Family First Coronavirus Response Act

Congress passed and the President signed a coronavirus-related bill this week. While mainly addressing employment benefits, it also includes payroll-tax-related provisions to mitigate the effect of the benefit expansion on employers.

Following is a recap of the Act. It is intended as an introduction and quick reference only. Please review the Act itself for detailed questions.

The Family First Corona Virus Response Act has two key employment-benefit components. Employers are to be reimbursed for the benefit expansion via a tax credit mechanism.

A. The Emergency Paid Sick Leave Act

1.  Private employers employing less than 500 employees shall provide an employee with paid sick time if:

i. The employee is subject to quarantine or isolation due to COVID-19.

ii.  The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID– 19.

iii.  The employee is experiencing symptoms of COVID– 19 and seeking a medical diagnosis.

iv. The employee is caring for an individual described in (i) or has been advised as described in (ii).

v. The employee is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable, due to COVID–19 precautions.

vi. The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.

2. Full-time employees are entitled to 80 hours of paid sick time.

3. Part-time employees are entitled to the average number of hours worked on over a 2-week period.  For employees with varying schedules, the employer shall use the employee’s average number of hours per day over the 6-month period ending on the date the employee takes leave under the Act.

4. If an employee takes time off for self-care, the employee shall be compensated at the employee’s regular pay rate.

     i. Not to exceed $511 per day and $5,110 in the aggregate

5. If an employee takes time off for a sick family member or child, the employee shall be compensated at 2/3 of the employee’s regular pay rate.

     i. Not to exceed $200 per day and $2,000 in the aggregate

6. There are comparable provisions for the self-employed.

7. The Act expires on December 31, 2020.

8. The Labor Secretary is authorized to exempt employers with less than 50 employees if the requirements would imperil the viability of the business.

9. Employers who violate this Act shall be considered to have failed to pay minimum wages in violation of the FLSA and be subject to penalties related to such a violation.

B. Emergency Family and Medical Leave Expansion Act (E-FMLA)

1. The Act expands coverage of the Family and Medical Leave Act (“FMLA”) for employers with fewer than 500 employees. Employees are typically not eligible for FMLA leave until they have worked at least 12 months and 1250 hours. 

i.  For purposes of E-FMLA, this threshold is reduced to 30 days.

2.  E-FMLA applies if the employee leave is to care for a child under 18 if the school or place of care has been closed or child care provider is unavailable due to a public health emergency.

3. Protected leave can be for up to 12 weeks, but the first 10 days may consist of unpaid leave.

4.  The employee shall be compensated not less than two-thirds of the employee’s regular rate of pay.

i. Not to exceed $200 per day and $10,000 in the aggregate (for each employee)  

5. There are comparable provisions for the self-employed.

6. The Act expires on December 31, 2020.

7. The Labor Secretary is authorized to exempt employers with less than 50 employees if the requirements would imperil the viability of the business.

8. Employers who violate this Act shall be considered to have failed to pay minimum wages in violation of the FLSA and be subject to penalties related to such a violation.

C. Tax Credits

1. The compensation paid under the Act is not subject to the Old-Age, Survivors and Disability portion of FICA (that is, the 6.2%).

2. The compensation paid under the Act is subject to the Hospital Insurance portion of FICA (that is, the 1.45%).

3. On a quarterly basis, employers can claim a payroll tax credit for the sum of the following:

                a. Wages paid under this Act

b. Allocable “qualified health plan expenses” 

      ... think health insurance

c. The employer portion of Hospital Insurance (that is, the 1.45%)

4. Treasury is authorized to issue Regulations waiving penalties for not making payroll tax deposits in anticipation of the credit to be allowed.

5. The credit is refundable if it exceeds the amount the employer owes in payroll tax.

6. Employer taxable income is to be increased by the amount of payroll credit received.

           i. Otherwise there would be a double tax benefit.    

The Clintons And Their Residence Trusts

I am looking at a Bloomberg article titled” Wealthy Clintons Use Trusts to Limit Estate Tax They Back.”

I get the hypocrisy. There truly cannot be any surprises left with this pair, but I get it.

I also have no problem with the tax strategy. I would use it unapologetically, if I were within its wheelhouse.

This trust is known as a Qualified Personal Residence Trust (QPRT), pronounced “cue-pert.” I use to see more of them years ago, as this trust works better in a high interest rate environment. We haven’t had high interest rates for a while, so the trust is presently out of its natural element.

You can pretty much deduce that this trust is funded with a house. It can be funded with a main residence or a second home. I have seen it done with (very nice) vacation homes. There are income tax and gift tax consequences to a QPRT. 

Let’s go through an example to help understand the hows and whys of this thing.

Let’s say that we have a modestly successful, low-mileage, middle-aged tax CPA. We shall call him Steve. Steve owns a very nice second home in Hailey, Idaho. Word is he bought it from Bruce Willis. Steve and Mrs. Steve are meeting with their tax advisor, and they are discussing making gifts to their children. The advisor mentions gifting the Hailey residence, using a QPRT.

Mrs. Steve: How does that work?

Advisor:      The house is going to go the kids eventually, someday. We are just putting it in motion. We set up a trust. We put the house in the trust. We have the trust last a minimum number of years – in your case, maybe 15 years. At the end of the trust, the house belongs to the kids. Maybe it belongs to a trust set up for the kids. You can decide that.

Mrs. Steve: What’s the point? In any event the kids will wind up with house anyway.

Advisor:      The point is to save on estate and gift taxes. Someday this house will pass to the kids. If it happens while you are alive, we have to discuss gift taxes. If it happens at your or Steve’s death…

Steve:         I am right here, people.

Advisor:      Just explaining the process. If it happens at death, we have to discuss estate taxes.

Mrs. Steve: So, either way …

Advisor:      … you are hammered.

Mrs. Steve: How do I save money?

Advisor:      You continue to live in the house for a while, say fifteen years. The house is eventually going to the kids, so there is a gift. However the house is not going to the kids for fifteen years, so the value of the gift is the house fifteen years out.

Mrs. Steve: Wait. The house will be worth more fifteen years out. How is this possibly helping me?

Advisor:      I said it wrong. The IRS considers the gift to be made today for something to be delivered fifteen years out. That long wait reduces the value of the gift, which is what drives the gift tax planning with a QPRT.

Mrs. Steve: Should I just invite the IRS to an audit?

Advisor:      Not at all. We can find out what the house is worth today. The IRS has given us tables and interest rates to calculate the fifteen years wait. Since we are using their tables and their rates, it is fairly safe mathematics. There isn’t much to audit.

Steve:         I am stepping out to stretch my legs.

Mrs. Steve: Give me an example.

Steve:         Is there fresh coffee in the break room?

Advisor:      We have seen cases where someone has transferred a house worth $2 million in a ten-year QPRT and the IRS says the gift was only around $550 thousand.

Mrs. Steve: Which does what?             

Advisor:      You get to hold on to your lifetime gift tax exemption as long as possible. You can make more, or larger, gifts and not owe any gift tax as long as you have some lifetime exemption amount remaining.

Mrs. Steve: Who pays for the house; you know, the utilities, the maintenance, taxes and all that?

Advisor:      You do. And Steve, of course.

Steve:         (from outside the room) Did I hear my name?

Mrs. Steve: No! Go find your coffee.  

Mrs. Steve: Who gets to deduct the real estate taxes – the trust?

Advisor:      The trust is “invisible” for tax purposes. It is a “grantor” trust, which means that – to the IRS – there is no trust and it is just you and Steve. You get to deduct the real estate taxes.

Mrs. Steve: Wait a minute. If there is no trust, how can there be a gift?

Advisor:      This part gets confusing. For income tax purposes, the IRS says that there is no trust. For gift tax …

Steve:         (from outside the room) Where’s the cream?

Advisor:      For gift tax purposes, the IRS says there is a trust. Because there is a trust, you can make a gift.

Mrs. Steve: You are kidding.

Advisor:      No. Tax law can be crazy like that.

Mrs. Steve: What happens if after fifteen years I still want to live there? Does the trust boot me out?

Advisor:      Nope. You can rent the house, but you will have to pay fair market value, of course.

Mrs. Steve: Because I no longer own it.

Advisor:      Right. Also, since you do not own it, technically the kids could act against you and sell the house, even if against your will. That is a reason for keeping the house in some kind of trust, even after the QPRT term, as it allows for an independent trustee.

Mrs. Steve: What is the downside to this QPRT thing?

Steve:         (walking back into room, with coffee) We done yet?

Advisor:      You have to outlive the trust.

Steve:         I intend to. What are you talking about?

Advisor:      If the QPRT is for fifteen years, then you have to live at least fifteen years and a day for this thing to work.

Steve:         And if I don’t?

Advisor:      It will be as though no trust, no gift, no anything had ever happened. The house would be pulled back into your estate at its value when you die.

Steve:         Why do I keep dying with you two?

Mrs. Steve: OK. Steve dies before fifteen years. What can I do to minimize the risk to me of him dying….

Steve:         Risk to you?

Mrs. Steve:  … of him dying before his time?

Advisor:      Several things. You and Steve own the house jointly, right?

Mrs. Steve: Of course.

Steve:         (under his breath) As though there was a choice.

Mrs. Steve: What was that, dear?

Steve:         Just blowing on the coffee to cool it down, dear.

Advisor:      We set up two trusts. One for Steve and one for you. It helps with the odds.

Mrs. Steve: I like that.

Advisor:      We can even “supercharge” that by putting fractional interests in the trusts. Say you put a 1/3 fractional interest each. You and Steve would be able to fund six different trusts. We could vary the term of the trusts – say from ten to twenty years – again improving your odds.

Steve:         Are we still talking about me?

Mrs. Steve: It’s not about you, dear.

Believe it or not, this is pretty straightforward and well-marked tax planning for folks who know they will be subject to the estate tax. Few planners would describe QPRTs as aggressive. There are some twists and turns in there – say if the trust sells the house during the trust term, for example – but that can be a blog for another day.

How and why would the Clintons be pursuing this strategy? Remember that they own two houses: one in Washington (worth approximately $2 million) and another in Chappaqua, New York (worth approximately $5 million). They have quite a bit of money tied-up there. They are almost certain to face an estate tax some day, bringing them well within the wheelhouse of a QPRT.

Not bad for dead broke.

The President’s myRA

The President introduced something called a “myRA” at the State of the Union speech. He explained…

… while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401(k) s. That’s why, tomorrow, I will direct the Treasury to create a new way for working Americans to start their own retirement savings: myRA. It’s a savings bond that encourages folks to build a nest egg. myRA guarantees a decent return with no risk of losing what you put in.”

The idea here is to encourage small retirement savers. The concern is that routine bank or investment fees (for example, the annual “maintenance” fee for an IRA) may discourage some (or many) from saving for retirement. Under the myRA, the government picks up that tab. The concept makes sense.

The myRA would function as a Roth-type account. Monies going in would not be deductible for income taxes.

Contributions will be automatic, voluntary and small. Initial investments could be as low as $25 and ongoing contributions as low as $5. Contributions would be made through “automatic” payroll deductions.

COMMENT: “Automatic” meaning actual employers who pay people in actual payroll department to process these transactions. Automatic seems to mean “magical” inside the Washington beltway. 

The myRA big deal will be the savers account balance “will never go down.”

COMMENT: Somewhat like a savings account or certificate of deposit. There are – by the way – no annual fees for those accounts either. They are “magical.”

The myRA will earn the same interest rate as the federal employees Thrift Savings Plan Government Securities Investment Fund.

NOTE: Which returned 1.47% in 2012. Unfortunately, inflation for 2012 was 1.8%. The G Plan pays investors the investor the average return on long-term Treasury bonds.  

It will be available to households earning up to $191,000 annually.

Participants will be able to save up to $15,000, or for a maximum of 30 years. 

            COMMENT: Remember: this is a “starter” savings plan.

There would be a provision to transfer the account to a Roth IRA.

COMMENT: That part makes sense, as these accounts can be described as “Roth-lite.”

The President created this by executive action this past Wednesday.

            COMMENT: Really? 

Reflecting the crowd currently occupying it, this White House also wants to compel employers that do not offer myRA’s to offer automatic enrollment IRAs.

OBSERVATION: Approximately half of American workers are not covered by a retirement plan at work, propelling policy mandarins to talk about “mandatory” solutions to the retirement “problem.” I acknowledge the problem - two problems, in fact. First, that many people do not save enough. It might help if they had a job, though. Second, that these hacks and their “mandatory” solutions are themselves a problem.  

Call me completely underwhelmed. 

Laurel and Hardy Dancing on the Fiscal Cliff

I personally would prefer Laurel and Hardy to what we have up there presently.