American Rescue Plan Act of 2021 (ARPA) Extends and Enhances CARES Act Programs for Employers
The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act introduced important programs for employers. The Employee Retention Credit (“ERC”), Paycheck Protection Program (“PPP”) loans, and refundable credits for paid sick and family medical leave wages, have all helped businesses and organizations continue to survive and pay wages and benefits to employees during the pandemic. The American Rescue Plan Act of 2021 (“ARPA”) signed into law on March 11, 2021, expands and enhances these key programs, providing additional relief to employers and businesses.
Expansion of the Employee Retention Credit
ARPA expands the ERC first, by extending the availability of the credit through December 31, 2021, and second, by adding two new categories of employers who can qualify for additional ERC: recovery startup employers and severely financially distressed employers.
- A recovery startup business employer can claim an ERC of up to $50,000 for wages paid during a quarter. ARPA defines a recovery startup business as one that a) began carrying on a trade or business after February 15, 2020; b) meets an average gross receipts test of $1 million or less; and c) does not meet the usual ERC criteria of a government ordered suspension or reduction in quarterly gross receipts
- A severely financially distressed employer can claim the ERC for all wages paid during a quarter. ARPA defines this category of employer as one with gross receipts for a calendar quarter in 2021 that are less than 10 percent of gross receipts for the same calendar quarter in 2019, with special rules applying for those not in business for all quarters in 2019.
According to IRS guidance, employers claiming ERC should decrease deductible wages expense and health benefits expense in accordance with Internal Revenue Code section 280C(a). These expense deductions are reduced for federal income tax purposes by the amount of the credit allowed for that quarter. An employer does not, however, reduce its deduction for the employer’s share of Social Security and Medicare taxes by any portion of the ERC.
Any wages taken into account for the ERC cannot be used for other payroll credits, including the paid sick and family medical leave credit. A credit claimed under these provisions is subject to a five year statute of limitations.
Credit for Paid Sick and Family Medical Leave
Under the Families First Coronavirus Response Act (“FFCRA”), employers could claim a refundable tax credit for 100% of mandated emergency sick or family medical leave wages and health benefits paid during the last three quarters of 2020. The Consolidated Appropriations Act, 2021, extended this credit through March 31, 2021, but does not extend the mandate to provide the paid leave after 2020, allowing it to expire. ARPA extends this credit two more quarters through September 30, 2021.
Under ARPA, the refundable credit is available for wages paid that would otherwise meet the requirements of the mandated emergency sick or family medical leave wages under FFCRA. In addition, the credit is now only available if the employer does not discriminate in favor of highly compensated employees, full-time employees, or on the basis of an individual’s employment tenure to allow some more access to paid sick and family medical leave than others. The maximum amount of emergency paid sick leave for any person is limited to wages for 80 hours (up to $511 per day for 10 days). The new law makes clear that the 80-hour limit is applies annually. There is an 80 hour limit for the last three quarters of 2020 and a new 80-hour limit for all of 2021.
Beginning April 1, 2021, ARPA expands the amounts eligible for the credit to include:
- wages of an employee paid while the employee is seeking or awaiting the results of diagnostic tests or a medical diagnosis of COVID-19, if the employee has been exposed to COVID-19 or the employee’s employer has requested such a test
- sick leave wages paid during the time an employee is getting a vaccine or recovering from reactions to the vaccine
- an increase in total wages eligible per employee for FMLA leave from $10,000 to $12,000
The FFCRA paid sick and family medical leave credit also applies to self-employed persons. The credit is equal to an amount that an employer would be entitled to if the individual was an employee and not self-employed. Consistent with the employer credit, ARPA increases the number of days the credit can be claimed by self-employed persons for FMLA leave from 50 days to 60 days.
For federal income tax purposes, employers claiming the FFCRA credit increase their gross income by the amount of the credit on the last day of the calendar quarter for which the credit is allowed. Any wages taken into account for this credit cannot be used for other payroll credits, including the Employee Retention Credit. The FFCRA credit claimed is generally subject to a five year statute of limitations.
Paycheck Protection Program Enhanced
The CARES Act provides forgivable loans to many businesses and certain tax exempt organizations facing economic uncertainty as a result of the COVID-19 pandemic. PPP loans can be forgiven to the extent the borrower spends the proceeds on eligible expenses during a covered period. ARPA makes changes to borrower criteria to expand the number of businesses and organizations eligible for PPP loans.
To qualify for a first draw PPP loan, businesses and organizations had to employ no more than 500 employees during 2019 or during the four quarters ending before the loan application was filed. Exceptions to this rule were included in the law, most notably for franchise organizations and businesses in the hospitality industry which can count employees by location.
ARPA expands eligibility to borrowers by permitting tax exempt organizations to determine employee counts based on each geographic location of the organization. The following organizations may apply for PPP loans if the organization has fewer than 500 total employees in a physical location:
- Section 501(c)(3) charitable tax exempt organizations
- Section 501(c)(4) social welfare organizations
- Section 501(c)(6) business leagues
- Section 501(c)(19) organizations for past and present members of the military
Other tax exempt organizations qualify if the organization: a) has fewer than 300 total employees in a physical location; b) would be eligible to receive loans from the Small Business Administration (including for this rule, tax exempt and religious organizations); and c) passes several tests demonstrating limited activities, receipts, and expenses related to political lobbying.
ARPA also extends eligibility for PPP loans to certain internet news publishing organizations. The new law sets several specific criteria to qualify these organizations for PPP loans.