The American Rescue Plan Act (“ARPA”) includes an extension of the credits for emergency paid sick and family medical leave wages and relieves certain individuals of the need to pay COBRA health insurance premiums to their former employer. These provisions apply for leave taken and premiums due beginning April 1, 2021, and ending September 30, 2021.
Emergency Paid Sick and FMLA Leave Credits Continue
Beginning April 1, 2021, businesses and tax-exempt employers with less than 500 full time employees and certain governmental employers are eligible for refundable payroll tax credits equal to the amount paid to employees for COVID related absences, including time spent receiving a vaccine and recovering from side effects experienced with the vaccine. Self-employed individuals can claim a comparable credit. These credits are currently set to expire as of September 30, 2021. Leave taken after that date will not be eligible for these credits.
The maximum amount of the credit for emergency paid sick leave per employee is 100% of wages up to $511 per day for up to 80 hours. Emergency paid sick leave includes paid time off for COVID related illness restrictions as well as getting the vaccine and recovering from it.
The maximum credit for paid FMLA leave per employee is two-thirds of an individual’s regular pay up to $200 per day and a limit of $12,000 per employee. FMLA leave includes paid time off for COVID related absences, such as caring for individuals with COVID or children unable to attend school due to COVID, and paid time off to get a vaccine or recover from it.
Wages eligible for the credit are increased by a share of health care costs allocable to the wages paid for the time off discussed above.
These credits are monetized in the same way that employee retention credits are monetized, by reducing payroll tax deposits that would otherwise be made or by requesting a refund on Form 7200 filed before the due date for filing Form 941. All credits and payments of the credit are reconciled quarterly on the employer’s federal payroll tax return, Form 941. A self-employed person claims comparable credits on Form 1040.
Free COBRA Health Coverage for a limited time
In general, individuals who would otherwise lose employer health benefits due to an involuntary termination of employment or a reduction in hours can continue coverage under an employer’s health plan for specified time periods by paying a COBRA premium. The American Rescue Plan Act offers qualifying individuals a break from paying COBRA premiums. This is a limited time offer for “no premium” health benefits from April 1 to September 30.
Along with the free COBRA coverage, ARPA introduced a new refundable payroll tax credit to reimburse employers and insurers for the costs they incur for the “free” health benefits provided to former employees. This credit is equal to 100% of the premium for COBRA continuation of health insurance coverage and continuation coverage under certain State laws for eligible individuals. An individual is not eligible if the individual is eligible for other group health plan coverage, such as coverage under a spouse’s plan, or Medicare.
This credit applies for coverage from April 1, 2021, until September 30, 2021, but ends earlier if the individual’s COBRA coverage period ends or the individual becomes eligible for Medicare or another group health plan or the individual’s maximum COBRA continuation coverage period ends.
ARPA also expanded the COBRA election period for individuals who had an involuntary termination of employment or reduction in hours in the last 18 months. These individuals can opt in to COBRA coverage to take advantage of the ARPA subsidy. Employers are required to provide notice to employees and former employees of the availability of this COBRA benefit by May 31, 2021.
The Department of Labor issued guidance on April 7, 2021, in the form of Frequently Asked Questions and several model notices to assist employers and former employees to take advantage of the “no premium” health coverage. Treasury and the IRS have not yet issued guidance regarding how employers can claim the tax credit, although we anticipate that it will be claimed as the other payroll credits are claimed, in the Form 941 or an amended Form 941-x.
Cherry Bekaert has a team of professionals dedicated to making sure that your business benefits from all the payroll tax credits available. Contact your Cherry Bekaert professional to be sure you claim the credits to which you are entitled.
