The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") provides for an employee retention credit (“ERC”) designed to encourage employers to retain workers during the COVID-19 crisis. The Internal Revenue Service (the “IRS”) published a detailed FAQ, which can be found here, describing this relief. A brief summary of the key points follows, below.
What are Employee Retention Credits or ERCs?
The ERC permits eligible employers to claim a refundable tax credit equal to 50% of “qualified wages” paid to employees in a given quarter of 2020. An employer may not receive both the ERC and a loan under the Paycheck Protection Program.
Who is an Eligible Employer?
For purposes of the ERC, an “eligible employer” is any employer, including tax-exempt organizations, that carried on a trade or business during 2020 and either (i) fully or partially suspended operations in any quarter of 2020 because of a government order limiting commerce due to COVID-19 or (ii) experienced a significant decline in gross receipts during the quarter. Note that to be an “eligible employer,” an employer must meet either (i) the operational test or (ii) the gross receipts test, not both.
Question 3 of the FAQs provides that an employer’s operations are considered partially suspended if a governmental authority restricts the employer by limiting commerce, travel or group meetings due to COVID-19 “such that the employer can still continue some, but not all of its typical operations.”
Alternatively, Question 4 of the FAQs provides that an employer experiences a “significant decline in gross receipts” as of the first quarter in 2020 in which gross receipts are less than 50% of the gross receipts for the same quarter in 2019.
What are Qualified Wages?
“Qualified wages” include cash compensation paid between March 13, 2020 and December 31, 2020 and certain qualified health plan expenses (defined below). This rule is especially important for employers that did not pay wages to furloughed employees, but continued and paid for some or all employee health insurance during the period of the furlough.
Although employers of any size may receive the ERC, certain limitations apply to the definition of “qualified wages” with respect to large employers (e.g. those averaging more than 100 full-time employees in 2019).
The maximum amount of “qualified wages” that may be taken into account for purposes of the ERC with respect to each employee is $10,000 (i.e., the maximum permitted credit for any employee is $5,000). Question 47 of the FAQ provides helpful examples for calculating the ERC.
What are Qualified Health Plan Expenses?
“Qualified health plan expenses” are those amounts paid or incurred by the employer to maintain a health plan, to the extent such amounts are excluded from an employee’s gross income.
In an earlier version of the FAQs, the IRS indicated that an employer could not claim the ERC unless it was paying wages subject to Social Security and Medicare withholding. Accordingly, employers that had furloughed employees but continued to pay health insurance premiums for employees appeared to be ineligible for the ERC.
On May 7, 2020, the IRS reversed its position on this issue and updated the FAQs. Now, an eligible employer is entitled to an ERC for qualified health care expenses regardless of whether a given employee was paid wages subject to withholding.
Information About the FAQs
A full version of the FAQs can be found at the link, above. In addition to the rules summarized above, the FAQs include detailed information about withholding (Question 13), the interaction between the ERC and leave under the Families First Coronavirus Response Act (Question 14), the aggregation of employers (Question 25), the calculation of qualified wages (Question 48), and the calculation and allocation of qualified health plan expenses (Questions 62 – 71).
Note that the FAQs are informal guidance from the IRS and cannot be relied on as a legal authority. Moreover, the FAQs are subject to revision and may be updated or amended at any time.