Emergency Paid Sick Leave and Family Leave Tax Credits Under the American Rescue Plan Act

As we reported earlier this month, the recent American Rescue Plan Act (“ARPA”) contains a number of provisions covering an employer’s ability to seek tax credits for providing its employees with COVID-19 related paid sick and family leave similar to the leave previously mandated by the Families First Coronavirus Response Act (“FFCRA”). Although paid sick and family leave arising out of COVID-19 is not something an employer is still required to provide (barring any state or local law to the contrary), the ARPA implements several changes with respect to an employer’s ability to receive a tax credit for voluntarily providing covered leave, with these changes set to go into effect April 1, 2021.

Current status of emergency COVID-19 paid sick and family leave.

As noted above, employers are no longer required to provide emergency paid sick leave or emergency paid family leave for reasons related to COVID-19 (as of December 31, 2020). However, covered employers have the ability, through September 30, 2021, to receive payroll tax credits covering wages paid to employees who take COVID-19 related leave.

Below is a summary of some common questions regarding the scope and availability of the tax credit under the ARPA.

Do employers have to grant leave?

No. Unlike under the FFCRA, employers are not required to provide employee with paid sick or family leave due to COVID-19. However, employers still must comply with any other applicable state or federal law with respect to an employee’s need for leave, for example, the Americans with Disabilities Act.

What employers qualify for the tax credit?

Employers with fewer than 500 employees qualify for the tax credit if they offer their employees paid leave for the reasons discussed below.

What reasons for leave are covered?

Employees who take leave for the following reasons qualify for the tax credit:

  1. The employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
  2. The employee has been advised by a health care provider to self-quarantine related to COVID-19;
  3. The employee is experiencing COVID-19 symptoms and is seeking a medical diagnosis;
  4. The employee is caring for an individual subject to an order described in (1) or self-quarantine as described in (2);
  5. The employee is caring for a child whose school or place of care is closed (or child care provider is unavailable) for reasons related to COVID-19; or
  6. The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.

The above reasons are the same as those under the FFCRA, with the ARPA additionally providing that the following reasons for leave are now covered as well:

  1. The employee is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID–19 and such employee has been exposed to COVID–19 or the employee’s employer has requested such test or diagnosis, or
  2. The employee is obtaining immunization related to COVID–19; or
  3. Recovering from any injury, disability, illness, or condition related to such immunization.

How much covered leave is available?

Employers may seek the credit for employees who take leave for up to twelve weeks (as discussed below).

The ARPA additionally “resets” an employee’s leave “bank” effective April 1, 2021, meaning that if an employee previously took the maximum amount of leave prior to April 1, 2021, they may again be eligible for leave covered by the tax credit.

What rate of pay is reimbursable as a credit?

The rate of pay an employee is entitled to receive varies depending on the reason that an employee takes the leave:

  • If an employee takes leave due to the first, second, or third reasons in the list above, the employee is entitled to their regular rate of pay (up to $511 per day) for up to ten days and is further eligible to receive two-thirds of their regular rate of pay (up to $200 per day) for an additional ten weeks afterwards (up to a total cap of $12,000.)
  • For the other reasons listed above, the credit covers two-thirds of the employee’s regular rate of pay (up to $200 per day) for twelve weeks total (up to a total cap of $12,000.)

Can leave only be provided to a portion of an employer’s workforce?

The ARPA provides that the tax credit is not available to employers who provides the leave to only a portion of their workforce if eligibility is limited to:

  1. Highly compensated employees (e.g. an employee who earns more than $130,000.00 annually);
  2. Full-time employees; or
  3. Discrimination based on employment tenure.

Further, as a practical matter if an employer is only providing the paid leave to a portion of its workforce it should make sure that doing so does not have a disparate impact on members of specific protected classes (race, age, sex, etc.).

 Can employers only provide leave for some, but not all, of the covered reasons?

 The ARPA itself is silent with respect to whether an employer can still receive the tax credit if they elect to only provide paid leave for some, but not all, of the covered reasons for leave. The ARPA is similarly silent with respect to whether an employer can elect to make the leave available for a shorter period (i.e., by discontinuing the availability of paid leave before September 30).

Given the fact that an employer’s decision to provide paid leave is now voluntary, it appears likely that an employer can grant leave for a shortened period or for only some of the covered reasons while still qualifying for the tax credit, however, this conclusion is not certain. Both the Department of Labor and the IRS have stated that guidance regarding ARPA-covered leave is forthcoming but said guidance has not yet been issued.

Bottom Line

The ARPA provides employers with some tax relief should they elect to allow employees to continue to take paid leave for reasons related to COVID-19, including for the expanded reasons related to an employee receiving COVID-19 vaccination. Again, while an employer is not required to provide this type of leave, employers may want to consider whether it makes sense to offer these benefits to employees given the tax relief in doing so.