The American Rescue Plan Act of 2021 (“ARPA”), which was signed into law last month by President Biden, brought about many changes as part of its $1.9 trillion legislation. One significant impact of the ARPA was the expansion of eligibility for tax credits to certain governmental employers that voluntarily provide qualifying paid sick and family leave to employees.
Last year, the Families First Coronavirus Response Act (“FFCRA”) required certain employers to provide paid sick and expanded family and medical leave to employees unable to work or telework for specified reasons related to COVID-19 from April 1, 2020 through December 31, 2020. The FFCRA also provided tax credits for employers to help offset some of the costs associated with providing leave. However, governmental employers, including local school districts, were not eligible for the tax credits. The only limited relief for governmental employers was that, if the employer and employee were otherwise subject to Social Security and Medicare taxes for eligible wages, governmental employers did not need to pay the employer portion of the Social Security tax.
Earlier this year, under the Consolidated Appropriations Act of 2021, governmental employers, including school districts, were permitted to provide paid leave on a voluntary basis through March 31, 2021. However, school districts were still not eligible for expanded tax credits that were available to small and mid-size private employers.
Under the ARPA, school districts continue to be permitted to provide paid leave on a voluntary basis from April 1, 2021 through September 30, 2021. However, under the ARPA, it appears that additional tax credits are now available to governmental employers (other than the federal government and its agencies and instrumentalities), including school districts.
The good news for state and local governmental employers is that tax credits under the ARPA are allowed against the employer portion of the Medicare tax for wages paid from April 1, 2021 through September 30, 2021. We are monitoring this development and awaiting clarification and guidance from the IRS to address this major change from previous rules.
To take advantage of this benefit, when issuing paid leave payments under the ARPA, if the employer and employee are otherwise subject to Social Security and Medicare taxes, school districts:
- Must pay the employer portion of the Social Security tax;
- Must withhold the employee share of the Social Security tax;
- Must pay the employer share of the Medicare tax;
- Must withhold the employee share of the Medicare tax; and
- Must withhold federal income tax.
It is important to note that a school district that provides paid leave payments to its employees before it is required to deposit federal employment taxes with the IRS may keep the amount of federal employment taxes it deposits for that quarter by the amount of paid leave (up to the applicable cap), the employer portion of the Social Security tax and the employer portion of Medicare tax on the qualified wages for that calendar quarter. If the amount of the tax credit for a calendar quarter exceeds the employer portion of the Medicare tax for that quarter, then the excess is treated as an overpayment that can be applied to offset any remaining tax liability (including the employer portion of the Social Security tax) on Form 941 prior to being refunded to the school district. If a school district does not have enough federal employment taxes on deposit to cover the amount of the anticipated credits, it may request an advance by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Furthermore, the ARPA added a nondiscrimination provision restriction. Under this provision, no paid leave tax credits will be allowed if the school district discriminates in favor of highly compensated employees, full-time employees, or employees with more years of service in the school district.
More guidance on these changes is expected from the IRS.