The IRS has issued preliminary guidance addressing the refundable payroll tax credit provisions under the Families First Coronavirus Response Act (FFCRA). The FFCRA is the second major piece of federal legislation enacted in response to the US outbreak of COVID-19, the disease that results from SARS-CoV-2 (Pub. L. No. 116-127 (2020); see Legal Update, COVID-19 Legislation Includes Group Health Plan Coverage Requirements). The FFCRA follows enactment earlier this month of the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 (Pub. L. No. 116-123) (Mar. 6, 2020), which provided supplemental emergency funding to several federal agencies to prevent, prepare for, and respond to the COVID-19 outbreak (see Legal Update, President Signs Legislation to Fund Coronavirus Response; Health Insurers to Waive Co-Pays).

For more information on the COVID-19 pandemic, see Practical Law's Global Coronavirus Toolkit and Practice Note, COVID-19 Compliance for Health and Welfare Plans.

As background, the FFCRA requires certain employers to provide paid sick leave and expands the Family and Medical Leave Act (FMLA) for absences related to COVID-19 (see Article, Expert Q&A: COVID-19 and Employment). The FFCRA also provides for tax credits relating to sick leave and family leave wages that are intended to fully reimburse employers for the cost of providing paid leave related to COVID-19 to employees under the FFCRA. Employers will be allowed to claim the credits based on qualifying leave they provide between the FFCRA's effective date for the leave provisions and December 31, 2020.

The IRS guidance notes that the payroll tax credits also reflect health insurance costs. Specifically, the credits are increased for "qualified health plan expenses" that are allocable to those wages. The FFCRA defines "qualified health plan expenses" as amounts that:

These qualified health plan expenses are allocated to sick leave family leave wages under the FFCRA on a pro rata basis (and subject to additional IRS guidance).

The IRS guidance indicates that reimbursements for paid leave under the FFCRA will be made rapidly and without administrative complexity. The reimbursements will consist of:

(Wages used in determining the sick leave or family leave wages credit cannot also be used in calculating the credit under Code Section 45S (26 U.S.C. § 45S); see Practice Note, Employer Credit for Paid Family and Medical Leave Under the TCJA (Code Section 45S).)

Under normal payroll tax procedures, employers must withhold federal income taxes and the employees' share of Social Security and Medicare taxes from employees' pay (see Practice Note, Payroll (FICA) Taxes). Employers deposit these federal taxes, along with the employer's share of Social Security and Medicare taxes, with the IRS and file quarterly payroll tax returns (Form 941) with the IRS.

However, the IRS will permit employers that pay qualifying sick or child care leave under the FFCRA to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid (as opposed to depositing those amounts with the IRS). Specifically, these amounts will include:

In some cases, an employer's payroll taxes may be insufficient to cover the cost of qualified sick and child care leave paid. If this occurs, an employer may request an accelerated payment from the IRS, which the IRS intends to process in two weeks or less.

The Department of Labor (DOL) intends to issue a temporary nonenforcement policy under which employers will have a limited period of time to comply with the FFCRA. During the 30-day nonenforcement policy, the DOL will not bring an enforcement action against an employer for violations of the FFCRA, if the employer has acted "reasonably and in good faith" to comply with the FFCRA.

This IRS guidance is an initial pronouncement regarding the FFCRA's payroll tax credits, and more detailed information—including as to the process for employers to receive advance payment of the FFCRA's credits—is to follow. Additional guidance would also be welcome concerning the credit's inclusion of health plan costs.