By Greta Cowart
Payroll Tax Relief Under CARES Act, FFCRA, and Executive Order
Ashley Withers contributed to this section
While the Coronavirus Aid, Relief, and Economic Security (CARES) Act permitted employers to defer depositing the portion of the FICA taxes the employer pays on an employee’s taxable wage base of up to 6.2% of the employee’s wages, it did not originally extend to all employers. In June, the Paycheck Protection Program (PPP) Flexibility Act became law and the deferral of the payment of FICA taxes was expanded to make it available to all employers, including those receiving a PPP loan forgiveness so that all employers are eligible to defer depositing the 6.2% of the taxable wage base of each employee with payroll taxes for amounts paid between March 27, 2020, through December 31, 2020. Such deferred payroll taxes must be paid as follows:
- On December 31, 2021, 50% of the amount deferred must be paid to the Internal Revenue Service (IRS)/Department of Treasury; and
- On December 31, 2022, the remaining balance due (the other 50%) must be paid.
The IRS also issued an updated manual related to employment taxes and the credits for the mandated paid leaves, employee retention credit, and deferral of deposit of the employer payroll taxes and filing Form 7200 to request a refund of the payroll taxes under the Families First Coronavirus Response Act (FFCRA) and the CARES Act which provides a list of common mistakes.
View the “Deferral of employment tax deposits and payments through December 31, 2020” FAQ page on the IRS website »
In addition to the above, on August 8, 2020, President Donald J. Trump issued an executive order deferring the withholding, deposit, and payment of employee payroll tax contributions for wages paid from September 1, 2020, to December 31, 2020.
The deferral only applies to the employee’s payroll tax (imposed by 26 U.S.C. § 3101(a)) and not the employer’s payroll tax (imposed by 26 U.S.C. § 3111(a)). Employers already have the option to defer the deposit and payment of the employer’s FICA tax as discussed above.
The employee payroll tax deferral is only available to employees making “generally less” than $4,000 biweekly ($104,000/year).
The deferred taxes have not been waived or forgiven, but the Secretary of the Treasury was instructed to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”
It remains to be seen how the employee payroll tax deferral will be implemented administratively by the IRS. If the IRS follows suit as it did with the employer social security tax deferral, IRS guidance will likely be provided in the coming weeks and may include further revisions to Form 941 Employer’s Quarterly Federal Tax Return to account for the new deferral.
Such guidance will be needed, especially for employers with employees who leave their employment in 2021, when the deferred payroll taxes will be due, and the employer, as the withholding agent of the employee payroll taxes, will presumably be required to collect and remit the taxes to the IRS.
Retirement Plan Developments
Defined Benefit Pension Plan Contribution Relief Under CARES
The CARES Act also permitted employers sponsoring single-employer defined benefit pension plans to elect to delay payment of their minimum required contributions that would have been due during calendar year 2020 until January 1, 2021, but required the employer to increase such contributions for interest from the original due date (either quarterly or annual) until paid. The date of depositing such contributions has a number of other ramifications such as on the calculation of the Adjusted Funding Target Attainment Percentage, funding related elections and the actuarial certification of the funded status which determines whether any benefit restrictions related to the funded status are triggered. The IRS issued Notice 2020-61, which tackles all of these inter-related requirements and how this relief applies in the context of a calendar year plan and of a fiscal year plan. Employers who are contemplating using the deferral of the required minimum contribution due in 2020 should consider contacting their actuary to be certain all of the considerations related to such decision and related elections are coordinated.
Because the funding level and failure to make minimum required contributions also impacts requirements under the governance of the Pension Benefit Guaranty Corporation (PBGC), the PBGC also provided updated FAQs related to the impact of the CARES Act. Since the required minimum contributions due in 2020 have been extended until January 1, 2021, the employer does not need to report to the PBGC that it missed the 2020 minimum required contribution; however, if the employer misses the extended due date of January 1, 2021, then the report to the PBGC varies based on the amount of contributions missed. This report can be due as early as January 11, 2021.
The 2020 variable rate premium is due to be paid to the PBGC on October 15, 2020. The CARES Act moved the last required contribution to after the due date for the variable rate premium, but the PBGC relief is more limited based on its governing laws and it permits employers to include the discounted value of contributions for 2019 paid in 2020 after September 15, 2020, and before the variable rate premium is filed, to be included in the assets value for calculation of the variable rate premium on a discounted value. However, if the contribution is not made until after the variable rate premium is filed, it is not included in the assets for calculation of the variable rate premium. Employers working to minimize their obligation to pay variable rate premiums to the PBGC will need to consider the impact of the potential deferral of the contribution due in 2020 on their PBGC variable rate premium.
New IRS Model Rollover Notices Released
The rules related to when retirement plan participants must start to take retirement plan distributions were changed late in 2019 with the enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and by the CARES Act. The changes were previously discussed for plan sponsors in a prior IRS Notice, and now the notices provided to employees when receiving a distribution of their retirement funds have also been updated. The new model notices will apply until the law changes at some time after August 6, 2020, when the new model forms were issued.
401(k) Safe Harbor Contribution Change Relief
Normally, 401(k) safe harbor matching and non-elective contributions must last for the full plan year except in certain very limited circumstances. Temporary relief from the requirement that 401(k) safe harbor matching on non-elective contributions continue for a full plan year was provided for amendments adopted between March 13, 2020, and August 31, 2020, that reduce or stop such safe harbor matching or non-elective contributions mid-year. Notice 2020-52 provides the limited relief in permitting the reduction or suspension to occur even if the supplemental notice is not provided to eligible employees 30 days in advance of going into effect as long as the notice is provided before August 31, 2020, and the plan amendment reducing or suspending the safe harbor contribution is adopted no later than the date the reduction or suspension is effective. This relief eliminates the requirement that the employer be operating at an economic loss or must have included in the prior safe harbor notice an ability to change the safe harbor contribution.
Notice 2020-52 also included a reminder that safe harbor matching and non-elective contributions can always be eliminated, provided the safe harbor notice is modified. If an employer is considering cost cutting measures, but may not be sure that it meets the operating at an economic loss normal criteria to cease safe harbor contributions under the general rule, this special option expires by the end of this month August 2020.
Other retirement plan guidance has been issued on required minimum distributions and CARES Act distributions and loans, financial factors in selecting plan investments and electronic disclosure of plan information to participants. This alert is not intended to address all developments for retirement plans.
Coronavirus-Related Non-Retirement Plan Guidance
Reporting of Qualified Sick Leave Wages and Qualified Family Leave Wages Paid Pursuant to FFCRA
Employers who pay emergency paid sick leave or emergency family and medical leave extension under the FFCRA will need to report the amounts of such wages paid to employees on the Form W-2, Box 14 or on a separate statement. The different types of wages need to be separately stated. IRS Notice 2020-54 provided guidance on the reporting of emergency paid sick leave and emergency family and medical leave extension pay for employers and for self-employed individuals. Employers need to be tracking the emergency paid sick leave and emergency family and medical leave extension paid by participant in order to be able to report these payments on Forms W-2 and for purposes of claiming the payroll tax credits under the FFCRA.
Leave Sharing Programs
Employers can establish leave sharing whereby an employee can contribute their time off to a pool of relinquished leave time that can then be allocated to other employees adversely impacted by a major disaster such as the coronavirus pandemic. The employee relinquishing the leave does not have an expense or deduction for giving up the leave and also does not have the income or wages from the relinquished leave. Leave sharing programs have been utilized in past natural disasters such as following hurricanes.
ACA’s Birth Control Mandate Challenge Update
The Affordable Care Act required group health plans to cover preventive care and permitted an agency to designate what services constitute preventive care. The list of preventive care required to be covered included birth control initially with no exception for any religious based exemption. The mandate was subject to numerous challenges. Regulatory exemptions followed and more challenges. The most recent religious exemption was promulgated as Interim Final Regulations in 2017 and again it was challenged by Little Sisters of the Poor Saints Peter and Paul Home v. Penn. The 2017 Interim Final Regulations significantly expanded the church exemption to include an employer that “objects… based on it sincerely held religious beliefs, to establishing, maintaining, providing, offering or arranging [for] coverage or payments for some or all contraceptive services.” It also created a “moral exemption” for employers with sincerely held moral objections to providing some or all forms of contraceptive coverage. The District Court issued a nationwide injunction against implementation of the Interim Final Regulations and the Third Circuit Court of Appeals affirmed the District Court’s order. Pennsylvania sued alleging that the 2017 Interim Final Regulations were procedurally and substantively invalid.
This case was appealed to the U.S. Supreme Court challenging whether the Interim Final Regulations with their expanded regulatory exemptions were validly promulgated within the agencies’ authority. The U.S. Supreme Court issued its decision on July 8, 2020, on whether the 2017 Interim Final Regulations were validly promulgated within the agencies’ authority. The Court’s decision upholds the agencies’ promulgation of the 2017 Interim Final Regulations. The case is not over though, it has been remanded back to the Third Circuit Court of Appeals to address its prior order affirming the District Court’s purported nationwide order invalidating the 2017 Interim Final Regulation. So, the Little Sisters of the Poor Saints Peter and Paul Home litigation saga will continue as we wait to hear from the Third Circuit Court of Appeals.
Greta E. Cowart has counseled employers for more than 30 years on best practices in human resources and employee relations issues related to benefits and executive compensation. In her practice, Greta routinely develops strategies for effective administration of claims and other disputes, including defense of grievances, and in litigation considering implications under ERISA, while also considering applicable labor and employment laws. Greta also provides fiduciary training and review of fiduciary operations to improve the documentation of the fiduciary process. Greta is a former chair of the Employee Benefits Committee of the ABA Section of Taxation, and has served on the U.S. Department of Health and Human Services CHIP Working Group.
Ashley P. Withers is an attorney in the tax practice of Jackson Walker’s Dallas office. She focuses her practice on tax planning for complex corporate, partnership, family, and inter-generational transactions as well as tax controversy matters including IRS audits and appeals. Her experience includes analyzing anti-conduit financing arrangements, 1099 and W-2 reporting compliance, taxability of litigation settlements, and tax implications of stock transfers in various situations. Ashley has become particularly adept at working with clients to understand and utilize Qualified Opportunity Zones (QOZs), which permit investors to sell or exchange appreciated assets, invest the gain in certain ventures within a geographically designated QOZ, and receive substantial tax benefits as a result.
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