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Employer Tax Savings Under the Families First Coronavirus Response Act (FFCRA)

The Families First Coronavirus Response Act (FFCRA) establishes certain tax credits to employers subject to the Emergency Paid Sick Leave Act (EPSLA) and the Expanded Family Medical Leave Act (EFMLA) provisions of the law. Such employers are entitled to fully refundable tax credits to cover the cost of the leave payable for periods during which employees are unable to work or telework due to one of the following six COVID-19-specific reasons. Certain self-employed persons in similar circumstances are entitled to similar credits.

Fully Refundable Tax Credit

The law allows a tax credit for leave taken between April 1, 2020, and December 31, 2020. This credit is for the cost of the paid leave itself, the cost of maintaining the employee’s health insurance coverage during the leave period, and the employer’s portion of the Medicare tax imposed on wages paid during the leave. (The employer is not subject to the employer portion of social security tax imposed on leave wages.)

    Employer’s tax credit = paid leave wages1 + cost of health insurance2 + Medicare tax3

We will break down each of these elements below.

1Calculating Paid Leave Wages

As described more fully in our previous article, paid leave provides:

  • 10 days of paid sick leave at the normal rate of pay or minimum wage, whichever is higher up to:
    • $511 per day or $5,110 in aggregate for employees who are:
      • Quarantined or isolated due to Federal, state, or local order related to COVID-19;
      • Advised by a health care provider to self-quarantine due to COVID-19-related concerns; or
      • Experiencing symptoms of COVID-19 and seeking a medical diagnosis
    • $200 per day, or $2,000 in aggregate for employees who are:
      • Caring for an individual who is subject to an order or who has been advised to quarantine by a health care provider; or
      • Experiencing any other substantially similar condition specified by the Secretary of Health and Human Services (HHS) in consultation with the Secretary of the Treasury and Secretary of Labor
  • 10 days of paid sick leave followed by 10 weeks of paid family leave if the employee is unable to work or telework and needs to care for a son or daughter if the school or place of care closes or is unavailable due to COVID-19 precautions

2Calculating the Cost of Health Insurance

There are particular methods for calculating this “qualified health plan expense” during the period of leave. It is important to note that employers must maintain benefits for any employee who is on leave for one of the FFCRA reasons, on the same terms as if they continued to work.

"Qualified health plan expenses" are amounts the employer pays or incurs to provide and maintain a group health plan. Note: The term “group health plan” means a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families. [IRC §5000(b)(1)]. Amounts that qualify include:

  • Wages prorated over the period of leave
  • Employer contributions toward health plan premium, including PPO, HMO, HDHP, etc.
  • Amounts to the extent they are excluded from an employee’s gross income, i.e., pre-tax contributions (does not include any post-tax contributions)*

*Contributions made on behalf of employees to Flexible Spending Account (FSA), Health Reimbursement Arrangement (HRA) or Individual Coverage Health Reimbursement Arrangement (ICHRA). Does not include contributions for qualified small employer health reimbursement arrangement (HRA), medical savings account (MSA) or health savings account (HSA).

To determine the “qualified health plan expenses,” employers need to use a reasonable method to establish the daily cost of health insurance expenses for each plan they offer. The employer then uses the corresponding health care cost for each specific employee’s plan participation and multiplies this times the number of days the employee is on FFCRA paid leave.

Fully-Insured Plans

An employer who sponsors a fully-insured group health plan may use any reasonable method to determine and allocate the plan expenses, including:

  1. the COBRA applicable premium for the employee typically available from the insurer,
  2. one average premium rate for all employees, or
  3. a substantially similar method that takes into account the average premium rate determined separately for employees with self-only and other than self-only coverage.

Self-Insured Plans

An Eligible Employer who sponsors a self-insured group health plan may use any reasonable method to determine and allocate the plan expenses, including:

  1. the COBRA applicable premium for the employee typically available from the administrator, or
  2. any reasonable actuarial method to determine the estimated annual expenses of the plan.

Calculating average premium rates (applies to items 2 & 3 for fully-insured and item 3 for self-funded plans)

To calculate the average premium rate, an employer will need to determine the qualified leave wages per day. Here are the two steps to calculate this amount:


Calculating the average premium rate

3Calculating the Tax Amount

The FFCRA paid leave wages are not subject to OASDI, i.e., social security tax. They are, however, subject to the 1.45% Hospital Insurance tax, i.e., Medicare tax. The full amount of the Medicare tax, on wages paid under the FFCRA, is inclusive in the tax credit amount.

Claiming the Tax Credit

Employers use their normal quarterly federal employment tax returns, i.e., Form 941, to report income and taxes and any corresponding credit. These federal employment taxes include federal income taxes withheld from employees, the employees’ share of social security and Medicare taxes, and the employer’s share of social security and Medicare taxes with respect to all employees.

To obtain immediate cash to fund the paid leave benefits, employers may hold back or retain, funds rather than depositing them with the IRS. The amount an employer may withhold shall not exceed the three amounts calculated above, i.e., paid leave wages1 + cost of health insurance2 + Medicare tax3.

  • If the Employer’s FFCRA tax credit for the quarter is less than the amount the employer owes for all employment taxes in that quarter, the employer deducts the tax credit on Form 941 and remits the difference to the IRS
  • If the Employer’s FFCRA tax credit for the quarter is more than the amount the employer owes for all employment taxes in that quarter, the employer may show the credit on Form 941 and remit no quarterly payment or may request an advance cash refund from the IRS using Form 7200.

Required Record Retention

  • Eligible Employers claiming these FFCRA tax credits must retain the following related records and documentation for four years from the date the tax is due or paid:
  • Copies of employee leave request with required information;
  • Detail of federal employment taxes;
  • Determination of qualified sick wages and health plan expenses; employer’s share of Medicare tax imposed; and
  • Forms 941 and 7200

For additional information on the Families First Coronavirus Response Act and how employers can make the most of federal regulatory response, visit our OneDigital Coronavirus Advisory Hub, or reach out to your local OneDigital advisory team.

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