Retirement plan professionals: don’t forget about the FFCRA

Effective between April 1, 2020, and December 31, 2020, the Families First Coronavirus Response Act (FFCRA) applies to private employers with fewer than 500 employees, as well as to some federal, state, and local public agencies. Some businesses may be exempt from the FFCRA.

• Businesses that close as a result of the COVID-19 public health emergency are excluded from FFCRA provisions (although the affected employees may be eligible for unemployment benefits).
• Businesses with fewer than 50 employees may be able to qualify for an exemption to the provision that requires paid leave due to school closings or lack of childcare.

Covered employers are required to provide all employees with paid sick leave or paid family leave if they meet certain COVID-19-related criteria.

• Two weeks of paid sick leave at the full rate of pay for employees who:
  • Are under official orders to quarantine
  • Experience COVID-19 symptoms and seek medical treatment
• Two weeks of sick leave paid at two-thirds the rate of pay for employees who:
  • Can’t work due to caring for someone who’s quarantined
  • Are caring for a child whose school or childcare provider is closed due to the COVID-19 pandemic
• A maximum of 10 additional weeks of paid expanded family and medical leave at two-thirds the rate of pay for employees who can’t work because they’re caring for a child whose school or childcare provider is closed because of the COVID-19 pandemic

Plan sponsors who are subject to the FFCRA should be aware that related payments may have an impact on compensation calculations under a retirement plan.

Payments to employees for paid sick leave and payments for absences under the Family and Medical Leave Act of 1993 (FMLA) made due to the COVID-19 pandemic should be included when determining compensation under a plan, unless that plan’s provisions specifically exclude this compensation from the definition.

Generally, in a 401(k) plan, these types of compensation are eligible to be included for the calculation of employee deferrals, associated matching contributions, and profit-sharing contributions. They should also be included as eligible compensation for loan repayments; however, plan professionals should check the plan’s definition of compensation. Unless the plan specifically states otherwise (e.g., specifically excluding compensation related to sick leave and/or family and medical leave), 401(k) deferrals should be withheld from pay related to sick or family and medical leave under the FFCRA. 

Employers will be reimbursed for the amounts they expend through refundable tax credits (e.g., federal income tax, as well as the employer and employee shares of Social Security and Medicare taxes). Employers will retain the amount paid in qualifying sick/childcare leave, rather than depositing it with the IRS. If payroll taxes are insufficient, employers may apply for an advance from the IRS, which will provide the necessary forms, instructions, documentation, and procedures for this purpose. 

Any amounts paid on or prior to March 31, 2020, should be excluded when determining amounts due pursuant to the FFCRA.

Perspective from John Hancock

As a rule, these forms of compensation are included in any basic definition of plan compensation, which is subject to 401(k) withholding. Amounts are paid by the employer and taxable to the employee, although the employer may claim a dollar-for-dollar tax credit.

Under applicable U.S. Treasury regulations, this form of compensation doesn’t appear to be considered an excluded form of compensation for plan purposes. Additionally, according to U.S. Department of Labor (DOL) regulations, this form of compensation doesn’t appear to be a welfare benefit because the compensation is included in payroll practices.

The FFCRA sets specific employee eligibility requirements for covered paid sick time. 

If a full-time employee is unable to work due to the effects of COVID-19 or because a child’s school or childcare is closed, the employee is eligible for an additional 10 weeks of pay; the full-time employee is also eligible for 80 hours of paid sick leave. So, in total, a full-time employee could be eligible for up to 12 weeks of paid leave (2 weeks under the paid sick leave provisions and an additional 10 weeks under the expanded FMLA provisions).

Part-time employees, subject to the same COVID-19-related requirements, would be eligible to be paid for the number of hours they’d normally work during that period. Plan sponsors should check the terms and conditions of each plan to clearly understand the eligibility provisions for such plans. The IRS precludes a plan sponsor from expressly excluding part-time employees from the plan if they’d otherwise satisfy the plan’s age and service requirements (e.g., maximum age of 21 and attainment of 1 year and 1,000 hours of service, respectively) for eligibility purposes. 

To determine paid sick time under the FFCRA, part-time employees are eligible to be paid for the number of hours they’d typically work, on average, over a two-week period. The same number of daily hours would be used to determine the employee’s eligible pay under the expanded FMLA. 

The applicable rate of pay for paid sick leave depends on why the employee has requested the leave. Employees who are subject to a quarantine or isolation order and have been advised by a healthcare provider to self-quarantine or who are exhibiting COVID-19 symptoms and seeking medical diagnosis are entitled to receive their regular rate of pay. However, employees would only be entitled to receive two-thirds of their regular pay if they're unable to work because they must care for someone who's either subject to a quarantine/isolation order or has been advised to self-quarantine by a healthcare provider or care for a child whose school or childcare provider is unavailable due to COVID-19, or a similar situation specified by certain governmental authorities.

Perspective from John Hancock

Employees are required to provide documentation substantiating their need. Keep in mind that, while the FFCRA adds this new reason for FMLA purposes, if an individual would otherwise be eligible for FMLA purposes due to the impact of COVID-19, then the existing FMLA certifications must continue to be provided. As a result, it remains important to collect and retain any documentation for audit purposes.

The DOL provides FAQs on its website to show employers how to calculate the amount of leave.