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March 21, 2020

Ability to Fund New Sick and FMLA Leave

OADA received this information from NADA late Friday. The information can also be found on our website. Grassroots support will be needed, so please stay tuned to our website, and your email, for notices in the coming days.

A Message from Paul Metrey, Vice President of Regulatory Affairs and Chief Regulatory Counsel, NADA

NADA has become aware that some dealers and dealer advisors are concerned about certain provisions under the recently enacted federal legislation relating to paid sick and FMLA leave.  Specifically, we have heard that people are concerned that the tax credit provisions of the legislation are insufficient to ensure the orderly funding of the payment obligations imposed, despite the fact that all of the direct costs a dealer would bear would ultimately be repaid via a refundable tax credit. 

Please be aware that a Congressional staff summary of the recently enacted legislation sheds important light on this issue.  The staff summary contains an explanation which – if adopted by the Department of the Treasury (Treasury) when it issues implementing guidance – should address many of the concerns that have been expressed about whether dealers will have sufficient cashflow to fund the new entitlements.  What’s more, the staff summary expressly suggests that Treasury is expected to adopt this approach.

Here are the particulars:  Regarding the source of funding available to dealers providing the mandated sick and FMLA leave, the staff summary states as follows:

“Because quarterly returns are not filed until some period of time after wages are required to be paid, the Act recognizes that the Treasury Department and IRS will exercise broad discretion in ensuring that accrued tax credits are effectively advanced to employers as soon as possible.

  • Under the payment schedule set forth above, most employers will have funds on hand, including withheld income and employment taxes that they would normally be required to hold in escrow and pay to the IRS…

More specifically, the Treasury Department and IRS plan to issue guidance that would, among other relief:

  • Allow employers to access for the purpose of paying sick leave any employment tax liabilities otherwise required to be paid to the IRS after enactment of the Act, in contemplation of receiving refundable credits; and
  • On a current basis as sick leave is paid, allow employers to access for the purpose of paying such leave all withheld income and employment tax liabilities otherwise required to be paid to the IRS.”  

(Emphasis added.) 

If implemented by Treasury, this would mean that all dealership taxes held in escrow, including both employee income and payroll taxes and employer payroll taxes, could be used to pay employees on qualifying leave rather than be paid to the IRS.  Importantly, this would allow employers to draw funds from the payroll and income tax they withhold from or pay on behalf of all employees and not just those to whom they must provide paid leave under the new statute. 

For example, if a dealership must provide paid leave under the statute to 10 of its 100 employees, the dealership could use the amount it withholds in income and payroll taxes from all 100 of its employees to meet this obligation. While dealerships would still report income and payroll taxes on its quarterly return, it would receive a credit from the IRS that would offset this amount. 

Consequently, unless a dealership ends up having a significant percentage of its employees utilizing the new statutory leave entitlement, it may find that the collective amounts of its income and payroll tax withholdings are sufficient to meet its funding obligations under the new statute.

Keep in mind that the final Treasury regulations – which are expected very soon – will govern the extent of an employer’s flexibility in meeting its funding obligations.  Nevertheless, the staff summary suggests that the new leave entitlement may not inhibit most dealerships’ cashflow for this purpose.  And NADA will be submitting comments seeking to ensure that Treasury clarifies the availability of these pools of immediately available funds to pay for the mandated leave.

This situation is fluid and NADA expects more information to be made available soon.