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March 23, 2020

By: Robbins, Salomon & Patt, Ltd.

After last week’s passage of the Emergency Family Medical Leave Expansion Act (EFMLE), employers have wanted guidance on the timing of reimbursement by the federal government for any paid leave they provide after the law goes into effect on April 2nd. Many worry they won’t have the cash flow to cover any paid leaves while waiting months for the federal government to reimburse them.

Initially it should be noted that the Internal Revenue Service (IRS) and the Department of Labor (DOL) announced late last Friday, March 20, they won’t be bringing any enforcement actions against employers for violations within the first 30 days the law is in effect so long as the employer is acting in good faith to comply

Here is a short review of the IRS guidance on the new leave policy.

IRS Guidance on Reimbursement of Paid Leave Provided by Employers

The new law provides employees (at employers with fewer than 500 employees) paid sick leave and paid FMLA leave for COVID-19 related reasons but also makes it clear that this paid leave is 100% refundable to employers providing it.

As written, the law simply states that employers will be reimbursed for these payments later in the form of tax credits

The Friday guidance clarifies that employers can recoup these payments immediately by keeping a portion of the deposit they otherwise would pay as part of their employees’ federal, social security and Medicare taxes.

Here’s how to do it. When employers pay federal income taxes and the employees’ share of Social Security and Medicare taxes on their paychecks, they are required to deposit these federal taxes, along with their share of Social Security and Medicare taxes, with the IRS when they file and pay their IRS Form 941 quarterly payroll tax returns.

In a guidance to be released this week, the IRS will say that eligible employers who pay qualifying sick or child care may retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave 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 insufficient payroll taxes to cover the cost of qualified sick and childcare 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 will be announced this week. This means that taxes held in escrow for payment on federal, social security and Medicare taxes now can be used to pay for employees taking paid leave under the law effective April 2.

This allows employers to draw funds from the payroll and income tax they withhold from or pay on behalf of all employees and not just those to who they pay leave to.

Examples of How You’ll Be Reimbursed Immediately

In its guidance, the IRS gives examples of how this works:

If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.

If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.

The DOL Will Not Bring an Enforcement Action for Non-Compliance, for At least 30 Days

The DOL clarified in the same announcement that it would be “issuing a temporary non-enforcement policy that provides a period for employers to come into compliance with the Act. Under this policy, Labor will not bring an enforcement action 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. Labor will instead focus on compliance assistance during the 30-day period.”

What does “good faith” mean?

For purposes of this non-enforcement position, “good faith” means when violations are remedied and the employee is made whole as soon as possible and the employer, in writing commits to comply with the Act in the future