the employee obtain a COVID-19 test or diagnosis; or
- if the employee is obtaining a COVID-19 vaccination or is recovering from any injury, disability, illness, or condition related to the immunization.
The maximum number of days for which the credit can be obtained is still limited to a maximum of 10 days less the number of such leave credit days taken into account in the preceding quarters in the calendar year, as a general rule.
The paid sick leave credit applies even though the mandate to provide paid sick leave under the FFCRA has expired. The Relief Act further explains that health benefits expenses and amounts paid toward certain collectively bargained pension plans are considered and how they are included in the calculation of the wages for which a credit can be obtained. A credit taken on wages for paid sick leave can only be applied to wages that are not also used for the Indian Employment Credit, the wage credit for employees on active military duty, the credit for voluntary employee paid family and medical leave, the payroll credit for paid family leave, and the employee retention credit for employers subject to closure due to COVID-19. The credit remains refundable. Employers taking this credit need to be aware that requesting the credit means the return on which it is taken can be challenged for five years after that return is filed. The credit for paid sick leave does not apply to qualified sick leave wages paid by an employer that are used as payroll costs in connection with certain small business loans, economic aid loans for certain small businesses, nonprofits, and venues, or under the American Rescue Plan of 2021. If paid sick leave is used to support forgiveness of a Paycheck Protection Program (PPP) loan and such requested forgiveness is not granted for certain reasons, the amounts will still be treated as eligible for the paid sick leave credit.
If an employer discriminates in favor of highly compensated employees, full-time employees, or employees based on the tenure with the employer in determining the availability of the qualified paid sick leave, the employer loses the credit for such paid sick leave.
Paid Family Leave Credit Extended
The credit provided with the Emergency Family and Medical Leave Expansion Act added by the FFCRA was also extended. The credit continues to apply to wages paid for the reasons specified in the original act, but also includes now leave provided for an employee:
- seeking or awaiting the results of a diagnostic test for, or a diagnosis of, COVID-19 if such employee has been exposed to COVID-19, or if the employer has requested such a test or diagnosis; or
- obtaining immunization related to COVID-19 or recovering from any injury, disability, illness or condition related to such immunization after the public health emergency.
The wages for which the credit can be obtained have been expanded from $10,000 to $12,000.
If an employer fails to comply with the Family and Medical Leave Act or any provision of the Emergency Family and Medical Leave Expansion Act (without regard to any time limit for claims for a leave related to a public health emergency), the amounts paid by the employer with respect to such leave will not be considered eligible for the credit. An employer that takes any action which is discriminatory against any individual for requesting family medical leave or which interferes with, restrains, or denies the exercise of an attempt to exercise any rights provided under the Family and Medical Leave Act will be treated as failing to satisfy the requirements to be able to claim the credit. (Relief Act section 3132)
The credit continues to apply to qualified health plan expenses and to defined benefit plan contributions pursuant to collectively bargained agreements. The credit continues to be used as an offset to certain employment taxes. Like the paid sick leave credit extension, an employer may not double-dip and obtain other credits based on the same wages. The period during which the IRS can access the employer regarding the credit is at least five years from the date the request for the credit is filed or treated as filed.
This credit is also coordinated with small business loans and the PPP loans similar to the way the credit for the paid sick leave extension is coordinated above. Payroll costs that were not approved for use to forgive certain PPP loans for certain specified reasons may still be treated as qualified family leave act wages available for claiming the credit.
Employee Retention Credit
The employee retention credit is extended from June 30, 2021, through December 31, 2021, but under a new set of rules. These changes to the employee retention credit do not impact amounts eligible for the credit prior to July 1, 2021, as those remain under the prior rules explained in an earlier alert.
The new employee retention credit will be 70% of qualified wages of up to $10,000 for each employee for each calendar quarter. There are special rules for businesses that were not in existence on February 15, 2020. This summary will not address the special rules for recovery startup businesses. The credits again will offset employment taxes, and excess credits will be refundable.
In order to be eligible to claim the employee retention credit after June 30, 2021, the employer must be carrying on a trade or business during the calendar quarter for which the credit is sought, and the operation of the trade or business must be fully or partially suspended during that calendar quarter due to orders from an appropriate governmental authority affecting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19, or the gross receipts of that employer for such a calendar quarter must be less than 80% of the gross receipts the employer had for the same calendar quarter in calendar year 2019, or else the employer must be a “recovery startup business.”
Qualified wages must be wages paid to a full-time employee as defined in Code section 4980H, which in simplified terms means they must work 30 or more hours per week on the average. Severely financially distressed employers are eligible if their gross receipts are less than 10% of the rate of gross receipts in the prior year’s calendar quarter. Health plan costs continue to be allocated as part of the wages included when claiming the credit.
An employer’s eligibility for the employee retention credit is determined based on the employer’s controlled group (as determined in code section 52(a) and (b) and 414(m) and (o)). This credit does not apply to the United States government or the government of any state or political subdivision or any agency or instrumentality of any of the foregoing.
Wages that do not qualify under the paid leave credit with respect to certain small business loans also do not qualify for the employee retention credit. Similar provisions to those with respect to the wages used in a claim for forgiveness under the PPP program and for which forgiveness was denied for certain reasons will still be eligible.
Employers with fewer than 501 full-time employees are eligible to elect for any calendar quarter to receive an advance payment of the credit in an amount not to exceed 70% of the average quarterly wages paid by that employer in calendar year 2019. There are special elections available to employers who employ a specific type of seasonal worker. If an employer claims the employee retention credit after June 30, 2021, the employer’s payroll tax returns supporting how much credit is requested are subject to audit by the Internal Revenue Service for up to five years following the date on which they were filed (or deemed filed).
Additional Insights on the American Rescue Plan Act:
- American Rescue Plan Act and the COBRA Subsidy – Déjà Vu All Over Again »
- Multiemployer Pension Plan Changes in the American Rescue Plan Act »
- JW Coronavirus Insights & Resources microsite »
- COVID-19 & Your Business: Frequent Questions »
- JW Fast Takes Podcasts & Webinars »
- Sign Up for JW eAlerts »
Please note: This article and any resources presented on the JW Coronavirus Insights & Resources site are 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.