On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (ARPA).  ARPA extends and modifies the availability of employment tax credits for wages and certain associated amounts paid under the Emergency Paid Sick Leave (EPSL), Expanded Family and Medical Leave (EFML), and Employee Retention Credit (ERC) programs. ARPA also introduces an employment tax credit for COBRA continuation coverage premium assistance.

In brief, EPSL and EFML credit availability will be extended through the second and third quarters of 2021, a COBRA continuation coverage premium assistance tax credit will be available for the second and third quarters of 2021, and the availability of the ERC will be extended through the third and fourth quarters of 2021. For these periods, some tax credit limits will be modified and all these refundable and advanceable credits will first be applied against the employer portion of Medicare tax.

Emergency Paid Sick Leave and Expanded Family & Medical Leave Credits

Extension:

EPSL and EFML credits will be available for qualified wages and certain associated amounts paid with respect to the second and third quarters of 2021.

Like the extension of the availability of these credits through the first quarter of 2021 under the Consolidated Appropriations Act (CAA) 2021, employers are not required to provide EPSL and EFML payments and leave. However, if an employer pays leave wages that would have been required to be paid had the EPSL and EFML requirements to provide paid leave been applicable during this period, the employer may claim credits for these wages and certain associated amounts.

Modifications:

Reset of EPSL Aggregate Day Limit

For the purposes of determining the maximum number of leave days countable for the purposes of EPSL credits, leave days taken in the second and third quarters of 2021 will be treated separately from leave days taken prior to April 1, 2021.

For EPSL in the second and third quarters of 2021, an individual may take up to 10 days of leave and depending on the type of sick leave, up to $200 or $511 per day may count toward qualified wages.

EFML Aggregate Wage Limit Increase

Beginning on April 1, 2021, the EFML aggregate wage limit will increase to $12,000. 

This increase is from the $10,000 aggregate wage limit that is in effect for wages paid in respect to dates prior to April 1, 2021.

Social Security Taxability

EPSL and EFML wages paid with respect to periods prior to April 1, 2021, are exempt from the employer portion of Social Security tax.

EPSL and EFML wages paid with respect to the second and third quarters of 2021 will be taxable for the purposes of the employer portion of Social Security tax.

Credit Amount Increase

To offset this change in taxability, EPSL and EFML credits for amounts paid with respect to the second and third quarters of 2021 will be grossed up by the employer portion of Social Security tax on EPSL and EFML qualified wages.

Credit First Applied Against Medicare Tax

EPSL and EFML credits for the second and third quarters of 2021 will first apply against the employer portion of Medicare tax and be refundable and advanceable.

If the IRS provides refund and advance payment mechanisms like those for these employment tax credits in previous quarters, credit amounts in excess of the employer portion of Medicare tax can be applied against other employment taxes, and credit amounts in excess of all employment taxes can be advanced to the employer.

EPSL and EFML credit amounts for periods before April 1, 2021, are first applied against the employer portion of Social Security tax, credit amounts in excess of the employer portion of Social Security tax are applicable against other employment taxes, and credit amounts in excess of all employment taxes can be advanced to the employer.

COBRA Continuation Coverage Premium Assistance Tax Credit

Employers that provide qualifying COBRA continuation coverage for periods beginning April 1, 2021, through September 30, 2021, can receive employment tax credits for each quarter in an amount equal to the coverage premiums not paid by eligible individuals.

This employment tax credit will apply against the employer portion of Medicare tax and be refundable and advanceable.

If the IRS provides refund and advance payment mechanisms like those for the other relief-related employment tax credits in previous quarters, amounts of this credit in excess of the employer portion of Medicare tax reduced by applicable EPSL, EFML, and ERC amounts can be applied against other employment taxes, and credit amounts in excess of all employment taxes can be advanced to employers.

For additional information on the ARPA’s COBRA Premium Assistance Provisions, click here to read our March 19 publication to PrimePay’s blog titled “Effective April 1, 2021: American Rescue Plan Act of 2021 (ARPA) COBRA Premium Assistance Provisions.”

Employee Retention Credit

Extension:

The ERC will be available for employee retention wages and certain associated amounts paid with respect to the third and fourth quarters of 2021.

Modification:

Credit First Applied Against Medicare Tax

ERC for amounts paid with respect to the third and fourth quarters of 2021 will first apply against the employer portion of Medicare tax and be refundable and advanceable.

If the IRS provides refund and advance payment mechanisms like those for this employment tax credit in previous quarters, credit amounts in excess of the employer portion of Medicare tax reduced by EPSL and EFML credits can be applied against other employment taxes, and credit amounts in excess of all employment taxes can be advanced to the employer.

ERC amounts for periods before July 1, 2021 are first applied against the employer portion of Social Security tax reduced by any EPSML and EFML credits. Credit amounts in excess of the employer portion of Social Security tax reduced by any EPSL and EFML credits can be applied against other employment taxes, and credit amounts in excess of all employment taxes can be advanced to the employer.

Stay compliant with PrimePay.

The modifications available under the ARPA are complex and bring new administrative burdens.  Working with a payroll service and human capital management (HCM) provider can help you stay compliant.

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Disclaimer: Please note that this is not all-inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding the specific application of the information to your own plan.