The Families First Coronavirus Response Act (FFCRA) provides small and midsize employers – with fewer than 500 employees – refundable tax credits that reimburse them for the cost of providing paid sick and family leave to their employees as the result of COVID-19. Workers may receive up to 80 hours of paid sick leave for their own health needs or to care for others, and up to an additional ten weeks of paid family leave to care for a child whose school or place of care is closed or unavailable.
The Internal Revenue Service (IRS) recently released a series of frequently asked questions (FAQs) focusing on how businesses should calculate and claim the credit – including how to determine the amount of wages which can be reimbursed. Of particular interest is how health coverage (including FSA/HRA/HSA contributions) is reflected in determining the amount of wages subject to this credit. Qualified health plan expenses provided to employees are included in the amount of the credit, but only to the extent that these expenses were excluded from the employee’s gross income as employer-provided coverage under a group health plan.
Q&As 31, 32, 35 and 36 are highlighted below…
Question #31 – Does the amount of qualified health plan expenses include both the portion of the cost paid by the Eligible Employer and the portion of the cost paid by the employee?
Answer: The amount of qualified health plan expenses taken into account in determining the credits generally includes both the portion of the cost paid by the Eligible Employer and the portion of the cost paid by the employee with pre-tax salary reduction contributions. However, the qualified health plan expenses should not include amounts that the employee paid for with after-tax contributions.
Question #32 – For an Eligible Employer that sponsors more than one plan for its employees (i.e. both a group health plan and a health FSA), or more than one plan covering different employees, how are the qualified health plan expenses for each employee determined?
Answer: The qualified health plan expenses are determined separately for each plan. Then, for each plan, those expenses are allocated to the employees who participate in that plan. In the case of an employee who participates in more than one plan, the allocated expenses of each plan in which the employee participates are aggregated for that employee.
Question #35 – For an Eligible Employer who sponsors a HSA or Archer MSA and a high deductible health plan (HDHP), are contributions to the HSA or Archer MSA included in the qualified health plan expenses?
Answer: The amount of qualified health plan expenses does not include Eligible Employer contributions to HSAs or Archer MSAs. Eligible Employers who sponsor an HDHP should calculate the amount of qualified expenses in the same manner as an insured group health plan, or a self-insured plan, as applicable.
Question #36 – For an Eligible Employer who sponsors a HRA, a health FSA or a qualified small employer health reimbursement arrangement (QSEHRA), are contributions to the HRA, health FSA, or QSEHRA included in the qualified health plan expenses?
Answer: The amount of qualified health plan expenses may include contributions to an HRA (including an individual coverage HRA), or a health FSA, but does not include contributions to a QSEHRA. To allocate contributions to an HRA or a health FSA, Eligible Employers should use the amount of contributions made on behalf of the particular employee.
These FAQs will be updated to address changes in the law or additional questions as they are raised.
COVID-19-Paid Leave Tax Credit FAQs https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-required-paid-leave-provided-by-small-and-midsize-businesses-faqs#allocable_qualified_health_plan_expenses