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IRS May Take More Generous Approach on Paid Leave

Posted on Mar. 25, 2020

Upcoming guidance on the paid leave provisions and payroll tax credits created in response to the coronavirus pandemic could be broader than the statute.

“It appears that Treasury and the Department of Labor are taking a more expansive and favorable reading of the statute than we did at least when we first read it,” Scott A. Harty of Alston & Bird LLP said March 24 during a webinar hosted by his firm.

The IRS issued a release (IR-2020-57) March 20 previewing guidance that is expected imminently in response to the passage of the Families First Coronavirus Response Act (P.L. 116-127). That legislation, signed into law March 18, provides payroll tax credits for employers providing paid sick and family and medical leave.

Harty said the pending guidance will explain how eligible employers who provide that leave will be allowed to retain payroll taxes equal to the amount of qualified wages paid.

“What [the IRS is] saying is that the payroll taxes available for retention would be both the employer and employee portion of FICA and withheld federal income taxes, which seems generous and broader than what the statute contemplates but is very good for employers,” Harty said. The goal is to get money into the system as quickly as possible, he added.

The March 20 release also says that if the payroll taxes aren’t sufficient to cover the cost of the wages paid, employers will be allowed to file a request for accelerated payment from the IRS.

“The IRS expects to process these requests in two weeks or less,” according to the release.

Credit Enhancer

Harty also said there’s an important enhancer that allows the credit to be increased by the employer’s health plan expenses that are allocable to the wages paid to the employee or are incurred to maintain a group health plan.

“The allocation methodology is not clear from the statute,” Harty said, adding that discretion has been given to the Treasury secretary to flesh out allocation rules.

“There is language in the statute that suggests an allocation would be proper if it’s pro rata among covered employees and pro rata on the basis of periods of coverage, but we’re not quite sure what that means,” Harty said. “So hopefully guidance will be forthcoming.”

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