Archived Insight | April 28, 2021

Guidance on the American Rescue Plan Paid Leave Tax Credits

The American Rescue Plan Act of 2021 extends and modifies several of the tax credits enacted in prior COVID-19 legislation. The IRS recently released guidance on how the new American Rescue Plan Act tax credits work.

The guidance covers:

  • Which employers are eligible for the tax credits
  • Leave for which tax credits can be claimed
  • The amount of the tax credits and how they are calculated
  • How to claim the tax credits
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The Families First Coronavirus Response Act (FFCRA) required covered employers to provide paid sick and family leave for reasons related to COVID-19 and included a tax credit to reimburse them. The requirement to provide the leave expired on December 31, 2020, but the tax credit remains.

The Consolidated Appropriations Act of 2021 permitted employers to continue receiving the federal tax credit for employer who provided COVID-19 related paid leave through March 31, 2021.

The American Rescue Plan Act extends and expands these payroll tax credits from April 1, 2021 through September 30, 2021.

The American Rescue Plan Act also established a new nondiscrimination rule that prohibits an employer from discriminating with respect to leave availability in favor of highly compensated employees, full-time employees, or on the basis of employment tenure.

Eligible employers

Under the IRS guidance, private sector employers with fewer than 500 employees are eligible for the tax credit.

In addition, as of April 1, 2021, state and local government employers are also eligible for the American Rescue Plan Act tax credit.

Eligible paid sick and family leave

To claim these optional tax credits for leave provided from April 1 through September 30, 2021, employers must provide paid sick and family leave based on reasons originally enacted in the FFCRA (as summarized in our March 30, 2020 insight) and also under new standards included in the American Rescue Plan Act.

The FFCRA provided up to two weeks of paid leave for absences when an employee was unable to work because they were:

  • Subject to a government quarantine or isolation order
  • Advised by a heath care professional to self-quarantine
  • Experiencing COVID-19 symptoms and seeking a medical diagnosis
  • Caring for an individual who is subject to a government quarantine or isolation order, or who has been advised to self-quarantine by a health care professional
  • Caring for a son or daughter whose school or place of care has been closed or whose childcare provider is unavailable

FFRCA also provided up to 12 weeks paid family leave for employees who were unable to work or telework because they needed to care for a son or daughter under the age of 18 whose school or place of care was closed or whose childcare provider was unavailable due to the public health emergency.

The American Rescue Plan Act expands the FFCRA paid family leave tax credit to include all of the paid sick leave reasons, not just the absences related to childcare. The American Rescue Plan Act also enacted additional standards that permit a tax credit if an employer pays sick or family leave under the following circumstances:

  • An employee is absent from work because the employee is seeking or awaiting the results of a diagnostic test for or a medical diagnosis of COVID-19, provided the employee has been exposed to COVID-19 or the employer has requested that the employee obtain such test or diagnosis.
  • An employee is obtaining immunization related to COVID-19.
  • An employee is recovering from injury, disability, illness, or condition related to an immunization for COVID-19.

The American Rescue Plan Act removed the initial two-week unpaid period of family leave under the FFCRA.

Reasons for paid sick leave include the FFCRA paid sick leave reasons and the new American Rescue Plan Act vaccine-related reasons.

Reasons for paid family leave include any FFCRA paid or sick leave related absences and the new American Rescue Plan Act vaccine-related absences.

Calculating the tax credit

Beginning April 1, 2021, an employer may receive tax credits for voluntarily provided paid sick leave or family leave. The American Rescue Plan Act resets the year for taking paid leave. That means an employer can claim the tax credit for leave taken on or after April 1, 2021, even if the employee had exhausted their FFCRA paid leave entitlement prior to March 31, 2021.

The tax credit is against the employer’s share of the Medicare tax. The tax credit is refundable, so employers are still entitled to the tax credit even if the amount exceeds the employer’s share of the Medicare tax.

There are different tax credits for paid sick leave and for paid family leave, as described below.

  Tax Credit
  Maximum Leave Per Day Total Pay Rate
Paid sick leave 2 weeks (80 hours) $511    $5,110 100%
Paid family leave 12 weeks $200 $12,000 2/3

The following may increase the amount reimbursable under the tax credits:

  • Certain health plan expenses
  • Contributions for certain collectively bargained benefits
  • The employer's share of social security and Medicare taxes paid on the wages

How to claim the tax credit

Employers will use the Form 941, Employer's Quarterly Federal Tax Return, to claim the tax credit.

The IRS has announced that, in anticipation of claiming the tax credit, an employer can keep the federal employment taxes that they otherwise would have deposited up to the amount of tax credit for which the employer is eligible. That includes federal income tax withheld from employees, the employees’ share of social security and Medicare taxes and the eligible employer's share of social security and Medicare taxes with respect to all employees.

Employers that do not have enough federal employment taxes to cover the amount of the credit they are due may request an advance of the credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. In this case, the employer would account for the advance when it files the Form 941 for the quarter.

Watch for additional guidance

The Equal Employment Opportunity Commission has stated that it is working on guidance for employers on how to provide incentives that encourage vaccination.

We expect the DOL will publish additional guidance that will include more details on how the American Rescue Plan Act credits differ from those under the FFCRA.

Action items

Employers are not required to provide paid sick or family leave under the American Rescue Plan Act, but if they do, they may be eligible for significant tax credits.

Employers should review their paid and unpaid leave policies to determine whether to expand those policies to permit leave for COVID-19 related reasons and, if so, whether they are eligible for the tax credits.

The Biden administration encourages employers to use these tax credits to offset the cost of paid leave for employees to get a COVID-19 vaccine and for any time the employee may need to recover from that vaccination. The Administration also calls on employers to provide information about how employees can get vaccinated and why they should get vaccinated.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.