The CARES Act has the following provisions effecting the federal taxes on payroll and payroll tax withholding. These provisions deal with employer payments for student loan repayments, as well as changes in terms of permitted benefits under health savings accounts (HSAs), Archer Medical Savings Accounts (MSAs), health flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs). Other federal withholding provisions of interest to employers during the COVID-19 public health emergency include employer-provided disaster relief payments and donate leave programs.
Each of these provisions are outlined below:
- Employers may provide student loan repayment assistance
The CARES Act allows employers that provide student loan repayment benefits to employees to do so on a tax-free basis and such payments may be excluded from the employee’s income. This benefit is available through Dec. 31, 2020. The payment is subject to the same $5,250 annual cap available under Code Sec. 127 for tuition, books, fees and supplies.
- Benefit plan provisions amended during COVID-19
The CARES Act ensures individuals are able to use all tax-favored health care accounts, like Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), to buy over-the-counter medicines tax-free without a prescription. This change would apply for amounts paid or expenses incurred after Dec. 31, 2019. In addition, Sections 3703 and 3704 explain that high deductible health care plans with HSAs will be able to provide coverage for telehealth services without having to satisfy the plan’s minimum deductible.
- Employer may provide disaster relief payments
Due to the Presidential Disaster declared for all 50 states for Covid-19, employers may make qualified disaster relief payments to employees impacted by the COVID-19 public health emergency. Qualified disaster relief payments, under this provision, made to an employee by an employer may be excluded from the employee’s taxable income. Qualified disaster relief payments include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair/replace the contents to the extent that they were not covered by insurance. Again, these payments would not be included in the individual recipient’s gross income.
- Employers may administer a donated leave program
Leave donated by employees to an employer-sponsored leave bank under a major disaster leave-sharing plan is not taxable for the leave donor if certain requirements are met. Leave donated by employees to an employer-sponsored leave bank under a major disaster leave-sharing plan is not taxable for the leave donor if certain requirements are met. Amounts paid to medical emergency leave bank recipients are taxable employee compensation and subject to FITW, FICA, and FUTA. Employees who surrender or deposit their time in the leave bank do not realize any income and incur no deductible expense or loss
- COVID-19 added as adverse condition for foreign income and housing exclusions.
Waives the required residency period for qualifying individuals with a tax home in a foreign country to use the foreign income and housing exclusion. The law added to the already existing conditions for waiver for Covid-19. For 2019 and 2020, for purposes of Code Sec. 911(d)(4), the coronavirus pandemic (“COVID-19 Emergency”) is an adverse condition that precluded the normal conduct of business as follows: (1) in the People’s Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau (China), as of Dec. 1, 2019; and (2) globally, as of Feb. 1, 2020. The period covered by Rev Proc 2020-27 ends on July 15, 2020, unless an extension is announced by the Treasury and IRS.
- IRS revises trust fund penalty assessment procedures
Due to Covid-19 and the shutdown of many IRS offices and services centers the IRS is directed to delay the assessment of the trust fund penalty on individuals responsible for the collections and payment of payroll taxes withheld and not deposited to the U.S, Treasury. Said delays are only available when no imminent statute or exigent circumstances exist.
- IRS provides deadline relief for correcting employment taxes and other time-sensitive actions.
Deadlines extended to July 15. The IRS has now postponed deadlines for certain specified time-sensitive actions on account of the ongoing COVID-19 pandemic.
Notice 2020-35, 2020-25 IRB extends tax deadlines to July 15, 2020 for the following: (1) employers correcting employment tax reporting errors using the interest-free adjustment process; and (2) employers correcting employment tax underpayments or overpayments.
- IRS provides guidance on leave-sharing program to aid COVID-19 victims
Under an employer leave-based donation program, employees elect to forgo vacation, sick, or personal leave in exchange for cash payments an employer makes to organizations described in Code Sec. 170(c).
The IRS will not consider any cash payments an employer makes to a Code Sec. 170(c) organization in exchange for vacation, sick, or personal leave that employees donate to be gross income or wages if the payments are: (1) made to the Code Sec. 170(c) organizations for the relief of victims of COVID-19; and (2) paid to the Code Sec. 170(c) organizations before Jan. 1, 2021.
Similarly, the IRS will not assert that the opportunity to make such an election results in constructive receipt of gross income or wages to the employees. Electing employees may not claim a charitable contribution deduction under Code Sec. 170(c) with respect to the value of forgone leave excluded from compensation and wages.
All of the information contained herein is intended to provide information on options and updates created by the CARES ACT and other changes effecting the payroll taxes and withholding. Each topic is covered in summary form only and it should not be considered tax or accounting advice. Before taking action it’s important to review all information regarding the provision and to consult a tax professional.