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Performance of the FFCRA Paid Leave Tax Credit

When lawmakers enacted the paid family and sick leave tax credit in the Families First Coronavirus Response Act (FFCRA), they intended it to be a critical resource for employees at small- and medium-size businesses balancing work with personal health and family caregiving responsibilities throughout the COVID-19 pandemic. Recent BPC polling emphasizes the need for such a resource, showing that over a third of unemployed adults would be more likely to return to work sooner if their employer offered paid family leave (PFL)—and that only 21% of Americans have access to such leaveWith FFCRA’s tax credit now scheduled to expire at the end of September, it is important to consider the factors impacting the reach of the program as policymakers consider permanent paid leave policies. 

Background  

FFCRA, enacted in March 2020, provides a fully refundable tax credit to employers with fewer than 500 employees who provide paid leave to workers for qualifying reasons related to COVID-19 (as well as self-employed workers taking such leave). In particular, the following types of leave are eligible for the credit:  

  • Two weeks (80 hours) of paid leave, at 100% of the employee’s regular wages, for an employee unable to work due to COVID-19-related illness or quarantine. 
  • Between two and 12 weeks of paid leave, at two-thirds of the employee’s regular wages (or, if higher, the applicable minimum wage), for an employee providing care to someone for reasons related to COVID-19 or who is without adequate childcare due to the pandemic. 

Employers with between 50 and 500 workers were required to provide such leave through 2020but subsequent legislation extended the tax credit for companies providing qualifying leave even after the mandate ended. 

Take-Up Lower than Expected 

While Congress hoped that the paid leave tax credit would be a critical resource to working families, recent data suggest it has been underutilized during the pandemic. The Congressional Budget Office originally estimated the FFCRA paid leave tax credit would cost the government $105 billion in total.  (That estimate was increased to $113 billion following three extensions of the credit.) As illustrated below, however, IRS data indicate employers claimed only $6.7 billion of the tax credit through the first quarter of 2021just 6% of the initial estimate. 

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Moreover, a March 2021 report published by the Government Accountability Office (GAO) highlighted that only a small portion of eligible businesses claimed the paid leave tax credit in 2020. The GAO reports that 382,727 employers claimed the tax credit in the second and third quarters of 2020accounting for 3.8% of establishments with fewer than 500 workers in 2020.

What Accounts for Low Uptake? 

A number of factors may be contributing to the gap between expected and actual use of the FFCRA paid leave tax credit, and lawmakers should consider and address each of them as they develop a new national program. 

Mandate exemptions 

The Department of Labor’s decision to exempt employers with fewer than 50 workers from FFCRA’s paid leave mandate meant that the vast majority of small firms were not required to provide paid leave in 2020—and were therefore less likely to use the paid leave tax creditLast year, employers with fewer than 50 workers employed 63% of workers in establishments with fewer than 500 employees.

Interactions with other COVID-19 emergency programs 

CBO highlighted that the tax credit’s interaction with other emergency programsnamely the Paycheck Protection Program (PPP) and unemployment insurance (UI)likely depressed take-up. Businesses and workers largely had to choose between the paid leave tax credits and PPP or and UI, with the latter two typically providing more generous support. 

The tension between FFCRA and PPP is straightforward—businesses are not allowed to claim FFCRA credits for wages paid with a PPP-forgiven loan. With 76% of businesses with fewer than 500 employees having received a PPP loan, this likely significantly reduced the number of employers able to claim the paid leave tax credit.  

Additionally, expanded UI eligibility and enhanced benefits likely resulted in many workers claiming UI rather than taking paid leave. Pandemic Unemployment Assistance (PUA) expanded eligibility to those who may have otherwise been on paid leave, including furloughed workers and those unable to work due to COVID-related personal illness or caregiving, as well as self-employed workers. Moreover, enhanced UI benefits, including the additional $300 (initially $600) in weekly benefits and the additional weeks of eligibility, likely made UI more generous than paid leave for many workers. The combination of these factors may have led a number of workers to leave their jobs and claim UI instead of taking paid leave. 

Low awareness 

Less than half of all U.S. employees are even aware of the paid leave option offered by FFCRA, reflecting, in part, the Small Business Administration’s (SBA) decision not to market the tax credit—to both employers and employees—as aggressively as PPP, Economic Injury Disaster Loans, and SBA Loan Forgiveness. Low program awareness has plagued previous paid leave policies; marketing the availability of paid leave is essential to increasing use of the benefit. 

Incomplete data  

Finally, it is important to keep in mind that IRS data on usage of the paid leave tax credit are incomplete. According to the CBO report, the IRS is still processing a backlog of paper returns, which are disproportionately used by small employers, and no data are available yet on claims by self-employed workers. Additionally, taxpayers are still able to claim the tax credit for 2020 or increase the amount of previous claims. It is likely that current reports understate tax credit take-up, but by how much remains to be seen. The IRS is still processing a backlog of paper returns, which are disproportionately used by small employers, and no data are available yet on claims by self-employed workers. Additionally, taxpayers are still able to claims the tax credit for 2020 or increase the amount of previous claims. It is likely that current reports understate tax credit take-up, but by how much remains to be seen. 

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