Last night (Wednesday, March 18, 2020) the President signed the Families First Coronavirus Response Act after it passed the Senate in the afternoon by a vote of 90-8.  The Act requires all private health plans to cover COVID-19 diagnostic testing—coverage that most insured and large self-insured health plans already are providing.  The Act also requires employers with fewer than 500 employees to provide up to ten weeks of paid FMLA leave and two weeks of paid sick leave to employees affected by COVID-19.  For small employers subject to these new leave mandates, the Act provides tax credits to help offset the cost of the mandates.  This means that the tax credits are not available to employers with 500 or more employees, even if they provide paid leave equal to or in excess of that required of smaller employers under the Act.  It is noteworthy that the Senate voted down amendments that would have expanded the bill’s paid FMLA leave or replaced the bill’s paid leave with state unemployment benefits.

Overview

The following provisions are included in the Act and are likely to attract the attention of private businesses and their employees.

• Testing.  The Act requires private health plans to provide coverage for COVID-19 diagnostic testing, including the cost of a provider, urgent care center, and emergency room visits for such purposes, at no cost to the participant.  Most insured and large self-insured plans are already providing this coverage.
• Emergency FMLA Expansion. The Act requires employers with fewer than 500 employees to provide employees, who have been on the job for at least 30 days, to the extent they cannot work or telework, with the right to take up to 12 weeks of job-protected leave under the FMLA to care for a child, under the age of 18, of an employee who has lost access to child care, due to coronavirus.  Earlier drafts of the legislation would have provided broader paid leave rights for those who were subject to a required or recommended quarantine or to care for a family member subject to a required or recommended quarantine.
  • After 10 days of unpaid leave (down from 14 days in earlier drafts of the legislation), an employer will be required to pay an employee no less than 2/3 of the employee’s usual wages up to a maximum of $200 per day and $10,000 total. Earlier drafts of the legislation did not impose such caps on the amount of leave. Note that employees may be able to make use of the paid sick leave included in the Act to receive pay during the 10-day period of unpaid FMLA leave.
  • The final version of the Act includes an exception permitting employers of health care providers or emergency responders to elect to exclude such employees from these emergency leave provisions.
  • The Department of Labor (“DOL”) may also issue general hardship waivers to employers with fewer than 50 employees.
  • The restoration provisions of the FMLA do not apply to employees who take such leave if they are employed by an employer with fewer than 25 employees provided that certain conditions are met. Generally, such an employer is not required to reemploy an employee who takes leave under the Act if that employee’s job no longer exists, on account of economic conditions at least nominally related to the outbreak of the coronavirus, and the employer makes reasonable efforts to restore the employee to an equivalent position.  Most notably, the employer must also make reasonable efforts to contact the former employee for up to one year if the a position becomes available.
• Emergency Paid Sick Leave. In a separate provision, the Act requires employers with fewer than 500 employees to provide employees, to the extent they cannot work or telework, with two weeks (80 hours for FT) of paid sick leave, paid at the employee’s regular rate (up to a cap of $511 per day and $5,110 total), to quarantine or seek a diagnosis for coronavirus or, paid at 2/3 the employee’s regular rate (up to a cap of $200 per day and $2,000 total) to care for a family member for such purposes or to care for a child.  Earlier drafts of the legislation did not impose caps on the value of such leave.
  • Employers may not retaliate against employees for using this leave and may not require an employee to find a replacement to cover a missed shift.
  • Employers of health care providers or emergency responders may elect to exclude such employees from these emergency leave provisions.
  • Unlike earlier drafts of the legislation, the technical corrections remove the requirement that the paid sick leave required under the law be in addition to any sick time allowed under existing employer policies.
  • DOL will provide a notice outlining employee rights that employers must post.
  • DOL may also issue general hardship waivers to employers with fewer than 50 employees.
• Tax Credits. The Act includes a dollar-for-dollar refundable credit in an amount equal to the sick and FMLA leave required to be paid under the Act.  The amount of the credit allowed may also be increased by an employer’s additional qualified health plan expenses that are allocable to leave wages, and by the amount of additional tax imposed for hospital insurance.  However, caps do apply ($200 per day per employee to $10,000 per employee for all calendar quarters for paid family leave and $511 per day per employee to $7,156 per employee for all calendar quarters for paid sick leave).
  • The credit is applied against the employer share of FICA taxes. It is unclear whether employers will be able to reduce their deposit liabilities as the required leave benefits are paid or if they will have to front the cost of the leave until after the quarterly Form 941 is filed.  We anticipate IRS guidance on the implementation of the credits will be provided quickly if the measure is enacted.
  • In addition to the tax credit, amounts paid for sick and FMLA leave under the Act are not included in wages for purposes of the employer share of Social Security tax. Although the benefits are not excluded from wages for purposes of the employer share of Medicare taxes, the credit calculation will offset the employer share of Medicare tax due on the leave payments.
  • Leave payments would be subject to the withholding of both federal income tax wages (and state income tax in most states) and all employee FICA taxes.
  • No tax credit is allowed under the Act for amounts subject to the credit under section 45S, which provides a temporary income tax credit for paid family and medical leave and was added as part of the Tax Cuts and Jobs Act of 2017. The section 45S credit is only available for taxable years that began before December 31, 2019.
  • Employers of more than 500 employees are not eligible for either tax credit under the Act because they are not subject to either leave mandate.

Key Issues

The provisions of the Act expanding FMLA and sick leave and offering tax credits to subsidize this expansion apply only to employers with 500 or fewer employees.  On the one hand, this means that small businesses, which are less likely to offer paid leave compared to larger employers, will be subject to a new paid leave mandate. On the other hand, larger businesses that offer existing leave programs or voluntarily expand their leave programs will not benefit from the Act’s new tax credits. Given that the current national emergency will likely result in a large increase in the amount of leave employees take, the lack of financial assistance in the form of tax relief to larger employers may force some of them to cut back on their leave programs or turn to layoffs or furloughs, given the simultaneous restriction on their ability to earn revenue through operations.  This is particularly true in the restaurant, entertainment, travel, and fitness industries.

The limitation of child care to care of children under the age of 18 (in the FMLA portion of the Act) is potentially harmful to the parents of older children with disabilities (e.g., the parent of a child whose severe autism has kept that child in the public schools past age 18).  This apparent gap in FMLA coverage is striking, given that the definitions used in the paid sick leave portion of the Act include children who are 18 years or older and incapable of self-care because of mental or physical disability.  It is possible that administrative relief will be offered by DOL in such instances.  Again, this issue would be limited to smaller employers subject to the Act’s FMLA leave mandate.

The Act includes special rules for employers that are subject to the paid leave mandates and also participate in multiemployer plans.  The intent of these provisions is to permit such employers to take credit for paid leave provided under the multiemployer plan toward the mandates and to qualify for the corresponding tax credits.  How this will work mechanically in practice will undoubtedly be subject to further administrative clarification and guidance.