American Rescue Plan Tax Credits for Employers Who Voluntarily Provide Paid Sick Leave and Paid Family and Medical Leave (US)
On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (the “Rescue Plan”). This post reviews Section 9641 of the Rescue Plan, which makes available tax credits to certain employers who voluntarily provide paid time sick leave and family and medical act leave to employees for absences occasioned by the pandemic, from April 1, 2021 through September 30, 2021.
Section 9641 of the Rescue Plan is based on the paid sick leave and paid family and medical leave provisions that were effective April 1, 2020 through December 31, 2020, under the Families First Coronavirus Response Act (“FFCRA”). Although the mandatory paid leave provisions of the FFCRA were not extended past December 31, 2020, the tax credits available under Section 9641 of the Rescue Plan are based on the framework of the FFCRA, with certain modifications.
This post will first review the FFCRA, and then explain how the Rescue Plan’s tax credits work.
The FFCRA applied to (i) all public employers, and (ii) private employers with fewer than 500 employees.
The FFCRA required a covered employer to provide a minimum amount of paid time off for emergency paid sick leave (“EPSL”) for one of five pandemic-related reasons:
The employee being subject to a government quarantine or isolation order.
The employee being advised by a health care professional to self-quarantine.
The employee experiencing COVID-19 symptoms and seeking a medical diagnosis.
The employee caring for an individual who is subject to a government quarantine or isolation order, or who has been advised to self-quarantine by a health care professional.
The employee caring for a son or daughter whose school or place of care has been closed or whose childcare provider is unavailable,
Under the FFCRA, the maximum number of available EPSL hours was 80 hours. A lower threshold applied for part-time employees.
A covered employer was required to pay 100% of the employee’s daily wages, up to a maximum of $511 per day, to eligible employees taking EPSL to address their own symptoms, diagnosis, or isolation orders (reasons 1-3 above). Other eligible employees (reasons 4 and 5 above) were entitled to payment of two-thirds (2/3) of their daily wages, up to a maximum of $200 per day.
The FFCRA also provided up to 12 weeks of emergency paid family and medical leave (“EPFL”) for employees who were unable to work or telework due to:
(i) a need to care for a son or daughter under the age of 18, due to a school or place of care being closed due to a public health emergency, or
(ii) the child care provider of a son or daughter under the age of 18 not being available due to a public health emergency.
For this purpose, a “public health emergency” was defined as “an emergency with respect to COVID-19 declared by a Federal, State, or local authority”.
The first two weeks of EPFL leave were job-protected but unpaid (unless they coincided with EPSL). After that time, an employee would be entitled to two-thirds (2/3) of his or her daily wages, up to a maximum of $200 per day, subject to a $10,000 maximum per employee.
To help offset this burden for private sector employers, Congress provided tax credits equal to 100% of the wages that were paid by the employer to meet the requirements of the FFCRA. Thus, essentially, this was intended to be a no-cost obligation of the employer.
These credits were claimed against an employer’s obligation to pay the “OADSI” portion of social security taxes for each calendar quarter in which qualified EPSL or EPFL wages were paid. The credits were refundable if the credit exceeded the employer’s OASDI tax obligations and also could be claimed in advance as an offset to required tax deposits of the employer. No tax credits were provided for public sector employers.
Extension of the Tax Credits – January 1, 2021 through March 31, 2021
The FFCRA expired on December 31, 2020. Thus, beginning January 1, 2021, employers were no longer required to provide federal EPSL or EPFL to employees who might be absent from work due to pandemic related reasons.
However, Section 286 of the Consolidated Appropriations Act of 2021 (the omnibus budget bill) provided that if a covered employer did provide EPSL and EPFL between January 1, 2021 and March 31, 2021 (presumably for the same reasons and under the same conditions as existed when the FFCRA was in effect), the employer could continue to be entitled to a 100% tax credit for the amount of those payments, through March 31, 2021.
In other words, even though a covered employer was not required to provide EPSL or EPFL after December 31, 2020, the employer could voluntarily do so throughout the first quarter of 2021, and continue to do so on a no-cost basis due to the available tax credits.
Extension of the Tax Credits – April 1, 2021 to September 30, 2021
The Rescue Plan did not revive the FFCRA framework. Thus, employers are still no longer required to provide federal EPSL or EPFL to employees.
However, Section 9641 of the Rescue Plan once again extends the 100% tax credit to a previously covered employer who voluntarily provides EPSL and EPFL from April 1, 2021 through September 30, 2021. Specifically, Section 9641 of the Rescue Plan does so in Internal Revenue Code (the “Code”) Sections 3131, 3132 and 3133.
These credits may be claimed on a quarterly basis against the employer’s share of the Medicare taxes (i.e., taxes imposed under Code Section 3111(b)) owed by the employer. Once again, a refund may be claimed if the amount of the credit exceeds the employer Medicare taxes due in a calendar quarter. The employer also is permitted to take an advance against the tax credit when making employment tax deposits.
In general, in order for an employer to claim the available tax credits, the employer is required to comply with all of the obligations that were previously set forth in the FFCRA regarding the payment of EPSL and EPFL, job protection and restoration, and non-retaliation. However, Section 9641 of the Rescue Plan has modified those requirements in certain respects discussed below.
Modified EPSL Requirements
The following is a summary of the modified EPSL requirements that must be met in order to claim the tax credits that are available under Code Section 3131:
Additional time off: The FFCRA required that, for full-time employees, EPSL be paid for a total of no more than 80 hours from the date of the law’s enactment through the end of 2020. For part-time employees, EPSL entitlement was based on the average number of hours the employee worked in a two-week period. Under the FFCRA, the tax credit was only available to an employer for a maximum of 10 EPSL days.
These requirements have been retained in Code Section 3131. If participating in the extended tax credits, employees are permitted to take an additional EPSL up to 80 hours regardless of how much EPSL has been used in preceding quarters.
Broader Coverage: The FFCRA only permitted EPSL to be used for one of the five covered reasons noted above. For reasons (1)-(3), to obtain the tax credit, an employee is entitled to full payment (100%) of his or her daily wages, up to $511 per day. The tax credit will likewise be provided for wages paid up to $511 per day.
For reasons (4)-(5), an employee is entitled to payment that is at least two-thirds (2/3) of his or her daily wages, at least up to $200 per day. The tax credit will likewise be provided for wages paid up to $200 per day.
Under Code Section 3131, the five original reasons for EPSL payments continue to be grounds for EPSL eligibility. In addition, if taking advantage of the tax credit, the employer must make available EPSL for the following additional reasons:
A covered employee is absent from work because the employee is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19, provided that the employee has been exposed to COVID-19 or the employer has requested that the employee obtain such test or diagnosis.
An employee is obtaining immunization related to COVID-19.
An employee is recovering from any injury, disability, illness, or condition related to an immunization for COVID-19.
If EPSL is provided for any of the foregoing reasons, the employer must pay full (100%) of the employee’s daily wages, up to $511 per day. Likewise, the tax credit will be provided for the wages paid up to $511 per day.
It is unclear whether “obtaining immunization” refers only to the time waiting in line or at a dispensing location for the vaccination shot(s), or whether it can be interpreted more broadly to include time spent waiting for an appointment, an important qualification for employers adopting or considering mandatory vaccination policies.
Modified EPFL Requirements
The following is a summary of the modified EPFL requirements that must be met in order to claim the tax credits that are available under Code Section 3132:
To qualify for the tax credits available under Code Section 3132, EPFL must be paid to employees for all of the following reasons:
All of the original reasons in the FFCRA when it was enacted (i.e., to care for children under age 18 whose school or daycare was closed or whose day care provider was unavailable due to a public health emergency).
Any of the three expanded reasons described above that are now included as bases for taking EPSL (e.g., COVID-19 testing and immunization).
EPFL Payment Amounts: As has been noted above, EPFL is paid at 2/3 of an employee’s daily wages, up to a maximum of $200 per day.
To claim the credit under Code Section 3132 for EPFL, the employer may no longer choose not to pay employees during the first 10 days of the leave, as was originally provided for under the FFCRA.
Because of the elimination of the 10-day unpaid period, in 2021, an employer might pay wages to an employee that qualify as both EPSL and EPFL, resulting in the employer potentially being entitled to claim credits under both Code Section 3131 (EPSL) and Code Section 3132 (EPFL) for the same wages. If that should occur, the employer must claim the credit under Code Section 3131 (EPSL). The amount of that credit will then reduce any credits that are available under Code Section 3132 (EPFL).
Increase to EPFL Caps: Under the FFCRA, up to twelve weeks of job-protected EPFL was available to eligible employees, and the total EPFL benefit obligation was capped at $10,000 per employee. Under Code Section 3132, up to $12,000 in EPFL benefits are available and the maximum tax credit for wages paid is thus extended to $12,000.
Other Tax Credit Matters under the Rescue Act
Enhancements to the Tax Credits: Code Sections 3131(d)(1) and 3132(d)(1) increase the amount of the tax credit that is available to an employer by a portion of the employer’s “qualified health plan expenses” as are properly allocable to the EPSL and EPFL wages which a tax credit is allowed.
Essentially, qualified employer health plan expenses are amounts paid by an employer for coverage under a group health plan, to the extent excluded from an employee’s gross income under the tax law (Code Section 106). The IRS is to prescribe methods for allocating health care costs to employee wages.
Code Sections 3131(e) and 3132(e) also permit an increase in an employer’s tax credits if an employer is making collectively bargained contributions to a multiemployer defined benefit pension plan. The credits are allowable to the extent that those contributions are properly allocable to EPSL and EPFL wages for which a tax credit is allowed
A similar increase to the tax credit also is allowed for an employer’s collectively bargained contributions to certain “registered apprenticeship programs”.
Exceptions: The Rescue Plan sets forth a number of exceptions from eligibility for the tax credit. For example, employers cannot “double dip” by counting EPSL or EPFL wages toward any employer retention credits credit that are claimed by the employer under Section 2301 of the CARES Act.
In addition, tax credits are not allowable for EPSL and EPFL wages paid to the following extent:
The wage payments are used to provide for loan forgiveness under Section 7(a)(37) or 7A of the Small Business Act (the Paycheck Protection Program);
The wage payments are made from grants given to the employer under Section 324 of the Economic Aid to Hard-Hit Small Businesses, Non-profits, and Venues Act; or
The wage payments are made from restaurant revitalization grants made under Section 5003 of the Rescue Plan.
Code Section 3131(j) and Code Section 3132(j) add new nondiscrimination requirements to the law as a condition of obtaining the tax credits under Code Sections 3131 and 3132 for EPSL and EPFL payments to employees.
Code Sections 3131(j) and 3132(j), no tax credit is allowable to an employer for any calendar quarter if, with respect to the availability of EPSL or EPFL payments, the employer discriminates in favor of:
highly compensated employees,
full-time employees, or
employees on the basis of tenure.
For this purpose, the term “highly compensated employee” (“HCE”) is defined in Code Section 414(q). In general, an employee will be an HCE for calendar year 2020 if he or she had more than $130,000 in compensation in 2019 or is a 5% owner of the business.
Although the tax credits that are being made available to employers are designed to allow an employer to provide the EPSL and EPFL payments at no cost to the employer, it might be difficult for an employer to offer additional sick leave or additional family and medical leave to all employees, including part-time employees, without incurring at least some additional costs. Thus, these nondiscrimination rules might be a bit of a red herring that could dissuade employers from using these provisions. Prompt guidance form the IRS on these nondiscrimination rules is certainly desirable.
Like many hastily-drafted laws, Section 9641 of the Rescue Plan does have some unanswered questions. While it certainly is designed to provide that employers may extend the payment of additional sick leave and family leave benefits at no cost to the employer, employers will still need to weigh the economic and non-economic costs of doing so. Factors an employer might consider are the needs of their workforce, the severity of the virus outbreak in the employer’s area, the demand for labor in the next two quarters, and the likelihood that risk mitigation strategies such as environmental and engineering controls, increased vaccination rates, and dropping infection rates may make it unlikely that employees have a continuing need for time off related to the pandemic.
 P.L. 117-2 (March 11, 2021)
 P.L. 116-127 (March 18, 2020).
 P.L. 116-260 (December 21, 2020).
 This was part of the Consolidated Appropriations Act of 2021 (the Omnibus Budget Bill) – P.L. 116-260 (December 21, 2020)