Congress Says Employers May Swap Paid Leave for Tax Credits: How the American Rescue Plan Act Can Reduce Employer Tax Payments

4 min

Earlier this month, Congress passed the American Rescue Plan Act (ARPA). Under this law, employers with fewer than 500 employees may receive substantial tax credits in exchange for voluntarily providing employees paid sick leave and family and medical act leave for qualifying COVID-19-related absences. Here is how ARPA works, along with some important considerations for employers that may wish to take advantage of the tax credits.

Providing Leave to Employees Is Voluntary

As we previously covered here, the mandatory leave provisions under the Families First Coronavirus Response Act (FFCRA) expired on December 31, 2020. Eligible employers are no longer required to provide either Emergency Paid Sick Leave (EPSL) or Expanded Family and Medical Leave (EFMLA). ARPA allows employers to voluntarily provide extended EPSL or EFMLA in exchange for tax credits.

Employees May Take Leave for Additional Qualifying Reasons

If eligible employers choose to extend employees' EPSL and EFMLA entitlements, in addition to the qualifying reasons already provided under the FFCRA, leave may be taken under EPSL and EFMLA for the following additional reasons:

  1. To receive the COVID-19 vaccine;
  2. To recover from a condition, illness, or disability related to the COVID-19 vaccine; and
  3. To seek or await results of a COVID-19 test or diagnosis.
Tax Credit for Additional Qualifying Reasons

Employers will receive a tax credit on the wages paid to employees for leave taken in accordance with these additional reasons, capped at $511/day. Note that this applies only to wages paid beginning April 1, 2021 through September 30, 2021. The amount of qualifying wages taken into account remains the same for the original FFCRA reasons, which we have previously written about in greater detail here.

Employees Are Conditionally Entitled to Additional EPSL (but Not Additional EFMLA)

ARPA enlarges the amount of EPSL available to employees, but only if an employer voluntarily chooses to provide additional leave. From April 1, 2021 through September 30, 2021, employees are allowed to take up to an additional 80 hours of EPSL. As a result, if employees have already exhausted their 80 hours of EPSL prior to April 1, 2021, they will still be entitled to this additional time.

ARPA does not provide additional time for EFMLA. Employees are still only entitled to a total of 12 weeks of EFMLA. Accordingly, if an employee has already used some of those 12 weeks prior to April 1, 2021, he or she is only entitled to use the remaining balance through September 30, 2021.

All EFMLA Is Paid

Under the original FFCRA scheme, two of the 12 weeks of EFMLA were unpaid. Under ARPA, those first 10 days are now paid, for a total of 12 paid weeks of EFMLA. The tax credit continues to be capped at $200 of qualified wages per day for these additional paid days.

The Aggregate Tax Credit for EFMLA Increased

ARPA expands the amount of tax credit an employer can receive for EFMLA. When Congress initially passed the FFCRA, the law allowed employees to claim a tax credit on wages of up to $10,000 paid to employees who took paid EFMLA. Employers are now eligible for tax credits on wages of up to $12,000 per employee. This is likely to account for the additional 10 days of paid EFMLA.

Employers Must Follow the Other Provisions of the FFCRA

The tax credit sections of APRA make clear that employers are entitled to the tax credit only if they abide by the requirements of the FFCRA with respect to EPSL and EFMLA. This includes job reinstatement obligations, as well as the prohibition against requiring employees to use other forms of paid leave (e.g., paid time off) concurrently with EPSL or EFMLA..

As with the extension provided under the COVID-19 relief law, employers must once again consider whether they would like to provide this continued entitlement. In assessing this question, employers should keep in mind state and local laws that provide for the same leave entitlements, their staffing needs as they likely move back toward regular business operations, the proliferation of vaccines, and overall employee morale.

Unfortunately, however, ARPA leaves some important questions unanswered, such as (i) May employers receive tax credits in exchange for voluntarily providing EPSL and EFMLA between April 1 and September 30 if they did not previously provide the same leave from January 1 through March 31? and (ii) Will an employer be able to receive a tax credit for leave that begins prior to September 30, 2021 but ends afterward? We anticipate that some of these details will be covered in regulations promulgated within due time. We will continue to monitor for any important updates. If you have any questions about the foregoing, or any other return-to-work or COVID-19-related questions, please contact the authors of this article or any other Venable Labor and Employment Group attorney.