The American Rescue Plan Act of 2021 (ARPA), signed by President Biden on March 11, 2021, extended and significantly modified the payroll tax credits for qualifying sick leave and family leave wages. Below is a summary of the key provisions.
Background: Both COVID-19-related credits were initially provided by the Families First Coronavirus Response Act and first applied to eligible wages paid from April 1, 2020, through December 31, 2020. In December of 2020 the Consolidated Appropriations Act of 2021 extended the credits, with some modifications, to apply to wages paid through March 31, 2021.
Extension of both credits. ARPA further extended both the paid sick leave credit and paid family leave credit to apply to wages paid through September 30, 2021.
Modifications to both credits. Beginning with respect to wages paid on April 1, 2021, ARPA made modifications to the credits. The following are the modifications that affect non-government employers:
- The credits are applied against the Medicare portion of payroll taxes instead of the OASDI (Social Security) portion. The Medicare portion taxes against which the credit is applied are those of all employees, not just employees to whom qualifying leave wages are paid. Additionally, the credits continue to be refundable (and thus allowed in excess of the Medicare taxes) and advance refundable (they can be applied against any employment taxes, including income tax withholding, for the quarter in which eligible leave wages are being paid, with any remaining credit refundable at the end of the quarter).
- Unlike under the Consolidated Appropriations Act of 2021, ARPA allows employers who voluntarily provide 80 hours of emergency paid sick leave and 12 weeks of emergency family leave beginning after March 31, 2021, to claim the leave tax credits, thereby resetting the leave bank regardless if the employee used leave previously or has exhausted leave.
- Reasons for eligible leave are expanded to include obtaining or recovering from COVID-19 immunization.
- The credits are increased by both the amount of the OASDI taxes paid and Medicare taxes paid with respect to eligible wages, instead of just the Medicare taxes.
- The credits are increased by the amounts of certain collectively bargained pension and apprenticeship program benefits. Under ARPA, the credits continue to be increased by qualified health plan expenses, but under clarified rules.
- Rules are provided that coordinate the credits with second draw Payroll Protection Program loans and certain government grants.
- The no-double-benefit rule, which disallows claiming both: 1) either of the above credits, and 2) the income tax credit for family or medical leave, is expanded to include similar coordination with certain other income and payroll tax credits.
- An employer is ineligible for the credits if, in providing paid leave, the employer discriminates in favor of highly compensated or full-time employees or on the basis of employment tenure.
- IRS is allowed an extended limitation-on-assessment period for deficiencies due to claiming either of the credits.
Modification to the paid sick leave credit. Effective beginning with wages paid on April 1, 2021, in determining whether the 10-day limit on eligible wages is complied with, only days after March 31, 2021, are taken into account.
Modifications to the paid family leave credit. Effective beginning with wages paid on April 1, 2021:
- The per-employee limit of wages taken into account is raised from $10,000 to $12,000.
- Reasons for eligible leave are expanded to include any qualifying reasons for taking paid sick leave.
- The two-week waiting period has been eliminated.
Contact your Yeo & Yeo professional if you have questions about the ARPA changes to the credits or how they apply to your business.