American Rescue Plan Act of 2021 (ARP): Using ARP Funds to Pay Employee Vaccination Incentives

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Kara Millonzi

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For local governments considering offering COVID-19 vaccination incentives to local government employees, my colleague Diane Juffras authored a comprehensive blog on the employment law issues here. A related issue is how to pay for the vaccination incentives. Incentives may take many forms—ranging from allowing an employee to take paid time off to receive the vaccine to providing bonuses, gift cards, gift certificates, or other tangible items (vaccination incentive rewards) to employees who provide evidence of vaccination. I’ve been asked by several local officials whether they may use their Coronavirus State and Local Fiscal Recovery Funds of H.R. 1319 American Rescue Plan Act of 2021 (ARP) monies to fund the vaccination incentive rewards. The answer, of course, is maybe. US Treasury guidance indicates that a vaccination incentive reward program for not-yet-vaccinated employees is an ARP-eligible use. Things get more complicated if a local government wants to use ARP funds to also provide vaccination incentive rewards to employees who have already been vaccinated. Read on for the full analysis.

Using ARP Funds for Local Government Employee Vaccination Incentive Rewards 

As discussed in previous posts, North Carolina local governments must expend ARP funds for an ARP-eligible expense that the local government has state law authority to undertake. In other words, local officials need to ensure that any proposed expenditure of ARP funds is authorized by state law and is allowable under the ARP.

State Law Authority for Employee Vaccination Incentive Rewards

There is broad state law authority for NC counties and municipalities to provide vaccination incentive rewards to current employees as employee fringe benefits. See G.S. 160A-162 (municipalities); G.S. 153A-92(counties). This authority generally allows a local government to create an incentive program that includes current full and part-time employees that fall into both the newly vaccinated category (employees vaccinated after the incentive program launched) and the already vaccinated category (employees vaccinated before the incentive program launched), subject to the ARP limitations discussed below.

ARP Eligibility for Employee Vaccination Incentive Rewards

The ARP presents a slightly more complicated analysis. In its Interim Final Rule, US Treasury authorizes a county and municipality to expend ARP funds to support a vaccination incentive reward program. See 31 CFR 35.6(B)(1)(i). US Treasury provides further guidance in its FAQs, specifically FAQ 2.12:

May recipients use funds to pay for vaccine incentive programs (e.g., cash or in-kind transfers, lottery programs, or other incentives for individuals who get vaccinated)?

Yes. Under the Interim Final Rule, recipients may use Coronavirus State and Local Fiscal Recovery Funds to respond to the COVID-19 public health emergency, including expenses related to COVID-19 vaccination programs. See 31 CFR 35.6(b)(1)(i). Programs that provide incentives reasonably expected to increase the number of people who choose to get vaccinated, or that motivate people to get vaccinated sooner than they otherwise would have, are an allowable use of funds so long as such costs are reasonably proportional to the expected public health benefit.

Parsing this language, any local government incentive program must serve the purpose of either being “reasonably expected to increase the number of people who choose to get vaccinated” OR designed to “motivate people to get vaccinated sooner than they otherwise would have.” Further, the total cost of an employee vaccination incentive program must be proportional to the expected public health benefit of having more local government employees vaccinated. These are the parameters that any employee vaccination incentive program must meet.

As Diane Juffras explains in her post, the EEOC has opined that “asking an employee to provide proof of vaccination is not a disability-related medical inquiry and, therefore, that an incentive offered to employees to show proof of vaccination is not subject to the requirement that the amount of the incentive not be coercive.” If a local government is using ARP monies to fund the incentive program, though, incentive amounts are limited by the proportionality requirement.

Vaccination Incentive Reward Program for Unvaccinated Employees OK

Based on the US Treasury parameters, it seems clear that an employee vaccination incentive program that targets only unvaccinated employees is an allowable ARP expenditure. A local government could provide bonuses, gift cards, gift certificates, or other tangible property awards to those employees who get vaccinated after the incentive program is initiated, if the total cost of the incentive program does not exceed the public health benefit of having these additional employees vaccinated. Arguably, such a program would be designed to “motivate [local government employees] to get vaccinated sooner than they otherwise would have.”

Vaccination Incentive Reward Program for Already Vaccinated Employees May Be OK Under Certain Circumstances

It is less clear that providing incentive rewards to those employees who are already fully vaccinated fits within US Treasury’s framework as an ARP-eligible expense. It is hard to argue that rewarding those who have already been vaccinated meets the criteria to “motivate people to get vaccinated sooner than they otherwise would have.” Simply providing the incentive awards to already-vaccinated employees probably does not work for ARP purposes. However, there may be creative ways to design an incentive program that rewards all vaccinated employees and that meets the alternative criteria of being “reasonably expected to increase the number of people who choose to get vaccinated.” For example, a local government that does not yet know which employees are vaccinated might provide that all employees vaccinated by a future date will receive a vaccination incentive award. The future date should be far enough out to allow someone who is not yet vaccinated to become fully vaccinated. This seems like a reasonable approach to meet the US Treasury criteria. Alternatively, a local government might set a targeted percentage of vaccinated employees for the local government, or perhaps even for large departments or other groups of employees, and reward all employees if the target is met. Or a local government could establish a raffle for gift cards or other tangible property and enter all employees who are vaccinated after a certain date. A local government might allow multiple entries for those who are newly vaccinated as an added incentive. These are just a few examples that could fit the US Treasury criteria.

A local government that is concerned about meeting the US Treasury criteria for already vaccinated employees also could enact a vaccination incentive program that provides bonuses or other rewards for all vaccinated employees (already vaccinated and newly vaccinated) but use ARP funds to pay only for the “newly vaccinated” costs and General Fund monies to pay for the “already vaccinated” costs.

Approval of Employee Vaccination Incentive Reward Program

A local government’s governing board must approve any change to employee compensation, including bonuses or other incentive rewards, unless this authority has been delegated to the manager or other employee or official in the local government’s pay classification plan. See G.S. 160A-162 (municipalities); G.S. 153A-92 (counties). County governments have a complicated organizational hierarchy which may raise issues as to who must approve vaccine incentive rewards. Sheriff Office employees and Register of Deed Office employees are not county employees for most purposes but are treated as county employees for compensation purposes. Id. Thus, these employees could be included in a county vaccination incentive reward program. Election board employees are county employees; however, their compensation is set by the local board of elections (except for the director of elections). See G.S. 163-32. Thus, other than the director of elections, election employees may not be included in a county vaccination incentive program without the approval of the local board of elections.

Because of the legal ambiguity in what type of incentive program ARP monies may be used to fund, I strongly encourage any local government to have its proposed incentive program vetted by its local attorney. And keep in mind that the total cost of an incentive program funded with ARP monies may not exceed the public health benefit of having more employees vaccinated and that any vaccination incentive program also must satisfy employment law requirements, including potential alternative reward opportunities for employees who qualify for a medical or religious exemption from the vaccination.

Budgeting for Employee Vaccination Incentive Program Costs

If the ARP funds have not already been budgeted, the governing board must take the budget action to appropriate the funds for this purpose, by either amending the annual budget ordinance or adopting or amending an ARP-specific grant project ordinance. (More on the budget options in this post.)

Tax Treatment of Employee Vaccination Incentive Rewards

Generally, any bonus payments or gift cards/gift certificates are treated as taxable wages to an employee and should be run through payroll. Other tangible gift items or services that are small in value may be treated as de minimis fringe benefits and excluded from taxable wages. A local government should consult its attorney or another tax professional for specific tax treatment guidance.

Retirement System Treatment of Vaccine Incentives

A final consideration is whether a vaccination incentive reward is retirement-eligible compensation reportable to Local Government Employees’ Retirement System (LGERS). Retirement-eligible compensation is defined as “all salaries and wages…derived from public funds which are earned… for service as an employee… performing full-time work.” G.S. 128-21(7a)a. It is likely that a vaccination bonus or gift card/gift certificate would not meet this definition, but, again, a local government should consult its attorney for definitive guidance.

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