Understanding the Payroll Implications of the American Rescue Plan Act
Written by Complete Payroll
The American Rescue Plan Act (ARPA) of 2021 was passed by Congress on March 10 of this year. It was passed as a means of providing continued relief related to the novel coronavirus pandemic. It affects the economy, public health, state and local governments, individuals, and businesses.
Some of the areas of impact include:
- Supplemental Nutrition Assistance Program (SNAP)
- Schools, colleges, and universities
- Childcare programs
- COVID-19 vaccinations and treatment
- Medical, mental health, and substance abuse treatment
- Rental and housing assistance
- Payments to state, local, tribal, and territorial governments
- Multi-employer pension plans
- Small business assistance
- Healthcare worker programs
- International and humanitarian programs
- Tribal government services
- Scientific R&D
- Projects that enable work related to COVID-19
- Healthcare providers in rural areas
As payroll managers, there are some important implications to be aware of.
There are 7 key areas of impact for payroll management. In this post, we will offer an overview of the changes. If you have specific questions, please don’t hesitate to get in touch with the payroll experts here at Complete Payroll.
- Paid Sick and Family Leave Credits
- Employee Retention Credit
- Unemployment Provisions
- Modifications to the Paycheck Protection Program
- Other Relief-Related Provisions
- Earned Income Credit
- Pension and Benefits Related Provisions
Paid Sick and Family Leave Credits
Here is what you need to know about paid sick and family leave credits:
ARPA extends the previously established FFCRA paid sick time and family leave credits until September 30, 2021. It establishes that paid sick and family leave credits are both able to be increased by the employer’s share of Social Security taxes (6.2%). However, it can only be applied to the employer’s share of the Medicare tax (1.45%), not the employee’s.
Some of the other changes include:
- Paid sick and paid family leave credits may each be increased by the employer's share of Social Security tax (6.2%) and employer's share of Medicare tax (1.45%) on qualified leave wages.
- Waiver for failure to deposit penalties on "applicable employment taxes" if the failure to deposit is due to an anticipated credit.
- Credits for paid sick and family leave may be structured as a refundable payroll tax credit against Medicare tax only (1.45%), beginning after March 31, 2021
- There’s an increase in the amount of wages for which an employer may claim the paid family leave credit in a year. It was $10,000 per year, but now it is $12,000 per employee.
- There’s an expansion of the paid family leave credit to allow employers to claim the credit for leave provided for the reasons included under the previous employer mandate for paid sick time.
- Paid sick and family leave credit may be claimed by employers who provide paid time off for employees to obtain the COVID-19 vaccination or recover from an illness related to the immunization.
- There’s an increase in the paid sick and family leave credit by the cost of the employer's qualified health plan expenses and by the employer's collective bargains contributions to a defined benefit pension plan (as defined under Code Sec. 414(j)) and the amount of collectively bargained apprenticeship program contributions.
- Establishment of a non-discrimination requirement where no credit will be permitted to any employer who discriminates in favor of highly-compensated employees as defined under Code Sec. 414(q), full-time employees, or employees on the basis of employment tenure.
- There’s a reset of the 10-day limitation on the maximum number of days for which an employer can claim the paid sick leave credit with respect to wages paid to an employee. The current 10-day limitation runs from the start of the credits in 2020 through March 31, 2021. For the self-employed, the 10-day reset applies to sick days after January 1, 2021 for self-employed individuals.
- There’s a clarification that while no credit for paid sick and family leave may be claimed by the federal government or any federal agency or instrumentality, this would not apply to any organization described under Code Sec. 501(c)(1) and exempt from tax under Code Sec. 501(a), including state and local governments.
Employee Retention Credit
The Employee Retention Credit (ERC) was established under the CARES Act to encourage companies to keep their employees on the payroll, even during the challenges of the novel coronavirus pandemic.
The original ERC provided a 50% tax credit of up to $10,000 in wages paid by eligible employers whose businesses have been financially impacted by the pandemic.
ARPA extends the ERC from June 30, 2021, until the end of the year (December 31, 2021). It allows the tax credit to continue at a rate of 70% during this time. The $10,000 in qualified wages remains the same. With both the CAA and ARPA extensions, an employer could potentially claim up to $40,000 in qualified wages per employee through 2021.
ARPA also does the following:
- It limits the ERC to $50,000 per calendar quarter of an eligible employer that is a "recovery startup business" as defined in Code Sec. 3134(c)(5).
- It allows the credit to be claimed against Medicare (1.45%, Hospital Insurance - HI) taxes only. Since the employer/employee tax rate for Medicare is 1.45%, it could take longer to immediately claim the credit under the ARPA for the third and fourth quarters of 2021. Instead of just withholding the taxes immediately, it could be more likely that more employers would need to file Form 7200 (Advance Payment of Employer Credits Due to COVID-19).
- It continues the year-over-year gross receipts decline requirement at 20%, and the threshold for qualified wages (even if the employee is working) would continue to be 500 employees, as expanded by the CAA. Also, certain governmental employers would continue to be exempt from claiming the ERC, except certain tax-exempt organizations that would include colleges and universities or medical or hospital care providers.
- It requires the Treasury Secretary to issue guidance providing that payroll costs paid during the covered period would not fail to be treated as qualified wages to the extent that a covered loan under the Small Business Act is not forgiven. As with the expansion of the ERC under the CAA, this would continue to mean that Paycheck Protection Program (PPP) recipients would be eligible if the loan did not pay the wages in question.
- Qualified wages paid by an employer can be taken into account as payroll costs under (1) Second Draw PPP loans, (2) shuttered venues assistance, and (3) restaurant revitalization grants are not eligible for the ERC.
ARPA extends continued unemployment provisions through September 6, 2021. (Note that many other aspects of the bill extend to the end of the calendar year, but unemployment provisions do not.)
Unemployment provisions include:
- Pandemic Unemployment Assistance (PUA)
- Federal Pandemic Unemployment Compensation (FPUC)
- Pandemic Emergency Unemployment Compensation (PEUC)
- Funding to waive the one-week unemployment benefit waiting period
- Temporary financing of short-time compensation payments (This applies to states with STC programs, and it establishes STC agreements for states without their own programs.)
- Temporary assistance for states with federal unemployment advances
- Full federal funding of extended unemployment compensation
The FPUC unemployment payment of $300 per week has been extended through September 6, 2021. Importantly, ARPA does not extend the 50% credit for reimbursing employees.
Paycheck Protection Program Modifications
ARPA allocates an additional $7.25 billion towards PPP funding. This is important, though: the application period has not been extended. It ends on March 31, 2021.
The legislation also adds “additional covered nonprofit entity” as an eligible nonprofit for First Draw and Second Draw PPP loans. You can learn about these definitions in the following sections: Code Sec. 501(c) other than those Code Sec. 501(c)(3), Code Sec. 501(c)(4), Code Sec. 501(c)(6), or Code Sec. 501(c)(19).
The legislation also:
- Adds the following to eligible entities for PPP loans: (1) Code Sec. 501(c)(3) nonprofit and veterans' organizations with up to 500 employees; and (2) Code Sec. 501(c)(6) nonprofit organizations (business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues); and (3) domestic marketing organizations with no more than 300 employees per physical location.
- Adds Internet-only news publishing and Internet-only periodical publishers to businesses eligible for First and Second Draw PPP loans. To be eligible, the organization must employ no more than 500 employees.
- Provides that amounts used from First Draw and Second Draw PPP loans for premiums used to determine the credit for COBRA premium assistance as provided under Code. Sec. 6432 are eligible for loan forgiveness. See Pension and Benefits Related Provisions below for further information regarding COBRA.
Other Relief-Related Provisions
There are few more relief-related provisions to be aware of.
Restaurant revitalization grants pull from $28,600,000,000 that has been appropriated for fiscal year 2021 to help struggling restaurants. These grants are administered by the SBA, and the funds will be available until they have been exhausted.
Restaurants are not eligible for these grants if they operate at more than 20 locations, regardless of whether or not the restaurants use different names. If your company already received or has a pending application for the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, you are not eligible.
Grants may be used for:
- Payroll costs
- Mortgage payments
- Maintenance expenses
- Food and beverage expenses
- Covered supplier costs
- Operational expenses
- Paid sick leave
- Any other expense determined to be essential to maintaining the business
In addition to restaurants, there are a few specific industries that are supported by the legislation. Shuttered venue operators, such as theaters and talent representatives, who can demonstrate a 25% reduction in revenues can pull from ARPA’s appropriated $1,250,000,000 in grants.
Airports and manufacturing employers can also apply for these grants.
Earned Income Credit
There have been some major changes to the Earned Income Credit (EIC) for tax years beginning after December 31, 2020 and before January 1, 2022.
Taxpayers without qualifying children can expect:
- The 7.65% credit percentage and phaseout percentage are increased to 15.3%.
- The $4,220 earned income amount is increased to $9,820.
- The $5,280 phaseout amount is increased to $11,610. These amounts are not adjusted for inflation.
Pension and Benefits Related Provisions
A final area of ARPA’s governance is in pension and benefits-related pensions.
Dependent Care Assistance has been increased from $5,000 to $10,500 for married couples filing jointly. Filing separately? The cap is $5,250. Assistance Eligible Individuals (AEIs) may also receive an 85% subsidy for COBRA premiums.
Employers may apply a quarterly tax credit against the Medicare payroll tax equal to the premium amounts not paid by AEIs. If the credit amount exceeds the quarterly Medicare payroll tax, the excess will be treated as an overpayment refundable under Code Sec. 6402(a) and Code Sec. 6413(b).
That’s a Lot of Change! Are You Ready?
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Questions? Let’s talk! We know that it can be overwhelming to adapt to the constant changes that we’re all facing because of the pandemic, including this most recent legislative response to it. If you have questions, we have answers. We look forward to helping you make informed decisions about your HR and payroll processes.