Payroll Tax Credits Under the FFCRA and the CARES Act: Determining Qualified Health Plan Expenses
***Information and guidance in client updates was up to date at time of publication. During the pandemic, information and guidance has been changing rapidly. If you have any questions about the information contained in a client update, please contact the author(s) or your Miller Johnson attorney.***
Both the Families First Coronavirus Response Act (the FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) provide for payroll tax credits for the payment of certain employee wages until December 31, 2020. Under both the FFCRA and the CARES Act, the amount of these wages include “qualifying health plan expenses,” which may result in a larger payroll tax credit.
Under the FFCRA, an employer is typically eligible for a fully refundable payroll tax credit that is equal to the qualified sick leave wages and the qualified family leave wages, plus allocable qualified health plan expenses paid between April 1, 2020 and December 31, 2020.
Under the CARES Act, an employer whose operations is fully or partially suspended may be eligible for a payroll tax credit up to 50% of the wages paid (up to $10,000) between March 12, 2020 and January 1, 2021. Again, these wages include allocable qualified health plan expenses.
Employers may offset the amount of their anticipated payroll tax credits under the FFCRA and the CARES Act against their deposit of employment taxes (including income tax withholdings) with the IRS. Since many employers are required to make these deposits with the IRS on a semi-weekly basis, employers should start determining their qualified health plan expenses as soon as possible.
Both the FFCRA and the CARES Act include the following provisions:
- That the amount of the credit (under the FFCRA) or the amount of qualified wages (under the CARES Act) includes the employer’s allocable “qualified health plan expenses.” (See Section 7001(d)(1) of the FFCRA and Section 2301(b)(3)(C)(i) of the CARES Act.)
- “Qualified health plan expenses” means “amounts paid or incurred by the employer to provide and maintain a group health plan (as defined in section 5000(b)(1) of the Internal Revenue Code of 1986), but only to the extent that such amounts are excluded from the gross income of employees by reason of section 106(a) of such Code.” (See Section 7001(d)(2) of the FFCRA and Section 2301(b)(3)(C)(ii) of the CARES Act.)
- The FFCRA and the CARES Act direct the Secretary of the Treasury to prescribe how qualified health plan expenses are allocated but also state that, “[e]xcept as otherwise provided by the Secretary, such allocation shall be treated as properly made if made on the basis of being pro rata among employees and pro rata on the basis of periods of coverage (relative to the periods such wages relate).” (See Section 7001(d)(3) of the FFCRA and Section 2301(b)(3)(C)(iii) of the CARES Act.)
The provisions related to determining qualified health plan expenses for purposes of claiming payroll tax credits under either the FFCRA or the CARES Act are difficult to interpret. The following sections of this Client Update attempt to break these provisions down so that they are better understood. The first step is to determine which health plan expenses are eligible for a payroll tax credit. The second step is to allocate these expenses to the appropriate employees.
Eligible Health Plans
A “group health plan” under Section 5000(b)(1) of the Internal Revenue Code (the Code) includes all plans that are subject to the continuation of coverage requirements under COBRA. As a result, the following employer-sponsored plans are included for purposes of determining the payroll tax credit under both the FFCRA and the CARES Act:
- Medical/prescription drugs;
- Medical Flexible Spending Account (medical FSA);
- Health Reimbursement Arrangement (HRA), except for Qualified Small Employer HRAs;
- Employee Assistance Plans (other than referral-only EAPs); and
- On-Site Medical Clinics.
Expenses incurred as a result of providing one of the above group health plans are only included for purposes of determining the payroll tax credit under the FFCRA and the CARES Act to the extent these amounts are excluded from the gross income of employees under Section 106(a) of the Code. This includes amounts paid by the employer. It also includes amounts that are paid by employees through pre-tax salary reductions under a Section 125 Cafeteria plan. Amounts paid by employees on an after-tax basis, such as COBRA premiums, are not included for purposes of determining the payroll tax credit.
The IRS issued a series of FAQs regarding the payroll tax credits under the FFCRA (which are available here). The IRS also issued FAQs on the payroll tax credits under the CARES Act (which are available here), but those FAQs don’t address qualified health plan expenses. Since the statutory provision regarding the allocation of qualified health plan expenses is the same under the FFCRA and the CARES Act, it appears reasonable that the FAQs on how to allocate these expenses under the FFCRA would apply equally to the CARES Act.
Fully Insured Group Health Plans
The IRS’s FAQs give the following three allocation methods with respect to fully insured group health plans: (1) the COBRA applicable premium for the employee typically available from the insurer (while the FAQs are silent on this, we do not recommend including the 2% administrative fee); (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.
The FAQs only give an example of the second allocation method. Here is that example:
An Eligible Employer sponsors an insured group health plan that covers 400 employees, some with self-only coverage and some with family coverage. Each employee is expected to have 260 work days a year. (Five days a week for 52 weeks.) The employees contribute a portion of their premium by pre-tax salary reduction, with different amounts for self-only and family. The total annual premium for the 400 employees is $5.2 million. (This includes both the amount paid by the Eligible Employer and the amounts paid by employees through salary reduction.)
For an Eligible Employer using one average premium rate for all employees, the average annual premium rate is $5.2 million divided by 400, or $13,000. For each employee expected to have 260 work days a year, this results in a daily average premium rate equal to $13,000 divided by 260 or $50. That $50 is the amount of qualified health expenses allocated to each day of paid sick or family leave per employee.
Self-Insured Group Health Plans
With respect to self-insured group health plans, the FAQs give the following two allocation methods: (1) the COBRA applicable premium for the employee typically available from the administrator (again, while the FAQs are silent on this, we do not recommend including the 2% administrative fee) or (2) any reasonable actuarial method to determine the estimated annual expenses of the plan. The FAQs do not, however, give any examples of the allocation methods for self-insured group health plans.
Miller Johnson’s Comments
From an administrative perspective, we believe it will be easiest for plan sponsors of fully insured group health plans or self-funded group health plans to use the COBRA applicable premium method because these COBRA premiums are readily available from the insurer (if fully insured) or the third-party administrator (if self-insured). Here is our example:
An Eligible Employer sponsors a group health plan (either fully insured or self-insured) under which the applicable monthly COBRA premiums (less the 2% administrative fee) are: (1) $550 for employee-only coverage; (2) $965 for employee-plus-one coverage; and (3) $1,430 for family coverage.
There are generally 22 “work” days in April. As a result, if employee is entitled to paid sick leave or family leave in April of 2020, the employer can include the following amounts as qualified health plan expenses for purposes of calculating the payroll tax credit per day of sick or family leave: (1) $25.23 for employees enrolled in employee-only coverage ($550/22); (2) $43.86 for employees enrolled in employee-plus-one coverage ($965/22); and (3) $65 for employees enrolled in family coverage ($1,430/22). It appears that these calculations can also be used to determined allocable qualified health plan expenses under the CARES Act.
If you have additional questions about calculating the proper amount of the payroll tax credits under the FFCRA and the CARES Act, especially with respect to qualified health plan expenses, please contact a Miller Johnson Benefits or Tax attorney.