Paid Sick Leave

Updated as of 1:00 p.m. on April 6, 2021

There are many different relief options that employers can utilize to ensure that their employees receive compensation while dealing with COVID-19, one of which is paid sick leave. This can be used by employers who do not have a sick pay policy, and many employers are entitled to the paid sick leave option. Below are the details you need to know to see if you qualify as an employer, what amount you can pay your employees and how to calculate the related payroll tax credit.

The Families First Coronavirus Response Act (FFCRA) required covered employers to provide employees with paid sick leave and expanded family and medical leave for reasons related to COVID-19 that occurred from April 1st through December 31st, 2020. This provision expired on December 31st, 2020 but the Consolidated Appropriations Act, 2021 (HR 133, “the Act”), passed on December 27th, 2020, extended the FFCRA tax credit through March 31st, 2021. President Biden signed the American Rescue Plan Act of 2021 (HR 1319, “Rescue Plan”) on March 11th, 2021, which further extended the FFCRA leave through September 30th, 2021. Both the Act and Rescue Plan do not require employers to provide FFCRA leave. Covered employers who voluntarily offer this leave, may utilize the tax credit to cover the cost of wages and benefits paid to employees.

The Rescue Plan resets all employee’s balances of paid sick time off. Beginning April 1st, employees will be eligible for two weeks of pay (up to 80 hours) to be used through September 30th, 2021, regardless of if an employee had previously exhausted their hours or had unused hours available. If an employee had unused hours at the end of March 31st, 2021, they cannot roll these hours into the Rescue Plan’s April 1st through September 30th, 2021 timeframe. The Rescue Plan added additional qualifying circumstances where the paid leave can be utilized but did not change the caps on the amount of pay employees are entitled to receive, the calculation of the credit or the employer’s documentation requirements. In addition, the Rescue Plan updated qualifications and the length of the expanded family and medical leave. Below is a summary of the Rescue Plan’s qualified sick pay qualifications, amounts and requirements.

Covered employers are certain public employers and private employers with fewer than 500 employees. If the employee has been employed for at least 30 days, then they are eligible for an additional 12 weeks of expanded family medical leave for related to COVID-19 circumstances.

The FFCRA allows employees of covered employers the following leave:

The Rescue Plan also added nondiscrimination requirements to the law for employers to claim the tax credit. Employers will not be able to claim a tax credit for any calendar quarter if the employer discriminates in favor of highly compensated employees, full-time employees, or employee tenure.

It is important to determine what the employee’s regular rate of pay is when determining the amount to pay during the sick leave. To calculate, employers should take the average rate of pay over a period of up to six months and include any commissions and tips that the employee receives. In addition, employers will need to pro-rate the allowed sick pay leave for part-time employees. Part-time employees should use the average number of hours that they work over a typical two-week period.

If employers have an employee who will be utilizing the FFCRA leave, employers must document it. At a minimum, employers should document the employee’s name, dates for which leave is requested, the reason for the leave and a statement from the employee that they are unable to work because of the reason. If the leave is requested because they are subject to a quarantine order or advised by a health care provider, employers should document the name of the entity or health care provider who is issuing the quarantine order. Lastly, if the employee requests leave due to caring for a child whose school or childcare is closed, employers must also document the name of the child being cared for, the name of the school or childcare facility and a statement from the employee that no other suitable person is available to care for the child.

Covered employers who are utilizing paid leave options are eligible to claim a refundable tax credit on their quarterly Form 941 to help cover the costs of providing paid sick and family leave wages to their employees for COVID-19 related reasons. The credit is equal to the required paid sick leave amount (up to the daily maximum established), the employer’s share of Medicare tax imposed on the wages and its allocable cost of maintaining health insurance for the employee during the sick leave period. In addition, the employer is not subject to the employer’s portion of social security tax imposed on those wages paid. However, the employee is still required to pay their portions of Medicare tax and social security tax on these wages. It is important to note that the employer can pay the employee more than the max amounts stated above. However, they will only be able to claim a credit for the max amounts set forth in the FFCRA.

The costs of maintaining health insurance for the employee during the sick leave period is referred to as qualified health plan expenses. These are amounts paid or incurred by the employer to provide and maintain a group health plan. This includes the cost paid by the employer and the cost paid by the employee, if it is a pre-tax plan. If the health insurance is an after-tax contribution, the employee contribution is not included and only the employer contribution is used. Employers may use any reasonable method to determine and allocate the plan expenses to use for the credit, such as (1) the COBRA premium for the employee from the insurer, (2) one average premium rate for all employees or (3) a substantially similar method that takes into account the average premium rate determined separately for employees with self-only and other than self-only coverage. Allocate the health plan expenses for the number of days the employee received sick pay wages. The amount of health plan expenses does not include employer contributions to HSAs, Archer MSAs or QSEHRA.

Covered employers can reduce their Form 941 deposit by the credit amount. If the amount of the credit exceeds their Form 941 deposit, the excess is treated as an overpayment on Form 941 and refunded to the employer. If employers do not want to wait to receive their refund after filing Form 941, they can file Form 7200 Advance of Employer Credits to COVID-19, to receive an advance payment at the time their credit exceeds their Form 941 payment. Any credit received should be recorded as Tax Credit Income on the employer’s financial statements.

The quarterly Form 941 has been updated to account for COVID-19 payroll relief options. Employers should verify they are using the correct form to properly account for these items. Also, if using a payroll software, employers should create separate pay items for each type of paid leave. This will help summarize the information needed for the quarterly and annual reports.

The amount of sick wages paid under FFCRA will also need to be included on the employee’s W2 in Box 14. These wages need to be broken out by which leave was taken, sick leave to care for self, sick leave to care for other or expanded family and medical leave.

In summary, employers can continue to utilize paid leave options through September 30th, 2021. This paid leave is funded through a credit the employer can receive against their Form 941 liabilities. If you have any questions related to COVID-19 payroll relief options, please contact your MHCS advisor.