New COVID-19 Relief Bill in the U.S. Incentivizes Paid Sick Leave, Expands 162(m) Eligibility

Published: March 2021

 

The new $1.9 trillion rescue bill in the United States is aimed at boosting recovery from the pandemic through provisions like extending tax incentives for paid sick leave and more.

The American Rescue Plan Act (ARPA), which was signed into law on March 11, has several provisions aimed to assist employers and their workers with continued disruptions due to the COVID-19 pandemic. While the ARPA does not require paid emergency family or sick leave, it does extend and expand, in some cases, many of the tax credits that were authorized in the early days of the pandemic. These tax credits are intended to incentivize small and mid-sized companies to provide paid time off for COVID-19-related reasons.

Paid Sick and Family Leave Tax Credits

The new legislation extends and expands the qualification of tax credits for qualified paid sick leave (PSL) and paid family leave (PFL) until September 30, 2021. The initial tax credits were part of the Families First Coronavirus Response Act, which was passed in March 2020.

The amount of allowable leave is also getting a reset. From April 1 to September 30, the credit is available for another 10 days of PSL (in cases where an employee has already taken up to 10 days) and 12 weeks of PFL (up from 10 weeks). As a result, the total wages eligible for tax credit increases from $10,000 to $12,000. This is in addition to applicable health plan expenses.

The types of leave that qualify for tax credits will now include obtaining a COVID-19 vaccine; recover from injury, disability, illness or a condition related to a COVID-19 vaccine; and awaiting COVID-19 test results. Tax credits are capped at the level of the employer’s Medicare taxes for a quarter, but any excess is treated as an overpayment to be refunded.

The legislation prohibits so-called double dipping (i.e., prohibiting wages paid to provide PSL or PFL where a tax credit is taken to also be considered for purposes of certain other credits).

Finally, the law extends the period of limitations on assessing a credit claimed for wages paid to provide PSL or PFL to five years. In effect, this extension makes it more important that employers accurately determine eligibility for the tax credits and maintain sufficient records for that period of time.

Employee Retention Credit Extended

Originally enacted under the CARES Act, the latest law extends the Employee Retention Credit (ERC) until June 30, 2021. This provision gives eligible employers a tax credit for qualified wages paid to employees. The ERC was capped at $5,000 per employee for 2020, but the new legislation increases it to $7,000 per employee per quarter for qualified wages made during the first six months of 2021. (You can read more about the HR impacts of CARES in our alerts The CARES Act Offers U.S. Companies Relief, but Not Without New Limits on Executive Pay and How Companies Should Prepare for Expanded Unemployment, Health Benefits in CARES Act.)

For the last six months of 2021, the ERC is extended at 70% of qualified wages. For larger employers, qualified wages are based on the average number of employees an eligible employer had during 2019. For employers with 500 or fewer full-time employees in 2019, qualified wages mean wages paid to any employee during a COVID-19 suspension of business operations or a significant decline in gross receipts. However, since qualified wages are usually limited to $10,000 per employee per quarter, the ERC is likely to remain capped at the same rate ($7,000) as the first half of the year.

The latest relief bill does not put a cap on ERC for “severely financially distressed employers.” This is defined at companies that have experienced a gross receipts reduction of more than 90% compared to the same quarter in 2019. Additionally, the amount of the ERC for recovery startup businesses — defined as companies established after February 15, 2020, with annual gross receipts of $1 million or less — is limited to $50,000 per quarter for aggregate employees.

Executive Compensation

The ARPA expands the list of individuals that fall under Section 162(m), which limits the deductibility of executive compensation in excess of $1 million. Currently, the limitation applies to anyone who has served as CEO, CFO or one of the next three highest paid officers. Under the new law, after the CEO, CFO and the next three highest paid officers, the next five highest paid employees will also be subject to the $1 million deduction limit for taxable years beginning after 2026. These individuals will be determined each taxable year beginning after December 31, 2026.

Next Steps

The latest law continues to incentivize companies through certain tax benefits to grant paid sick and family leave to employees as they continue to navigate the pandemic. As the vaccine rollout ramps up in the U.S. and globally, many employers also are voluntarily giving employees paid time off to get the vaccine or recover from side effects. The ARPA now provides a boost of tax incentives to do so.
It’s important for companies to keep in mind that they still need to follow any applicable local laws on paid sick leave, as many states and municipalities have passed related legislation requiring certain paid time off due to the pandemic.

More information about all of the health provisions in the ARPA is available in Aon’s client alert from our health solutions team here.

If you’d like to speak with one of our rewards experts about this topic, please contact one of the authors or write to rewards-solutions@aon.com.
 

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