Covid-Related Paid Sick Leave and Salary Deferrals

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.  

A recent call with a financial advisor from Washington is representative of a common inquiry related qualified leave wages. “My client sponsors a 401(k) plan for her employees.  She has had a number of employees taking sick leave due to Covid-related reasons. Is Covid-related sick pay considered compensation for making employee salary deferrals?”

Highlights of the Discussion

TheFamilies First Coronavirus Response Act (FFCRA)requires certain covered employers to provide eligible employees with paid sick leave (for two weeks) and expanded family and medical leave pay (for an additional 10 weeks) if taken for specified reasons related to COVID-19. The Department of Labor published a helpful FFCRA summary for employers that define which employers are affected, who eligible employees are and how to calculate the qualified leave wages.  

The IRS further clarified in question and answer (Q&A) #54 of a Special Issues News Release that plan sponsors should include qualified leave wages paid to employees due to the COVID-19 pandemic as plan compensation, unless that plan’s provisions specifically exclude this compensation from the definition. See excerpt below from Q&A #54. 

“The FFCRA does not distinguish qualified leave wages from other wages an employee may receive from the employee’s standpoint as a taxpayer; thus, the same rules that generally apply to an employee’s regular wages … would apply from the employee’s standpoint.  To the extent that an employee has a salary reduction agreement in place with the Eligible Employer, the FFCRA does not include any provisions that explicitly prohibit taking salary reduction contributions for any plan from qualified sick leave wages or qualified family leave wages.” 

Conclusion

Unless a 401(k) plan’s provisions specifically exclude Covid-19-related qualified leave wages, plan sponsors should include such amounts in the definition of compensation for plan purposes.