Public Employers Now Eligible to Claim Tax Credits for Voluntarily Providing COVID Leave

School districts and other state and local public employers have a new tool to mitigate the costs of providing paid sick and family leave due to COVID-19. These employers can temporarily access the same kind of tax credits formerly only available to private sector employers.

Governmental Employers of Any Size Eligible

The American Rescue Plan Act of 2021 (ARPA) provides refundable tax credits previously available only to small and midsize private employers and expands them to include non-federal governmental employers of any size. These tax credits are available for wages paid for qualifying leave from April 1, 2021, through September 30, 2021.

Qualifying Leave Types

While the mandatory leave provisions in last year’s FFCRA1 sunset at the end of 2020, employers may voluntarily continue to give employees leave for the qualifying reasons under that law:

Employee was under government quarantine/isolation,
Employee was self-isolating at the direction of a health care provider,
Employee was experiencing COVID-19 symptoms and seeking a medical diagnosis,
To care for an individual who was subject to quarantine or isolation, or
To care for a child whose school or care provider was closed or unavailable due to COVID-19 precautions.

The ARPA includes three additional qualifying reasons for paid leave:

Leave taken while seeking or awaiting the results of a test for or a diagnosis of COVID-19,
Leave taken to receive COVID–19 vaccinations, or
Leave taken to recover from any injury, disability, illness or condition related to the vaccinations.

Some employers have asked whether they must voluntarily offer leave for all of these reasons. To avoid potential discrimination claims, if an employer decides to provide the voluntary leave, it is a best practice to allow leave for all legally qualifying purposes.

The ARPA also expands the list of qualifying reasons for paid FMLA2 (sometimes referred to when discussing the FFCRA as “expanded FMLA”) to include all the eligible reasons listed above. Previously, expanded FMLA was only available to employees caring for a child whose school was closed or whose care provider was unavailable. The ARPA also eliminated the initial two-week unpaid period at the beginning of the paid family leave period. This means that an employee could potentially access paid leave for up to 12 weeks, depending on how much FMLA the employee has already used for non-FFCRA qualifying purposes. Paid sick leave banks for all eligible employees reset as of April 1, 2021, meaning that even employees who exhausted their available leave during 2020 or the beginning of 2021 can take up to 10 days of emergency paid sick leave. An employee’s access to paid leave under the expanded FMLA will depend on how much FMLA they have remaining during the employer’s designated 12-month FMLA period.

How to Calculate the Credits

Calculate the tax credit for paid sick leave wages by totaling the amount paid for COVID-19 related reasons for up to two weeks (80 hours), limited to $511 per day and $5,110 in the aggregate, at 100 percent of the employee’s regular rate of pay.
Calculate the tax credit for paid family leave wages by totaling the amount paid for up to twelve weeks, limited to $200 per day and $12,000 in the aggregate, at 2/3rds of the employee’s regular rate of pay.
Employers may also include health plan expenses and contributions to certain collectively bargained benefits, as well as the employer’s share of social security and Medicare taxes paid on the wages (up to the respective daily and total caps).

How to Claim the Credits

The paid leave credits under the ARPA are refundable tax credits against the employer’s share of the Medicare tax, so employers will receive a payment for the amount of the credit that exceeds the employer’s share of the Medicare tax.

To claim the credits, eligible employers will use their federal employment tax return (usually Form 941, Employer’s Quarterly Federal Tax Return) to report:
their total paid sick and family leave wages,
eligible health plan expenses,
collectively bargained contributions, and
the eligible employer’s share of social security and Medicare taxes on the paid leave wages.

To prepare to file Form 941, employers should:

Keep the federal employment taxes that they otherwise would have deposited with respect to all employees up to the amount of credit for which they are eligible.
This includes federal income tax withheld from employees, the employees’ share of social security and Medicare taxes, and the eligible employer’s share of social security and Medicare taxes.

If an eligible employer does not have enough federal employment taxes set aside to cover amounts provided as paid sick and family leave wages, they may request an advance of the credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Watch Out for New Non-Discrimination Rules

The ARPA creates new non-discrimination rules stating that no tax credit is available if the employer discriminates in favor of highly compensated employees, on the basis of employment tenure (seniority), or by providing leave only to full-time employees.

What You Need to Do Now

Government employers choosing to voluntarily extend COVID related leave to employees during the April-September 2021 timeframe should consult with their tax advisors to ensure they qualify for the tax credits and are taking all necessary steps to claim the credits.

This blog is up to date as of May 2021 and has not been updated for changes in the law, administration or current events.