American Rescue Plan Act May Permit Public Education Employers to Claim Tax Credits for SB 95 Paid COVID Leave In 2021
UPDATE (04.22.21): IRS issues guidance on American Rescue Plan Act tax credits for government employers
On April 21, 2021, the IRS issued guidance for employers on claiming tax credits pursuant to ARPA for COVID-related paid leave provided to employees during the period April 1 – September 30, 2021. The IRS guidance confirms that state and local government employers are eligible to claim the tax credits, and provides additional instructions for claiming the credits. The IRS guidance can be viewed here.
On March 19, 2021, the Governor signed SB 95, requiring California employers to provide employees with up to 80 hours of paid leave for specified COVID related reasons during the period January 1 – September 30, 2021. Key points of SB 95 are summarized in our previous alert. A provision of the federal American Rescue Plan Act of 2021 (ARPA) signed into law on March 11, 2021 may enable school and education employers to claim federal tax credits for paid leave granted in 2021 pursuant to SB 95, as well as for certain other paid leaves for COVID-related reasons granted in 2021 pursuant to local MOU/local policy, even if not required by SB 95.
Underscoring the importance of leaves of absence as a matter of social policy, the very first piece of federal legislation enacted to address the pandemic in its early days was the Families First Coronavirus Relief Act (FFCRA), signed into law on March 19, 2020.
FFCRA required employers to grant employees paid leave for specified reasons related to COVID-19, during the period April 1 – December 31, 2020. This requirement applied generally both to public sector employers, and to private sector employers with fewer than 500 employees. The legislation allowed private sector employers to recoup the cost of wages paid for such leave by claiming a tax credit against social security payroll taxes – in other words, for every dollar an employer spent on wages for an individual employee’s paid leave required by FFCRA, the employer could claim a dollar-for-dollar credit against the employer’s overall obligation to pay social security taxes for all of its employees. However, many public sector employers do not participate in the social security system, and even as to those that do, Congress specifically excluded state and local government employers from the FFCRA social security tax credit. Thus, for these public sector employers, the cost of the mandate of the FFCRA to provide paid leave in 2020 was not offset by any specifically associated federal funding source or tax credit (although soon afterwards, the CARES Act directed massive amounts of federal money to the public sector for other specified purposes).
The mandate of the FFCRA for employers to provide paid leave expired on December 31, 2020. Notwithstanding the expiration of the FFCRA mandate, many public education employers negotiated local MOUs to continue providing employees with additional paid leave for COVID-related reasons. The federal stimulus bill signed into law on December 27, 2020 (HR 133) extended the FFCRA social security tax credit for those employers that voluntarily extended FFCRA to March 31, 2021; this extension, however, was of little relevance to public education employers in California, since they were never eligible for the FFCRA social security tax credit in the first place.
The American Rescue Plan Act (ARPA) signed into law on March 11, 2021, provided additional tax credits to incentivize employers to further extend paid leave for reasons that would have qualified under the FFCRA, as well as for reasons of vaccine appointments or side effects. The basic operation of these additional tax credits are summarized in our prior alert.
Significantly, ARPA modifies the tax credit available for employers that continue to extend paid leave for specified COVID-related reasons leave during the period April 1, 2021 – Sept. 30, 2021. Whereas FFCRA originally provided a credit for employers against the social security tax (which is inapplicable to many state and local government employees), ARPA now provides a credit for employers against the Medicare tax (to which state and local government employees are subject). And, whereas the original FFCRA specifically excluded state and local government employers from the tax credit, ARPA does not contain this exclusion language: ARPA has language specifically excluding certain federal employers, but there is no exclusion specific to state and local government employers. This appears to imply an intention on the part of Congress to allow state and local government employers to claim a Medicare tax credit if the employer grants paid leave for the COVID-related reasons recognized by ARPA during the period April 1 – Sept. 30, 2021.
Putting all of this together, although the mandate of the FFCRA to provide paid leave expired on December 31, 2020, California law now requires employers to grant paid leave during the period January 1 – September 30, 2021, for reasons similar (although not identical) to those previously required by the FFCRA. And although the FFCRA did not make the social security tax credits available to public education employers for paid FFCRA leaves granted in 2020, ARPA would appear to make Medicare tax credits available to these employers for paid leaves granted for similar reasons from April 1 – September 30, 2021, including paid leaves granted pursuant to the mandate of SB 95.
Additionally, although SB 95 is more limited than was the FFCRA in its mandate for paid leave for childcare-related reasons, ARPA makes Medicare tax credits available to employers that voluntarily grant paid leave for childcare reasons that were covered by FFCRA, including childcare-related reasons that are not covered by SB 95. Thus, to the extent that public education employers may be continuing to grant paid childcare leave for COVID-related reasons that is not required by SB 95, these employers may be able to claim a tax credit pursuant to ARPA for such paid leave.
Furthermore, for those state and local government employers that do participate in social security, provisions of ARPA appear to dictate that these employers can receive credits against Medicare taxes to offset the social security taxes associated with wages paid to employees for paid leaves in the period April 1 – September 30, 2021, for the COVID-related reasons recognized by ARPA.
Dollar limits and other conditions apply to the ARPA tax credits. Additionally, the IRS has yet to issue guidance on these issues of interpretation as they apply to state and local government employers. It is therefore not entirely clear whether the tax credit is indeed available to state and local government employers, although for the reasons explained above based on the text of ARPA, it would appear to be. Assuming the tax credit is available, it also remains to be seen what recordkeeping or tax return requirements the IRS may establish in order for public education employers to claim the credit.
As is often the case with tax issues, the devil is in the details, and the most important interpretation of tax law is usually that adopted by the IRS. School and community college district employers therefore are advised to monitor announcements from the IRS and to consult with legal counsel on this issue. If you have questions, please contact one of the authors or your regular AALRR counsel.