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IRS Updates Its Employee Retention Credit to Cover Businesses Who Continue To Provide Health Insurance

Following Treasury’s announcement that that it will revise rules for the Employee Retention Credit to make the tax break available to companies who have furloughed workers but are still providing health insurance, the Internal Revenue Service has updated its Employee Retention Credit Frequently Asked Questions (FAQs) to reflect those revisions. We have included the relevant questions (64 and 65) below for your review:

64.  May an Eligible Employer that averaged 100 or fewer full-time employees in 2019 treat its health plan expenses as qualified wages for purposes of the Employee Retention Credit? (updated May 7, 2020)

Yes. An Eligible Employer that averaged 100 or fewer full-time employees in 2019 may treat its health plan expenses paid or incurred, after March 12, 2020, and before January 1, 2021, during any period in a calendar quarter in which the employer’s business operations are fully or partially suspended due to a governmental order or a calendar quarter in which the employer experiences a significant decline in gross receipts as qualified wages, subject to the maximum of $10,000 per employee for all calendar quarters for all qualified wages.  Eligible Employers may treat health plan expenses allocable to the applicable periods as qualified wages even if the employees are not working and the Eligible Employer does not pay the employees any wages for the time they are not working.

Example 1: Employer Y averaged 100 or fewer employees in 2019.  Employer Y is subject to a governmental order that partially suspends the operation of its trade or business.  In response to the governmental order, Employer Y reduces all employees’ hours by 50 percent.  It pays wages to the employees only for the time the employees are providing services, but Employer Y continues to provide the employees with full health care coverage.  Employer Y’s health plan expenses allocable to wages paid during the period its operations were partially suspended may be treated as qualified wages for purposes of the Employee Retention Credit.

Example 2: Employer Z averaged 100 or fewer employees in 2019.  Employer Z is subject to a governmental order that suspends the operation of its trade or business.  In response to the governmental order, Employer Z lays off or furloughs all of its employees.  It does not pay wages to its employees for the time they are laid off or furloughed and not working, but it continues the employees’ health care coverage.  Employer Z’s health plan expenses allocable to the period its operations were partially suspended may be treated as qualified wages for purposes of the Employee Retention Credit

65. May an Eligible Employer that averaged more than 100 full-time employees in 2019 treat its health plan expenses as qualified wages for purposes of the Employee Retention Credit? (updated May 7, 2020)

Yes. An Eligible Employer that averaged more than 100 full-time employees in 2019 may treat its health plan expenses paid or incurred, after March 12, 2020, and before January 1, 2021, allocable to the time that the employees are not providing services during any period in a calendar quarter in which the employer’s business operations are fully or partially suspended due to a governmental order or a calendar quarter in which the employer experiences a significant decline in gross receipts as qualified wages, subject to the maximum of $10,000 per employee for all calendar quarters for all qualified wages.  However, an Eligible Employer may not treat health plan expenses allocable to the time for which the employees are receiving wages for providing services as qualified wages; only the portion of health plan expenses allocable to the time that the employees are not providing services are treated as qualified wages.

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