How HSAs, FSAs and HRAs Affect the Tax Credit for COVID-19 Required Paid Leave

The Families First Coronavirus Response Act (FFCRA), signed into law on March 18, 2020, requires small and midsize businesses to provide paid sick leave for employees sickened by COVID-19 or caring for someone who is. These businesses will then receive reimbursement for the cost of those payments in the form of a tax credit. The IRS released FAQs about how to claim this credit. The Employers Council on Flexible Compensation (ECFC), highlighted some points of interest that relate to health coverage and the amount of wages subject to this credit:

“Qualified health plan expenses provided to employees are included in the amount of the credit, but only to the extent that these expenses were excluded from the employee’s gross income as employer-provided coverage from a group health plan under Internal Revenue Code section 106. Q&A 31 through 36 of the IRS FAQs detail how qualified health plan expenses are determined and they include the following items of interest:

  • The portion of health care costs paid by the employee with pre-tax salary reduction contributions are considered qualified health care expenses for purposes of the credit. However, the qualified health plan expenses do not include amounts that the employee paid for with after-tax contributions. (Q&A 31)
  • The amount of qualified health plan expenses does not include employer contributions to HSAs or Archer MSAs. (Employer contributions to an HSA are excluded from the employee’s income under Code section 223(a).) However, employer contributions for premiums for HSA-eligible high deductible health plans would be considered qualified health plan expenses. (Q&A 35)
  • The amount of qualified health plan expenses may include contributions to an HRA (including an individual coverage HRA (ICHRA)), or a health FSA, but does not include contributions to a qualified small employer health reimbursement arrangement (QSEHRA). (Q&A 36)”

We will continue to update you on any legislative developments related to COVID-19 and consumer-directed healthcare.

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