Employee Retention Credit: Treasury Updates its Position on Qualifying Wages
By Michael D’Addio, Principal, Tax & Business Services
Last week, the U.S. Treasury announced it has changed its position in its questions and answers on the Employee Retention Credit (ERC) as posted on its website.
Under Treasury’s new position, employer-provided health insurance coverage qualifies as wages, with respect to the ERC, to the extent it is otherwise allocable to qualifying wages, or to a period where the employee is not providing services. The Q&A addresses this matter both for employers that averaged 100 or fewer employees in 2019 and employers who averaged more than 100.
Under the CARES Act, employers that averaged 100 or fewer employees in 2019 can claim a credit of 50% on up to $10,000 of qualifying wages, including allocable health plan benefits, per employee (maximum credit of $5,000). This includes payments to or on behalf of all employees. Employers that averaged over 100 employees in 2019 can take the ERC on qualifying wages paid to employees for time the employees did not provide service to the employer. This limits health plan costs eligible for the credit to the portion allocable to such qualifying wages or non-working time.
For employers that averaged 100 or fewer employees in 2019, all wages paid are qualifying wages. Employer-provided health insurance paid or incurred after March 12, 2020, and before January 1, 2021, during qualifying periods will qualify whether the employees are working or not.
Example 1
Where the employer is subject to a governmental order that partially suspends operations and it reduces all employee hours by 50%, but continues to provide employees with full employer-paid health coverage, 100% of the health plan expenses allocable to wages paid during the period are eligible. Wages and benefits are eligible whether they apply to working or non-working hours.
Example 2
Where the employer is subject to a government order that fully suspends operations and it furloughs all of its employees and does not pay them wages but continues employer-paid health coverage, the employer’s health plan expenses allocable to the quarters of eligibility can be included as qualifying wages for the qualifying quarters.
Marcum Insight
This is the change from the prior Treasury opinion. Under its previous reasoning, since there are no wages being paid to the non-working employees, there are no wages to which the healthcare costs can be allocated. Treasury will now allow the healthcare costs allocable to this period to be considered part of qualifying wages.
Employers that averaged more than 100 employees in 2019 and meet the qualifications for the ERC (full or partial closure due to a governmental order or significant decline in gross receipts) are only allowed the ERC on wages paid for non-working hours.
Example 1
Where there is a partial closure under a governmental order that causes the employer to reduce all employee working hours by 50% but full employer-paid health benefits are continued, the health plan expense allocable to the time that employees are not providing services can be treated as qualifying wages. However, the health plan expenses allocable to the time that the employees perform work are not considered qualifying wages.
Example 2
Where there is a full closure under a governmental order and the employer furloughs employees with no pay but continues employer-provided health benefits, since the health benefits are allocable to non-working hours of the employee, these costs can be treated as qualifying wages for purposes of the ERC.
Example 3
The employer is subject to a governmental order that partially suspends its operations and it reduces employee hours by 50% but reduces wages by only 40% (employees are receiving 60% of their wages for working 50% of normal hours). Treasury concludes that the employer is paying the employee 10% of wages for not working, and these wages are eligible for the ERC. In addition, 50% of the health plan costs are allocable to the 50% of non-working time, and these allocable health plan costs are also eligible. However, the 50% of the health plan costs allocable to the 50% of the time the employees are working are not qualifying wages.
If you have any questions, contact your Marcum tax professional or contact Michael D’Addio at 203.781.9665 or email Michael.
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