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IRS Reverses its Position on Employee Retention Credit Allocable Health Care Expenses

In response to pressure from key members of Congress, the IRS has changed its position on the treatment of certain employer-paid health plan expenses for purposes of the ERC when the employer is not otherwise paying wages to the employee.

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In response to pressure from key members of Congress, the IRS has changed its position on the treatment of certain employer-paid health plan expenses for purposes of the ERC when the employer is not otherwise paying wages to the employee.

In response to pressure from key members of Congress, the IRS has changed its position on the treatment of certain employer-paid health plan expenses for purposes of the Employee Retention Credit (ERC) when the employer is not otherwise paying wages to the employee (i.e., the employee has been furloughed or laid off). In its new guidance released on May 7, 2020, the IRS provided that allocable health plan expenses paid on behalf of employees may be treated as qualified wages even if the employer isn’t otherwise paying wages to the employee.

Senate Finance Committee Chair, Senator Chuck Grassley, R-Iowa praised the new guidance stating,

“This decision will encourage employers to help employees keep their health insurance while temporarily furloughed due to the shutdown. The decision also aligns Treasury’s policy with the original congressional intent behind the employee retention tax credit.”

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) created the Employee Retention Credit (ERC), a fully refundable tax credit available to eligible employers who do not receive a Paycheck Protection Program (PPP) loan. The credit is generally equal to 50% of qualified wages, including allocable qualified health plan expenses, that eligible employers pay their employees between March 13, 2020 and December 31, 2020. The credit is capped at $5,000 per employee. For a more in-depth description of the ERC as well as key highlights of the IRS guidance, click here. 

Generally, qualified wages for purpose of the ERC can include “allocable health plan expenses.” In the April 29, 2020 FAQs, the IRS provided guidance (FAQ #64 and #65) on the treatment of health plan expenses paid by an employer on behalf of an employee when the employer is not paying the employee any wages (i.e., if the employee has been furloughed or laid off). The IRS provided:

“if the Eligible Employer lays off or furloughs its employees and continues the employees’ health care coverage, but does not pay the employees any wages for the time they are not working, the employer may not treat any portion of the health plan expenses as qualified wages for purposes of the Employee Retention Credit because no portion of the health plan expenses would be allocable to wages paid to the employees.”

In response to this position, Senate Finance Committee Chair, Chuck Grassley, R-Iowa, along with Finance Committee ranking member Ron Wyden, D-Ore., and House Ways and Means Committee Chair Richard E. Neal, D-Mass sent a letter pressuring Treasury to reconsider the position. The Congressmen stressed that ““The intent [of the ERC was] to provide an incentive for employers to continue providing health benefits to their employees, even if the employer was otherwise unable to continue paying regular wages.”

As a result of the bipartisan pressure, Treasury and the IRS modified FAQ #64 and #65. FAQ #64 now expressly allows eligible employers that averaged 100 or fewer full-time employees in 2019 to treat allocable health plan expense as qualified wages, even if the employer does not otherwise pay any wages to the employees during the period. FAQ #65 addresses employers that averaged more than 100 full-time employees in 2019. Generally, for those larger employers, qualified wages can only include wages paid to an employee for time that the employee is not providing services. The FAQ #65 clarifies that for those larger employers, the portion of health plan expenses allocable to the time that the employees are not providing services are treated as qualified wages regardless of whether the employee is receiving wages for the time not worked.

The link to the updated IRS FAQs can be found by clicking here.

 

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Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

Disclaimer:  The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.

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