FFCRA – What Has Changed for 2021?

Please see the summary prepared by Shelagh MichaudIrene Scholl-Tatevosya, and Kimberly K. Harding of Nixon Peabody LLP regarding the Consolidated Appropriations Act and the FFCRA (Family First Coronavirus Response Act). The article from Nixon Peabody addresses the effects on extended tax credits for employers. The article also includes links to other updates the law firm has made. Please see below.

FFCRA – What Has Changed for 2021?

We highlight what employers need to know about the end of the FFCRA mandates and latest COVID-19 stimulus bill’s continuation of FFCRA tax credits as incentives to offer paid leave.

The latest COVID-19 stimulus bill — the Consolidated Appropriations Act, 2021; signed into law on December 27, 2020 and retroactive to April 1, 2020, when FFCRA became effective [1]—extends the dollar-for-dollar tax credits for employers that choose to allow employees to continue to take existing FFCRA sick leave and extended FMLA leave through March 31, 2021. The FFCRA, which requires certain employers to provide employees with up to 80 hours of paid sick leave or 12 weeks of expanded FMLA leave for specified reasons related to COVID-19, and its mandates expire on December 31, 2020. Section 286 of the new stimulus bill does not extend the FFRCA’s mandate to provide paid sick leave or expanded FMLA leave, but provides an incentive for employers to continue to allow employees to take FFCRA leave for COVID-19–related reasons through March 31, 2021. Under the new extension, employers that continue to allow employees to take FFCRA’s original 80 hours of paid sick leave and 12 weeks of expanded FMLA leave are eligible for tax credits under the same terms as FFCRA provided in 2020.

What does this mean for employers?

  • After December 31, 2020, employers are not required to continue to provide paid sick leave to employees for COVID-19–related reasons.
  • After December 31, 2020, employers are not required to continue to provide expanded FMLA leave to employees for COVID-19–related reasons.
  • Employers may choose to continue to provide 80 hours of paid sick leave for COVID-19–related reasons to eligible employees through March 31, 2021, and will be able to claim FFCRA tax credits as provided for under the FFCRA for that leave.
  • Employers may choose to continue to provide 12 weeks of expanded FMLA leave for COVID-19–related reasons to eligible employees through March 31, 2021, and will be able to claim FFCRA tax credits as provided for under the FFCRA for that leave.
  • Employees are only entitled to up to a maximum of 80 hours total paid COVID-19–related sick leave and 12 weeks total expanded FMLA leave. (The bill does not grant additional time; it only allows employees who have not exhausted their existing FFCRA paid sick leave and/or extended FMLA leave to use it until March 31, 2021, if their employers choose to continue to make the leave available.)
  • The bill does not provide any incentive (or requirement) for employers that cannot claim the tax credits, such as public entities, to continue to provide any FFCRA leave.

Considerations for employers

As with the previous requirement, this new incentive focuses on providing leave for employees who must remain out of work due to COVID-19, but also permits businesses to plan and provide for their day-to-day operations and policies. Businesses should consider the benefits of providing sick leave, including that made available through the FFCRA, during the pandemic to promote and maintain a healthy and safe work environment. Unlike passage of the FFCRA in 2020, which provided no notice or time for planning, this new bill gives businesses time to consider their options, consult with legal and tax advisors, and determine the best path forward for the business and its employees.

This summary is just part of the overlapping web of issues and legislation facing businesses as a result of the COVID-19 pandemic. In addition to extending tax credits for paid leave provided under the FFCRA, the Consolidated Appropriations Act, 2021 contained many provisions affecting employers in multiple industries. Nixon Peabody is keeping abreast of these changes and has provided the following alerts that address other provisions of the law:

Our Nixon Peabody team will continue to analyze the new law, monitor new developments and regulations as they are made available, and provide updates on other issues facing employers and solutions to assist them in navigating through these turbulent times.

  1. See our prior alerts discussing the FFCRA: “Families First Coronavirus Response Act: What employers need to know about the COVID-19 paid leave law” (March 26, 2020); “Ten most pressing questions from employers about implementing FFCRA leave” (April 07, 2020); and “Significant changes to FFCRA: DOL redefines ‘health care provider’ exception & clarifies intermittent leave for childcare purposes” (September 15, 2020). [Back to reference]

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

Sources: 

https://www.nixonpeabody.com/en/ideas/articles/2020/12/30/ffcra-whats-changed-for-2021?utm_medium=alert&utm_source=internal&utm_campaign=%E2%80%A6#Note1

https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-116HR133SA-RCP-116-68.pdf

Stimulus legislation temporarily relaxes flexible spending arrangement rules

Please see the summary prepared by  Damian A. Myers, Yelena F. Gray, and Lena Gionnette of Nixon Peabody LLP regarding the Consolidated Appropriations Act. The article from Nixon Peabody addresses the effects on FSAs. Please see below.

Stimulus legislation temporarily relaxes flexible spending arrangement rules

The recently signed Consolidated Appropriations Act is intended to provide various forms of tax relief, including among other things, temporary relaxation of the tax rules for health and dependent care flexible spending arrangements (“FSAs”). In this alert, we discuss the temporary relief for FSAs and highlight important takeaways for plan sponsors.

The massive Consolidated Appropriations Act, 2021, signed into law by the president on December 27, 2020, includes the Taxpayer Certainty and Disaster Relief Act of 2020 (the “Act”). The Act is intended to provide various forms of tax relief, including, among other things, temporary relaxation of the tax rules for health and dependent care flexible spending arrangements (“FSAs”). This benefits alert summarizes the temporary relief for FSAs and highlights important takeaways for plan sponsors.

Expanded carryovers and extended grace periods

As background, a primary feature of health and dependent care FSAs is the “use it or lose it” requirement. Under this requirement, unused funds in an FSA account at the end of the year are forfeited. Existing rules allow for a carryover of unused health FSA funds to the next plan year or a grace period in which unused funds can be used for claims incurred in the next plan year. Both of those exceptions to the use-it-or-lose-it requirement are limited: The health FSA carryover is capped at $550 (for 2020 and indexed thereafter) and the grace period cannot be longer than two and a half months. Further, health FSAs can allow a carryover feature or grace period, but not both.

Many FSA participants who elected to contribute to health and/or dependent care FSAs during open enrollment for the 2020 plan year may have done so in anticipation of upcoming elective healthcare procedures or in the expectation that their dependents would be in daycare or summer camp. Those expectations were probably frustrated by the COVID-19 pandemic, and therefore, many FSA accounts may have been over-funded by participants in 2020. To soften the blow of the use-it-or-lose-it requirement, the Internal Revenue Service (IRS) issued relief in May 2020 that allowed plan sponsors to extend the grace period to December 31, 2020, for the spend-down of unused 2019 contributions. It also allowed FSAs with carryover features to add the extended grace period for 2020. Given that the COVID-19 pandemic did not materially affect the United States until early spring 2020, the IRS relief described above was of limited usefulness.

The Act’s temporary relaxation of FSA rules goes much farther than the IRS relief. Details are as follows.

  • Expanded Carryovers. In FSAs that permit carryovers, plan sponsors can amend their FSAs to allow all unused funds in the 2020 and 2021 plan years to be carried over into the next plan year. This applies to health FSAs and dependent care FSAs (previously, dependent care FSAs could not have a carryover feature).
  • Extended Grace Periods. In FSAs that have a grace period, the grace period in which unused 2020 and 2021 plan year funds can be used in the next plan year can be extended to 12 months. In addition, similar to existing rules for dependent care FSAs, health FSAs may now permit terminated employees with unused funds to continue to receive reimbursements from their health FSAs for the rest of the plan year in which the termination occurred, plus any grace period.
  • Special Carry Forward for Dependent Care FSAs. Normally, dependent care expenses for a child are only reimbursable until the child attains age 13 (except in cases of incapacity). The Act permits reimbursements for dependent children until age 14 during the 2020 plan year. For the 2021 plan year, a dependent care FSA participant may receive reimbursements for expenses for a child until the child reaches age 14, but only if the participant had unused funds in their account at the end of the 2020 plan year.

Prospective election changes

In general, employees must make elections to contribute to health and/or dependent care FSAs before the start of the plan year. Those elections are irrevocable, subject to permitted mid-year election change events, such as changes in marital status, number of dependents, employment, dependent care costs, etc. The IRS previously granted relief from the irrevocability requirement in its May 2020 relief by allowing prospective election changes. Given that the COVID-19 pandemic will cause considerable uncertainty with respect to healthcare costs and dependent care expenses throughout 2021, the Act continues the IRS relief for health and dependent care FSAs for plan years ending in 2021.

Key takeaways

  • The Act’s temporary relief from the FSA use-it-or-lose-it and election irrevocability rules give FSA participants greater flexibility in managing their health and dependent care expenses in a time of uncertainty. However, plan sponsors and administrators should consider the following before adopting the changes:
  • As with the May 2020 IRS guidance, these changes are optional. Although the relaxed rules certainly benefit participants, adopting the temporary rules will increase costs for plan sponsors. An important characteristic of FSAs is that the full annual contribution amount be available to participants on the first day of the plan year. If a participant terminates employment having spent more FSA funds than the participant contributed, the FSA incurs an experience loss. These experience losses are typically offset, at least to some extent, by experience gains from forfeitures due to the use-it-or-lose-it requirements. Plan sponsors adopting the Act’s relaxed carryover rule or expanded grace period should expect fewer experience gains to offset experience losses.
  • Plans sponsors that elect to adopt the expanded carryover or extended grace period rules should notify participants of the changes as soon as possible. Given that the end of 2020 is only a day away, most FSA participants have already made their elections for the 2021 plan year. Participants may have made their elections based on the expectation of a limited carryover and a short grace period, so to the extent that more funds will be available in 2021, participants may need to change their elections.
  • If a health FSA is amended to temporarily permit terminated employees to continue participation for the remainder of the plan year (plus any grace period), plan administrators should coordinate the new process with the plan sponsor’s COBRA procedures. Normally, after termination of employment, health FSA participants who have not overspent their account have the right to elect COBRA continuation coverage. If the Act’s temporary relief is adopted, however, there would generally be no loss of coverage to trigger a COBRA election right.
  • The Act’s relaxed election change rules for the 2021 plan year are generally straightforward: Any election change is permitted as long as it is prospective. Nevertheless, plan sponsors should consider whether they should place any limits on the election changes. To mitigate against experience losses, a participant should not be permitted to elect a new annual contribution amount that, as of the election change date, is less than the greater of the amount contributed in 2021 and the amount of reimbursements received in 2021. To manage the administrative burden of implementing the election changes, plan sponsors should also consider whether to limit the number of election changes that participants can make.
  • FSA plan documents do not have to be amended to accommodate these changes until the end of the plan year after the year in which the changes are implemented. The amendment should be adopted retroactively to the date on which the changes were implemented, and the FSA should be operated consistently with the amended provisions during the interim period. Plan sponsors should keep the amendment deadline in mind to preserve the favorable tax status of their FSAs.

Plan sponsors considering whether to make these changes and communicate the new rules with their employees should consult with their legal advisors to ensure compliance with applicable laws and regulations.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising.

Sources:

https://www.nixonpeabody.com/en/ideas/articles/2020/12/30/stimulus-legislation-temporarily-relaxes-flexible-spending-arrangement-rules?utm_mediu%E2%80%A6%203/6

https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-116HR133SA-RCP-116-68.pdf

Italy & New Transfer Pricing Documentation Requirements

Italian Tax Authorities have issued new instructions regarding transfer pricings. Please read about these changes below, in the article entitled “Italy issues new transfer pricing documentation requirements and proposes changes to APA procedure”, drawn up by Ernst & Young LLP (EY).

Executive summary

On 23 November 2020, the Italian Tax Authorities issued new instructions (New Instructions)1 regarding the content and validity of the elective transfer pricing (TP) documentation available to Italian resident enterprises and Italian permanent establishments (PE) of foreign entities to provide administrative penalty protection in the case of a TP assessment.2

The New Instructions introduce significant changes to the mandatory contents of the TP documentation as defined under the previous instructions (2010 Instructions), in order to adopt the Base Erosion and Profit Shifting (BEPS) Action 13 deliverable and the associated revisions to the Organisation for Economic Co-operation and Development (OECD) TP Guidelines (OECD TPG) guidance on documentation.3 The New Instructions introduce the possibility to cover only certain intercompany transactions and a window for amending the TP policy/documentation for earlier financial years (FYs) – upon certain conditions – without any penalty or interest.

Detailed discussion

The New Instructions confirm that the set of TP documentation must include: (i) a Masterfile; and (ii) a Local country file, while introducing a new structure of the respective content. The Masterfile will become a mandatory document for all Italian taxpayers that want to access the elective Italian TP penalty protection regime (including subsidiaries for which, under the previous regime, no Masterfile was required).

Masterfile

The Masterfile must include information relating mainly to the multinational group as a whole and be structured as follows:

1. Description of the group structure

2. Description of the activities carried out by the group including information concerning:

2.1. Main profit generator factors

2.2. Transaction flows (five largest products and/or service offerings by turnover plus any other products and/or services amounting to more than 5% of group turnover)

2.3. Main intercompany service agreements

2.4. Main markets (for products and services referred to above)

2.5. Brief functional analysis of the entities of the group describing their contribution to value creation

2.6. Business restructuring transactions occurring during the FY

3. Description of the intangible assets owned by the group including information concerning:

3.1. Group strategy for Research & Development (R&D) and Intellectual Property (IP) management

3.2. Intangible assets relevant for TP purposes and their legal ownership

3.3. Main agreements among associated enterprises concerning intangible assets including Cost Contribution Agreements (CCAs), R&D service and license agreements 

3.4. TP policies related to R&D and intangibles

3.5. Significant intercompany transactions involving intangible assets occurring during the FY

4. Description of the intercompany financial transactions including information concerning:

4.1. Financing sources of the group (including financial arrangements with unrelated lenders)

4.2. Centralized financing functions (including indications on the country under whose laws the entity is organized and its place of effective management)

4.3. TP policies concerning financial transactions

5. Description of the group financial reports for the FY including:

5.1. Consolidated financial statements (to be attached to the TP documentation)

5.2. List and summary of any Advance Pricing Agreements (APAs) and other tax rulings related to the cross-border allocation of income, organized by country of reference

Under the 2010 Instructions, taxpayers could prepare, in certain cases, a Masterfile only in relation to a subgroup, in order to avoid filing the group Masterfile. Such possibility no longer exists, given that the New Instructions refer only to group Masterfiles, consistently with the applicable OECD TPG guidance. Also, under the New Instructions, more than one Masterfile for each group could be prepared should it be possible to segregate in separate sets different operations and different transfer pricing policies that are applicable within the same group.

Local country file

The Local country file must include information relating to the Italian resident taxpayer and be structured as follows:

1. General description of the entity (history, market trends etc.) including information concerning the relevant:

1.1. Operating structure (local organization chart and a description of the individuals to whom local management reports, including the countries in which they have their principal offices)

1.2. Business strategies pursued and changes from the previous FY, including an indication of any business restructurings or transfers of intangibles and of the key competitors

2. Intercompany transactions (or groups of transactions pertaining to a same category that are material with regards to the overall amount of intercompany transactions), including a summary of all the transactions analyzed and the relevant amounts. This section can be divided into paragraphs and sub-paragraphs with the following information:

2.1

For type “1” transactions:

2.1.1. Description of the transaction, including amounts involved (received or paid), details of the counterparty, potential comparable uncontrolled transactions (internal and external) and the profit level indicators (PLIs) used in the analysis

2.1.2. A detailed comparability and functional analysis, including an accurate description of the transaction and any changes compared to prior FYs

2.1.3. The selected transfer pricing method, including the reasons for the selection and the full description of the analysis

2.1.4. Results of the method applied

2.1.5. Critical assumptions adopted

3. Financial information including:

3.1. Individual financial statements

3.2. Statements reconciling the PLIs used to apply the TP methodology with the figures in the annual financial statements

3.3. Summary tables with financial data pertaining to comparables

4. Attachments:

4.1. Copies of the contractual documentation for each covered transaction, including any cost sharing and CCAs

4.2. Copies of APAs and other cross-border tax rulings of the Italian entity as well as the same APAs or rulings not concluded by the Italian entity but in any way linked to the transaction covered

Selective documentation

The New Instructions explicitly introduce the possibility of limiting the operations covered by the documentation to be prepared to achieve administrative penalty protection in the case of a TP assessment. In such case, the penalty protection will be granted exclusively with reference to the transactions described and for which the information provided is considered compliant with the requirements.

Selective documentation

The New Instructions explicitly introduce the possibility of limiting the operations covered by the documentation to be prepared to achieve administrative penalty protection in the case of a TP assessment. In such case, the penalty protection will be granted exclusively with reference to the transactions described and for which the information provided is considered compliant with the requirements.

Small and Medium Enterprises (SMEs) definition

Similar to the 2010 Instructions, the New Instructions provide for a simplified approach for SMEs, which are still defined as entities with turnover not exceeding €50 million for the FY covered by the TP documentation. However, the New Instructions no longer include in the SME definition entities which directly or indirectly control or are controlled by an entity which does not qualify as an SME.

Further, the New Instructions confirm that SMEs are not required to update the economic data regarding the intercompany transactions in the Local country file during the following two FYs, provided that the comparability factors do not undergo significant changes in such two FYs and the comparability analysis is based on publicly available sources (as under the previous regime).

Clarifications on PEs

The New Instructions also apply to Italian PEs of nonresident enterprises as well as to Italian enterprises with foreign PEs.

Specific documentation for low value-added intercompany services

In compliance with the relevant OECD Guidance,4 the 2018 Decree introduced the possibility to adopt a simplified approach for low value-added intercompany services by determining a 5% mark-up on costs as an appropriate arm’s-length value of such services. The New Instructions now specify that, in order to apply the simplified approach, the taxpayer should prepare a dedicated set of additional documentation. However, based on the wording of the guidelines, it is not clear if it represents a third document different from the Masterfile and the Local country file. Also, based on the wording of the New Instructions, and pending any further clarification, some of the validity requirements described below might not be applicable to the TP documentation for low value-added services.

The documentation must include specific content including:

1. Description of intragroup services by category, including the identification of the beneficiaries, the reasons why the services are considered as low value adding, the expected or effective benefits received, and the allocation criteria used

2. Intercompany agreements

3. Value of the operations, including calculations for direct and indirect costs of the services, and

4. Calculations demonstrating the cost allocation

Drafting and validity requirements

1. Drafting of the TP documentation:

a. The documentation set must be in Italian, while the Masterfile may be in English, subject to confirmation of what appears to be a revision typo in the New Instructions.

b. Both the Masterfile and the Local country file must be signed by the Italian entity’s legal representative or a delegated person by means of an electronic signature and a time stamp (so called marca temporale) no later than the date of filing of the relevant tax return.

c. All the relevant documentation referred to by the New Instructions must be submitted in electronic format.

2. Timing for the provision of the documentation:

a. The TP documentation must be provided to the tax authorities by an increased term of 20 days from the relevant request (rather than the 10 days provided under the 2010 Instructions).

b. Any additional documents required by the tax authorities should generally be provided by seven days after the relevant request.

3. Validity of the documentation:

a. The TP documentation covers only one FY and should be preserved until the relevant statutes of limitations have expired.

b. In addition to the mentioned formal requirements about the structure and drafting of the document, the TP documentation is valid only if its content is complete and truthful.

Deadline to elect for the TP documentation 

As under the previous requirements, the TP documentation election is made in the tax return related to the relevant FY (e.g., in the case of a calendar year company, the election for FY 2020 can be made with the relevant tax return filed in 2021). Where a taxpayer amends a tax return related to a prior FY to correct transfer prices in accordance with the arm’s-length principle to increase its taxable income, the taxpayer may amend the respective TP documentation (documentation prepared for the original return) and an election for the TP documentation benefits can also be made with the filing of the amended tax return.

The New Instructions also introduce the option – upon certain conditions – to amend the tax returns of open fiscal years as of 23 November 2020, without application of penalties or interest, in the case of transactions non-compliant with the arm’s-length principle implying an unfavorable TP adjustment for the Italian taxpayer. This option is linked to cases of so-called “legitimate expectations,” (i.e., “bona fide”) envisaged by the Taxpayers’ Statute (Law no. 212/2000). However, the practical effects of such provisions require clarifications.

In order to clarify this last point as well as other provisions subject to interpretation, a Circular Letter from the Italian Tax Authorities is expected to follow the New Instructions.

APA highlights following the draft of the Budget Law for the year 2021

On 20 November 2020, the Italian Government issued an updated version of the draft of the Budget Law for the year 2021. The Italian Budget Law is currently under discussion within the Italian Parliament and is expected to be approved by the end of December 2020.5

The draft proposes an extension of the rollback of APAs available to international enterprises for managing in advance selected tax risks.

Moreover, an access fee would be required for the filing of a bilateral APA ruling request before the Italian tax authorities.


ENDNOTES

1 The New Instructions follow a Ministry of Finance decree of 14 May 2018 (2018 Decree) providing guidance on Italian transfer pricing rules.

2 Ministerial decree of 14 May 2018 provided updated guidelines for the application of the Italian TP provisions (Article 110, paragraph 7, of Presidential decree n. 917/1986) in line with international best practices. Article 8 of such decree consistently required that the Italian Tax Authorities issue an updated version of the instructions concerning TP documentation requirements.

3 See Chapter V OECD TPG.

4 See OECD TPG, Ch. VII, Section D.

5 See EY Global Tax Alert, Italy publishes draft 2021 budget law, dated 20 November 2020.


CONTACTS

For additional information with respect to this Alert, please contact the following: 

Studio Legale Tributario, Transfer Pricing, Milan

Studio Legale Tributario, Financial Services Transfer Pricing, Milan

Studio Legale Tributario, Transfer Pricing, Rome

Studio Legale Tributario, Bologna

Studio Legale Tributario, Rome

Ernst & Young LLP (United Kingdom), Italian Tax Desk, London

Ernst & Young LLP (United States), Italian Tax Desk, New York

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

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Source:

https://taxnews.ey.com/news/2020-2782-italy-issues-new-transfer-pricing-documentation-requirements-and-proposes-changes-to-apa-procedure

IRS Tools: Tax Deductible Charitable Donations Search

Taxpayers can now check if their charitable donation is tax deductible by using the IRS’ TEOS tool. As stated on the IRS website, the “Tax Exempt Organization Search” gives taxpayers the chance to search for tax exempt organizations and charities. This allows one to determine if any donations made can be considered tax deductible chartable contributions.

The IRS website also lists some features and functions of the TEOS tool below:

  • It provides information about an organization’s federal tax status and filings.
  • Donors can use it to confirm that an organization is tax-exempt and eligible to receive tax-deductible charitable contributions.
  • Users can find out if an organization had its tax-exempt status revoked.
  • Organizations are searchable by legal name or a doing business as name on file with the IRS.
  • The search results are sortable by name, Employee Identification Number, state and country.

The website also states that “users can also download complete lists of organizations eligible to receive deductible contributions, auto-revoked organizations and e-Postcard filers using links on the Tax Exempt Organization Search page of IRS.gov.”

For more information, please use the following links:
Tax Exempt Organization Search: Frequently Asked Questions
How the CARES Act changes deducting charitable contributions
Interactive Tax Assistant, Can I Deduct my Charitable Contributions

Sources:

https://www.irs.gov/newsroom/heres-how-taxpayers-can-check-if-their-charitable-donation-is-tax-deductible

https://www.irs.gov/charities-non-profits/tax-exempt-organization-search