IRS Revises Guidance on Employee Retention Credit and Furloughed Employees

The CARES Act introduced a refundable Employee Retention Credit (ERC) for eligible employers who continue to provide qualified wages to employees during a period where operations may be suspended as a result of a government order related to COVID-19, or if the business experiences a 50 percent decline in gross receipts during a quarter in 2020. The credit is equal to 50 percent of qualified wages with a maximum credit of $5,000 per employee.

The ERC includes a provision allowing qualified health plan expenses to be included in the calculation of qualified wages. The intent of this provision was to allow employers a credit for continuing to provide health care benefits to employees when an employee is not providing services or is furloughed.

On April 29th, the IRS released a list of FAQs for the ERC. One item that captured many taxpayer’s attention was a response stating that if an employer is only providing health plan coverage and paying no additional wages then those health plan expenses would not be eligible for the ERC.

After the release of this FAQ several members of Congress sent letters to Treasury and the IRS requesting that this position be revisited as it was not within the Congressional intent of the CARES Act. On May 7th the IRS updated the FAQ to now state that health plan expenses may qualify for the credit, even if no other wages are paid.

If employers have furloughed employees or have reduced employee hours while still continuing to pay health care benefits, then it is important that eligibility for this credit be analyzed. DHG can assist taxpayers with performing and documenting this analysis, as well as helping maximize the eligible credit amount.

The IRS’s FAQs on the Employee Retention Credit can be found here.

For more information, please reach out to us at taxCARES@dhg.com

CONTRIBUTORS

Paul Morrow
Manager | DHG Tax

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