TREASURY DEPARTMENT, IRS AND DEPARTMENT OF LABOR ANNOUNCEMENT REGARDING IMPLEMENTATION OF COVID-19 EMERGENCY PAID LEAVE AND EMPLOYERS’ “SWIFT RECOVERY” OF ASSOCIATED COSTS

By: Katherine F. Weber

On Friday, March 20, 2020, the U.S. Treasury Department, Internal Revenue Service and Department of Labor offered covered employers some encouraging reassurance with respect to the financial and practical impacts of the newly-enacted Families First Coronavirus Response Act (the “Act”).

Briefly summarized, this announcement included two key takeaways:

Immediate and Full Reimbursement of Leave Costs

Although the Act provides for the reimbursement of employer costs associated with COVID-19-related emergency leave through a tax credit, it is silent as to the logistics of this, leaving many employers wondering how and when they might expect to recoup such leave costs.  In the recent announcement the IRS made clear that employers may take immediate advantage of the paid leave tax credits, by retaining and accessing funds they would otherwise be required to pay the IRS in payroll taxes.

As explained by the IRS:

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 next week, 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 announced next week.

In short, covered employers (excluding state governments and political subdivisions) may immediately credit their qualifying emergency leave costs (including both paid emergency sick leave and Emergency Family and Medical Leave) against withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security taxes, rather than deposit these funds with the IRS.  Further, if such withholdings are not sufficient to cover the emergency leave costs, the employer may request an accelerated reimbursement payment from the IRS.

This provides employers certainty that they will not have to wait for a quarterly or even annual tax report to receive reimbursement for their associated COVID-19 emergency leave costs.

Non-Enforcement Period

The DOL further provided assurance that it will allow employers time to “get up to speed” with respect to their obligations under the Act, announcing that it will be issuing a “temporary non-enforcement policy” that provides employers a 30-day grace period to come into compliance under the Act.  The DOL stated that it will not bring an enforcement 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.

Instead, the DOL will focus on compliance assistance during the 30-day non-enforcement period.

The full text of the announcement, along with examples of potential recoupment scenarios, may be viewed here:

https://www.irs.gov/newsroom/treasury-irs-and-labor-announce-plan-to-implement-coronavirus-related-paid-leave-for-workers-and-tax-credits-for-small-and-midsize-businesses-to-swiftly-recover-the-cost-of-providing-coronavirus

This is welcomed news as small and mid-size employers navigate their obligations under the Act.

This publication is intended to generally inform our clients of recent legal developments.  It is not intended, and should be relied upon, as a substitute for specific legal advice.  Please contact legal counsel to further discuss any particular situation(s) or question(s) that you might have.