Larsson, Woodyard & Henson, LLP: Updated Family First and New CARES Acts Takeaways

See our updated version of this article that was posted on our blog on April 6.
https://larssonwoodyardhenson.blogspot.com/2020/04/updated-04-03-20-family-first-and-cares.html

Note that all of the information summarized below is current as of March 28, 2020 and is based off of the resources that were available at that time. There may be changes as more guidance is released.

Please contact us for further explanation and to discuss how these new acts will impact you.

Family First Coronavirus Response Act

Effective Beginning April 1, 2020

1. Emergency Paid Sick Leave Act

The Act requires up to two weeks of paid sick leave to all employees of employers with fewer than 500 employees. The Act covers both full-time and part-time employees, although part-time employees may not be entitled to a full two weeks of paid leave. Part-time employees are entitled to paid leave equal to the number of hours they work on average over a two-week period.

Paid leave is triggered by one of the following reasons:

· An employee is subject to a federal, state or local quarantine order related to COVID-19. (Businesses that are considered non-essential by the Governor’s stay-at-home order currently do not appear to be included in this even if the business remains open but employees are told not to work solely because of the stay-at-home order.)

· An employee has been advised by a healthcare provider to self-quarantine as a result of exposure to COVID-19.

· An employee is experiencing symptoms of COVID-19 and is seeking a medical diagnosis.

· An employee is caring for an individual who is subject to a self-quarantine or isolation order or has been advised by a healthcare provider to self-quarantine.

· An employee is caring for a child whose school (or daycare) has been closed.

· An employee has any other qualifying condition under rules to be set forth by the Secretary of the Treasury or the Secretary of Labor.

Notes: Hourly employees with fluctuating schedules will receive the equivalent pay for the average hours they would work per day over the prior 6-month period.

Wages paid under the Sick Leave and Expansion Act are subject to Medicare Tax but not Social Security Tax.

2. Emergency Family and Medical Leave Expansion Act

The Act provides up to 12 weeks of Family and Medical Leave if an employee is unable to work because the school or day care facility for a child under the age of 18 has been closed or the child’s babysitter or nanny is unable to work as a result of a COVID-19 emergency declared by the federal, state or local government. In order to be eligible, an employee must have worked for at least 30 days for the employer. In addition, the first 10 days of leave may be unpaid, however, they could be eligible for the two weeks of paid leave under the Sick Leave Act. The Act simply adds another reason an employee may take Family and Medical Leave. It does not increase the amount of leave available to an employee beyond what is already available under current law. Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed, or child care is unavailable in cases where the viability of the business is threatened. The exemption will be available on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer's business as a going concern. Labor will provide emergency guidance and rulemaking to clearly articulate this standard.

3. Employer Reimbursement

Employers receive 100% reimbursement for paid leave pursuant to the Act. This is accomplished by retaining the payroll tax deposit that would otherwise be required to be remitted to the IRS. If the payroll tax deposit is insufficient to cover the paid leave, the employer will be able to file a request for an accelerated payment from the IRS. (Procedure not yet available.)

Any credit received under this Act will be considered income to the employer for income tax purposes.

Paid Sick Leave Credit

For an employee who is unable to work because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis, eligible employers may receive a refundable sick leave credit for sick leave at the employee's regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days.

For an employee who is caring for someone with Coronavirus, or is caring for a child because the child's school or child care facility is closed, or the child care provider is unavailable due to the Coronavirus, eligible employers may claim a credit for two-thirds of the employee's regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days.

Child Care Leave Credit

In addition to the sick leave credit, for an employee who is unable to work because of a need to care for a child whose school or child care facility is closed or whose child care provider is unavailable due to the Coronavirus, eligible employers may receive a refundable child care leave credit. This credit is equal to two-thirds of the employee's regular pay, capped at $200 per day or $10,000 in the aggregate. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit.

Notes: Both credits are increased by the Employer Medicare Tax. Eligible employers are also entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Prompt Payment for the Cost of Providing Leave

When employers pay their employees, they are required to withhold from their employees' paychecks federal income taxes and the employees' share of Social Security and Medicare taxes. The employers then are required to deposit these federal taxes, along with their share of Social Security and Medicare taxes, with the IRS and file quarterly payroll tax returns (Form 941 series) with the IRS.

Under guidance that will be released soon, eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.

The payroll taxes that are available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees.

If there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less. The details of this new, expedited procedure will be provided by the IRS.

4. Non-Enforcement Period

Labor will be issuing a temporary non-enforcement policy that provides a period of time for employers to come into compliance with the Act. Under this policy, Labor will not bring an enforcement action against any employer for violations of the Act so long as the employer has acted reasonably and in good faith to comply with the Act. Labor will instead focus on compliance assistance during the 30-day period, which begins April 1.

Coronavirus Aid, Relief, and Economic Security Act CARES Act passed March 27, 2020

Refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis.

Eligible employers. The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. Employers must have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.

The credit is not available to employers receiving Small Business Interruption Loans under Sec. 1102 of the Act.

Wages paid to which employees? For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers' closure or reduced gross receipts are eligible for the credit.

No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit with respect to the employee.

Wages. The term "wages" includes health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee.

Wages do not include amounts taken into account for purposes of the payroll credits, for required paid sick leave or required paid family leave in the Families First Coronavirus Act, nor for wages taken into account for the employer credit for paid family and medical leave.

Other. IRS is granted authority to advance payments to eligible employers and to waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit.

Effective date. The credit applies to wages paid after March 12, 2020 and before Jan. 1, 2021.

Delay of payment of employer payroll taxes

The CARES Act allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020. The delay of payroll tax deposits requires 50% of certain payroll taxes to be paid by December 31, 2021, with the remaining 50% due by December 31, 2022. This rule won't apply to any taxpayer which has had indebtedness forgiven under the loan programs.

Net Operating Loss rule changes

The CARES Act temporarily removes the taxable income limitation to allow an NOL to fully offset income. NOLs arising in a tax year beginning after Dec. 31, 2018 and before Jan. 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss.

Effective date. The amendments apply to tax years beginning after Dec. 31, 2017, and to tax years beginning on or before Dec. 31, 2017, to which NOLs arising in tax years beginning after Dec. 31, 2017 are carried.

Modification of limitation on losses for noncorporate taxpayers

Noncorporate taxpayers can deduct excess business losses (over $250,000) arising in 2018, 2019, and 2020.

Limit on interest expense

The CARES Act temporarily and retroactively increases the limitation on the deductibility of interest expense under Code Sec. 163(j)(1) from 30% to 50% for tax years beginning in 2019 and 2020. Under a special rule for partnerships, the increase in the limitation will not apply to partners in partnerships for 2019 (it applies only in 2020).

Qualified Improvement Property now eligible for bonus depreciation

The CARES Act provides a technical correction and specifically designates “qualified improvement property” as 15-year property for depreciation purposes. This makes QI Property a category eligible for 100% Bonus Depreciation. Effective for property placed in service after Dec. 31, 2017.

Individual recovery rebate/advanced 2020 tax credit

Most individuals are allowed an income tax credit for 2020 equal to the sum of: (1) $1,200 ($2,400 for eligible individuals filing a joint return) plus (2) $500 for each qualifying child. The credit is being paid out in advance. The amount of the credit is reduced by 5% of the taxpayer's adjusted gross income (AGI) in excess of: (1) $150,000 for a joint return, (2) $112,500 for a head of household, and (3) $75,000 for all other taxpayers. Under these rules, the credit is completely phased-out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. For a head of household with one child, the credit is completely phased out when AGI exceeds $146,500. A qualifying child for purposes of this credit follows the same requirements as the Child Tax Credit. If an individual can be claimed as a dependent by someone else, they will not qualify for the credit.

IRS will refund the credit as rapidly as possible. If an individual hasn't yet filed a 2019 income tax return, IRS will determine the amount of the rebate using information from the taxpayer's 2018 return. If no 2018 return has been filed, IRS will use information from the individual's 2019 Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement. IRS may make the rebate electronically to any account to which the payee authorized, on or after Jan. 1, 2018, the delivery of a refund of federal taxes or of a federal payment.

No later than 15 days after distributing a rebate payment, IRS must mail a notice to the taxpayer's last known address indicating how the payment was made, the amount of the payment, and a phone number for reporting any failure to receive the payment to IRS.

If, when taxpayers file their 2020 income tax returns in 2021, they find that the advanced credit is greater than the actual credit, then it appears that they would not be required to repay the excess credit. In contrast, if the advanced credit is less than the actual credit, then taxpayers would be able to claim the difference on their 2020 income tax returns.

No 10% additional tax for coronavirus-related retirement plan distributions up to $100,000

Distributions taken in 2020 qualify if the individual is an individual (1) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC), (2) whose spouse or dependent is diagnosed with such virus or disease by such a test, or (3) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.

Any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made.

Unless the taxpayer elects not to, any amount required to be included in gross income for such tax year will be so included ratably over the 3-tax year period beginning with such tax year.

$300 above-the-line charitable deduction

The CARES Act adds a deduction, in the case of tax years beginning in 2020, for the amount (not to exceed $300) of charitable contributions made by an individual that doesn’t itemize.

Tax-excluded education payments by an employer temporarily include student loan repayments

An employee's gross income doesn't include up to $5,250 per year of employer payments made under an educational assistance program for the employee's education. The CARES Act adds to the types of educational payments that are excluded from employee gross income "eligible student loan repayments" made before January 1, 2021.

RMD requirement waived for 2020

The CARES Act provides that required minimum distributions (RMDs) do not apply for calendar year 2020.

Additional Resources

The Department of Labor’s explanation of who is covered by the Employer Paid Leave Act does not, in our opinion, coincide with the likely intensions of Congress. The businesses and employees that were directly impacted by State officials’ quarantine orders beginning the week of March 15^th are not covered by the Act because the DOL made the effective date for all rules to be April 1. Even then, businesses that close as a result of quarantine orders are not covered by the Act, according to DOL Q&A responses (as of March 28, 2020).

Flow Chart of Emergency Paid Sick Leave Act

It is currently unclear if employees who are unable to work due to a business closure by a state governor will receive paid sick leave.
Pay requirements based on reason for absence (see flow chart above)

100% pay up to $511/day; $5,110 in the aggregate (immediate health concerns)
2/3 pay up to $200/day; $2,000 in the aggregate (to care for others who are sick or cannot attend school/day care)

Pay is the greater of normal hourly rate, federal minimum wage, or state minimum wage
Pay is immediate – employees are not required to use other accrued time off first
Variable hour employees will receive the equivalent pay for the average hours they would work per day over the prior 6-month period.

Flow Chart of Emergency Family and Medical Leave Expansion Act

2/3 regular pay up to $200/day; $10,000 in the aggregate (10 weeks of pay, following the initial 2 weeks of leave)
Timing of pay

The first 10 days for which an employee takes leave may consist of unpaid leave (however, see the previous flow chart for the Emergency Paid Sick Leave Act – they should receive pay for those first 10 days under that act).

An employee may elect to substitute any accrued vacation leave, personal leave, or medical or sick leave for unpaid leave. (This should not be needed since they should receive 10 days under the first act.)