Employee Retention Credit: Opportunities for Healthcare Organizations

Legislation passed and signed in 2020 has impacted the healthcare industry in meaningful ways. The CARES Act and the PPP Flexibility Act in early 2020 provided significant opportunities for relief including the Paycheck Protection Program (PPP), Employee Retention Credit (ERC), and Provider Relief Funds (PRF).  Legislation enacted at the end of 2020 (the Consolidated Appropriations Act/CAA) most notably expanded opportunities related to the Employee Retention Credit.  These opportunities include a retrospective look back into 2020 as well as a prospective look into 2021. 

We will explore in this narrative what we see as those impacts of the CAA and its corresponding ERC change to the healthcare industry, including which segments in the industry may see the most opportunity and to help healthcare organizations understand which factors must be present inside their organization in order to benefit.  We have organized our thinking by addressing three specific categories:

2020 Retrospective:  PPP recipients and the opportunity for 2020 ERC

Many healthcare organizations took advantage of the PPP and PRF or the ERC and PRF in 2020 but up until the time the CAA was put into law at the end of December 2020, organizations could not benefit from relief under both the PPP and ERC.  With the CAA, an employer is now allowed to utilize both incentives during the same time period in 2020 and 2021.

Organizations with 500 or fewer employees may have been eligible to receive the PPP and qualify for forgiveness during 2020.  We largely saw physician practices, small hospitals, and post-acute care organizations fall within the parameters of this incentive.  Accordingly, these same organizations did not take the ERC in 2020 based on law that existed throughout most of the year.  With the CAA, we now strongly encourage these organizations or others that obtained the PPP to consider their eligibility to take the ERC for 2020.

A brief summary of the benefit and guidelines for ERC eligibility for those within this category include:

  • ERC is a 50% payroll tax credit for organizations limited to annual wages of $10,000. The maximum value of this credit is $5K per employee for 2020.
  • First, an organization must determine if it is an eligible employer by qualifying under one of the following:
    • Government Mandate – Your offices were closed, or operations partially suspended by a government order; OR
    • Gross Receipts – You experienced a 50% or more decline in gross receipts compared to the same quarter in 2019.
    • Comment: Many healthcare organizations did not experience a significant enough decline in gross receipts as outlined by the qualifications; however, the opportunity to consider eligibility based on partial suspension of operations or similarly a disruption in normal business operations is quite possible within organizations including physician practices, small hospitals or post-acute care facilities.  We saw this concept within healthcare organizations with actions such as limits on elective procedures or organizations adopting new ways of performing their services such as increased telemedicine programs.
  • If an organization is an eligible employer, the next step would be to determine qualified wages. Qualified wages for 2020 are determined as follows:
    • Employers with 100 or fewer full-time employees (small employer) – all wages and healthcare costs paid during the eligibility period.
    • Employers with more than 100 full-time employees (large employer) – all wages paid to employees who are NOT providing services (full or partial reduction, including healthcare premiums paid for furloughed employees).
    • Comment: Perhaps the greatest opportunity to benefit from the CAA for the 2020 retrospective are those healthcare organizations who received the PPP and have 100 or fewer employees.

Action related to this 2020 retrospective category is particularly urgent as many healthcare organizations who received the PPP are in the process of seeking loan forgiveness.  It is important for organizations to know that they cannot use the same wages to qualify for PPP forgiveness and the ERC; accordingly, it will be imperative that organizations consider where to allocate wages to preserve applicable wages for the ERC program and maximize PPP loan forgiveness.  While 60% of the PPP loan proceeds must be used for payroll expenses in order to qualify for loan forgiveness, organizations may not want to allocate more wages than necessary (thus preserving wages for the ERC).  Those organizations who do not yet have confirmed loan forgiveness (even if the application has been submitted to the bank but not yet processed by the SBA) need to immediately consider eligibility and appropriate planning.

2021 Prospective (small employer):  Organizations with 500 or fewer employees

Many healthcare organizations previously ineligible for the 2020 ERC will be eligible under the new 2021 rules, and at a more substantial/material benefit.  By increasing the credit amount and expanding eligibility, the 2021 ERC will be more accessible to mid-size healthcare organizations.  In particular, healthcare organizations with 500 or fewer employees such as smaller hospitals, long-term care facilities, and physician practices should reassess the ERC in 2021.

A brief summary of the benefit and guidelines for 2021 ERC eligibility for those within this category include:

  • The 2021 ERC credit increased to a 70% credit, as compared to 50% in 2020, on up to $10,000 of qualifying wages for each of the first two calendar quarters of 2021. This results in a total value up to $7K per employee for each of the first two quarters of 2021.  If an employer qualifies under both calendar quarters, the maximum potential credit is $14,000 per employee.  This is a significant increase from the $5k maximum potential credit for 2020.  (Please note that an organization can receive the credit for both 2020 and 2021.)
  • In order to be eligible for the credit, the organization must determine if it is an eligible employer by qualifying under one of the following:
    • Government Mandate – Your offices were closed, or operations partially suspended by a government order for the first or second quarter in 2021; OR
    • Gross Receipts – You experienced an 20% or more decline in gross receipts compared to the same quarter in 2019. This is as opposed to a 50% or more decline in gross receipts under the 2020 credit. Alternatively, an employer can elect to use the previous quarter’s gross receipts for this test, meaning they can qualify for Q1 2021 based on Q4 2020 compared to Q4 2019.
    • Comment: Many healthcare organizations did not experience a significant enough decline in gross receipts under the 2020 ERC AND government orders were limited to a 4-6 week time period in many states, therefore limiting the 2020 ERC benefit.  Under the new 2021 ERC modifications, many healthcare organizations may qualify under the new gross receipts test. 
  • If an organization is an eligible employer, the next step would be to determine qualified wages. Qualified wages for 2021 ERC are determined as follows:
    • Employers with 500 or fewer full-time employees (small employer) – ALL wages and healthcare costs paid during the first and second quarter of 2021 are considered eligible wages. This is as opposed to a 100 employee threshold under the 2020 ERC, effectively expanding the potential benefit for larger employers.  Under the 2020 ERC employers that had more than 100 employees could only include wages paid for services not performed.
    • Comment: Perhaps the greatest opportunity to benefit from the CAA for the 2021 prospective ERC is that healthcare organizations that have between 100 and 500 employees can now include ALL wages as qualified wages rather than only wages for services not performed.  This is a key change to the 2021 ERC that will be a significant benefit for employees in the 100-500 employee range.

Organizations in the 100-500 employee count range will want to reconsider a potential ERC benefit for 2021.  In particular, organizations will first want to ensure they qualify as an eligible employer. If qualified, the potential benefit of including ALL wages & healthcare costs paid will be a big win for this group.

2021 Prospective (large employer): Organizations with more than 500 employees

Healthcare organizations with more than 500 employees will potentially benefit from the expanded 2021 ERC.  However, these organizations may find the ERC to be more limiting.

A brief summary of the benefit and guidelines for 2021 ERC eligibility for those within this category include:

  • The 2021 ERC credit for organizations now has a value up to $7K per employee for each of the first two quarters of 2021, totaling a maximum potential credit of $14k per employee.
    • Comment: Large employers should consider the potential benefit of the 2021 ERC. The total potential credit has almost tripled ($5k in 2020 to $14k in 2021), therefore warranting another look at the ERC. The limitation on qualified wages as discussed below may limit the potential benefit for large employers.
  • In order to be eligible for the credit, the organization must determine if it is an eligible employer by qualifying under one of the following:
    • Government Mandate – Your offices were closed, or operations partially suspended by a government order for the first or second quarter in 2021; OR
    • Gross Receipts – You experienced an 20% or more decline in gross receipts compared to the same quarter in 2019.
    • Comment: Healthcare organizations with greater than 500 employees may now qualify under the expanded gross receipts threshold.  Note that the eligible employer definition is the same as the 100-500 employee category above.
  • If an organization is an eligible employer, the next step would be to determine qualified wages. Qualified wages for 2021 ERC are determined as follows:
    • Employers with greater than 500 employees (large employer) – Only wages paid for services not performed may be included in qualified wages.
    • Comment: The limitation on qualified wages for employers with greater than 500 employees will be a significant factor in determining the potential benefit of the ERC.  Large employers should first determine whether such wages could be segregated and properly documented in order to benefit from the credit. 
    • Comment: Many large healthcare organizations including large hospitals continue to furlough employees. As such, a significant potential benefit could be available for payment of healthcare costs for furloughed workers.  Additionally, many of these organizations did not take advantage of the 2020 ERC due to a more limited benefit, however with the potential benefit increasing from $5,000 to $14,000 per employee it can definitely be worth reconsideration.

Organizations with more than 500 employees will want to reconsider a potential 2021 ERC benefit.  A primary consideration will be whether the organization has qualified wages (i.e. wages paid for services not performed) and any eligible healthcare costs. 

Other considerations for the 2021 prospective ERC

The 2021 ERC allows some governmental entities to qualify for the ERC, including governmental hospitals.  Healthcare organizations that have a governmental affiliation or designation should reconsider eligibility under the 2021 ERC. 

How We Can Help

Our team understands how these legislative changes are often confusing but essential to the long-term vitality of healthcare organizations of all sizes. The cross-functional team at DHG Healthcare continues to keep a watchful eye on all of these changes, constantly scanning the landscape for opportunities to further serve our clients and help alleviate some of the stress from the pandemic. Our team members are prepared to help healthcare organizations of all sizes respond to COVID-19 in a variety of ways, including the evaluation of and preparation for reporting requirements.

ABOUT THE AUTHORS

Amy Bibby
Office Managing Partner, Asheville
Amy.Bibby@dhg.com

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