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Cash flow management 101: Basic steps for small businesses

08.18.20

Read this if you are a new business owner. 

Businesses always need money to survive, particularly in today's uncertain economic environment. Having enough money readily available is crucial to both short- and long-term viability. 

Short-term cash flow

In simple terms, cash flow is the amount of money that a business has on hand, whether that money is being paid out or received by the business. Managing the timing of the intake and outlay of funds can be complicated, and creating a cash flow management plan is a crucial part of running a successful business. Here are a few simple ways to improve your company's short-term cash flow:

  • Get references and run credit reports on new customers seeking credit to avoid taking on risky customers who may not be able to pay on time.
  • Require cash payments for the first 30 days to establish a payment routine with new customers.
  • Ask for deposits on upfront expenses to minimize the company outflow on materials.
  • Use technology whenever possible to bill customers and receive payments to lower processing costs and save time.
  • Bill customers as often as possible and follow up on overdue receivables to keep the money flowing in.
  • Link business operating accounts to sweep accounts to maximize earnings on idle funds.
  • Open a line of credit for sudden expenditures or to take advantage of unexpected growth opportunities.
  • Negotiate payment terms from suppliers and banks to extend credit, giving you more time to collect money from customers in order to pay these bills.
  • Only use company credit cards to pay vendors if you earn rewards and pay the cards off in 30 days.

Long-term cash flow

Once you are able to shore up these items, your immediate cash flow should improve. Looking at future cash flow is also important, as it can give you a clearer picture of what you can expect in months to come. Long-term intentional cash flow management is also essential to a business's survival. Here are some long-term cash flow tips that contribute to business sustainability: 

  • Streamline inventory processes to track inventory accurately, control costs, meet customer expectations, analyze data trends, and save time.
  • Monitor operating expenses using budgets to identify variances before they affect cash flow. Even a month of out of control costs can lead to negative cash flow and impact profits. 
  • Save six months of operating costs in an emergency fund to prepare for unexpected demands on your cash flow, from a client who doesn’t pay up to a sudden emergency that needs to be fixed immediately.
  • Pay cash when possible and use a line of credit to finance operations. Only use credit as a tool to long-term success, not as a band aid to cover up negative cash flow. Ultimately, profits will reduce your financing needs and the company will sustain on its own cash supply.
  • Develop a cash flow forecast as an important management tool. You should know what your cash balance will be a month from now, six months from now, and even a year from now. This will transform the way you manage your business.

Proper cash flow management is a key element of a healthy, growing business. By understanding and managing your cash flow and knowing your financials, you can save extra money for unexpected events and opportunities. If you have questions about cash flow management, or want to know more about your specific situation, contact the outsourced accounting services team at BerryDunn. We can walk you through these steps and assist in creating a cash flow forecast that will help you manage your business.

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Read this is you are a business owner or an advisor to business owners.

With continued uncertainty in the business environment stemming from the COVID-19 pandemic, now may be a good time to utilize trust, gift, and estate strategies in the transfer of privately held business interests. 

As discussed in our May 26, 2020 blog post 2020 estate strategies in times of uncertainty for privately held business owners, there may be opportunity to free up considerable portions of lifetime gift and estate tax exemption amounts through transfers due to suppressed values of privately held businesses, and the uncertainty surrounding the impact of the 2020 presidential election on tax rates and future exemption and exclusion thresholds. 

An element to consider when building on this opportunity is the ability to transfer non-controlling interests in a business. These interests are potentially subject to discounts for lack of control and lack of marketability. This may further reduce the overall value transferred through a given strategy, potentially offloading a larger percentage of ownership in a business while retaining large portions of the gift and estate lifetime exemption. Let’s focus on the discount for lack of control (DLOC).

Discount for lack of control

In the context of a hypothetical willing buyer and willing seller, the buyer may place a greater value on an ownership interest with the ability to make changes at their discretion, compared to an alternative ownership interest lacking control. Simply put, buyers like to be in control, and they will pay less for the investment if the interest lacks these characteristics. 

When valuing non-controlling business interests there is an inherent discount to full value recognized to reflect the fact that the subject interest does not hold a controlling position. As a result of this discount, the value of a non-controlling interest in a company will differ from the pro-rata value per share of the entire company. DLOCs alone commonly reduce the value of the transferred interest by 5% to 15%.

All else being equal, a non-controlling ownership position is less desirable (valuable) than a controlling position. This is because of the majority owner’s right to control any or all of the following activities: managing the assets or selecting agents for this purpose, controlling major business decisions, asset allocation choices, setting salary levels, admitting new investors, acquiring assets, selling the company, and declaring/paying distributions.
 
Market-based evidence of proxies for DLOCs can be found within the following subscription-based databases (including, but not limited to): 

  • Control premium studies published in the Mergerstat® Review series by FactSet Mergerstat/Business Valuation Resources
  • Closed-end fund data
  • The Partnership Profiles, Inc. Minority Interest Database and Executive Summary Report on Re-Sale Discounts for applicable entity types

In addition to these resources, to fully assess the degree of discount applicable to a subject interest, consider company-specific factors when estimating the DLOC. The degree of control for a subject interest may be impacted by relevant state statutes and the governing documents of the subject company. These factors are analyzed in conjunction with the current operational and financial policies established and implemented in practice by management to establish a comprehensive view on the applicable degree of discount.

Conclusion

Hypothetical business owners are knowledgeable of the facts and circumstances surrounding a business interest. They take a close look at what they are buying before they make an offer. Like most people, they like to be in charge, and are therefore generally not willing to pay the pro-rata value for a minority interest in a business when the interest lacks control. To assess an appropriate discount for lack of control, consider resources such as those referred to above, then ensure the selected discounts are appropriate based on the factors specific to the company and interest being valued. 

Our mission at BerryDunn remains constant in helping each client create, grow, and protect value. If you have questions about your unique situation, or would like more information, please contact the business valuation consulting team.

Article
Discounts for lack of control and marketability in business valuations

Read this if you are an employer.

Note: The tax deferral situation is very fluid, and information may change frequently. Please check back for updates.

The Treasury Department and Internal Revenue Service released Notice 2020-65 on August 28th, addressing the following questions highlighted in our earlier payroll tax deferral article.

Does the employer or the employee elect to defer taxes?

Notice 2020-65 provides that Affected Taxpayers are defined for purposes of the Notice as the employer, not employee. Therefore, employers will have to choose whether or not to opt-in and defer taxes. Important to note: while the notice doesn’t specifically state that deferral is optional, the IRS press release implies that it is. 

It is unclear if an employee can elect out of the payroll tax deferral, if their employer elects to defer taxes. Absent guidance, it seems that an employer who elects to defer the payroll tax should apply the payroll tax deferral to all employees and not permit an employee to elect out of the deferral. 

The other question for an employer is whether the payroll software will be able to accommodate the deferral feature as of September 1st. It seems highly unlikely that payroll software will be ready for the September 1st effective date. Employers should reach out to their payroll vendor to determine when the system/software will be ready.

How do bonuses, commissions, or other irregular payroll items impact the $4,000/biweekly compensation limit?

Per the Notice, Applicable Wages include wages as defined in Internal Revenue Code (“Code”) Section 3121(a) (i.e., wages for withholding FICA taxes) or compensation as defined in Code Section 3231(e) (i.e., wages for the Railroad Retirement tax) only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods. Additionally, the Notice states that the determination of Applicable Wages is made on a "pay-period-by-pay period" basis. Therefore, Applicable Wages would include items such as bonuses and commissions. For example, if a bonus of $2,000 caused an employee’s total Applicable Wages to exceed the $4,000 bi-weekly threshold for the respective pay period to which it relates, deferral would not be required for that pay period. In other words, payroll tax deferral applies to Applicable Wages of $4,000 or less for any bi-weekly pay period (or the equivalent threshold for other pay periods) irrespective of amounts paid in other pay periods.

Based on the guidance, an employer’s payroll system will need to be programmed to automatically monitor the $4,000 bi-weekly threshold and accumulate the tax deferral for each employee.

When and how are amounts deferred due to be paid by the employee?

An employer must withhold and pay the deferred taxes ratably from wages and compensation paid between January 1, 2021 and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021 with respect to any unpaid taxes.

This means that employers who elect to initiate the payroll tax deferral will double the Social Security tax withholding during the first four months of 2021. The President’s memorandum issued on August 8th states that Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum. However, only Congress can pass legislation to forgive the uncollected taxes, and has thus far been unwilling to do so.

What happens if an employee who is deferring taxes stops working for the employer? Is the employer responsible for collecting the taxes that were deferred?

This question is not addressed; however, the Notice does provide that an employer may make arrangements to otherwise collect the total taxes from the employee, if other than ratably from wages and compensation.

Employers electing to implement the payroll tax deferral may be assuming unnecessary financial risk related to employees who terminate employment during the period of deferral or during the period of repayment. Prior to initiating the payroll tax deferral, an employer will need to determine (and communicate to employees) how it will collect any unpaid tax deferrals when an employee terminates employment. For example, an employer could decide to withhold the deferred taxes from the employee’s final paycheck, if it can do so legally. Further guidance is necessary so an employer can determine the appropriate way to receive payment from employees who terminate employment.

Notice 2020-65 leaves many questions still unanswered.

Most notably, who is responsible for the taxes if an employer is unable to withhold due to an employee terminating employment? The IRS issued a draft version of a revised Form 941 to take into account the deferred payroll taxes.

Additional guidance will hopefully be forthcoming. Until further guidance is issued and payroll systems are updated, it is difficult for an employer to initiate the payroll tax deferral. 
 
 

Article
Payroll tax deferral update

Read this if you are an employer.

President Trump signed a memorandum on August 8 (hereinafter the “Memorandum”) ordering the Treasury Department to defer the withholding, deposit, and payment of the Social Security portion of the payroll taxes during the period September 1 through December 31, 2020. 

We have heard from a few employers who have employees asking them when the tax withholding will stop since September 1st is right around the corner. The short answer for employers and employees is the withholding deferral will begin “when Treasury and/or the IRS issues guidance”.

“Defer” and “deferral” are underlined for a reason. Employees must understand that the Memorandum provides for a “deferral” of the Social Security tax. The tax is not eliminated for the period September 1st through December 31st. This means that while an employee may enjoy some additional take-home pay during the period of deferral, the amounts deferred must still be paid to the IRS at some point. Only Congress can eliminate the payroll tax.

This is what we know so far:

  • The deferral only applies to the employee’s share of the Social Security taxes. It does not apply to the employee’s share of the Medicare taxes.
  • The deferral is only available to an employee with biweekly income of $4,000 or less, which translates to annual income of $104,000. 
  • Amounts deferred pursuant to the Memorandum shall be deferred without any penalties or interest.
  • For example, an employee earning $40,000 annually could potentially defer approximately $825 in payroll taxes and would need to pay that amount at a future date.

There are many open questions for both employees and employers to consider. Therefore, it is nearly impossible to move forward with the tax deferral guidance outlined in the memorandum. 

So, what are the operations questions that employers and employees need answers to before any deferrals can begin? Here are some that come to mind:

  • Does the employer or the employee elect to defer taxes?
  • If it is an employee election, how is that election made?
  • How do bonuses, commissions, or other irregular payroll items impact the $4,000/biweekly compensation limit?
  • When and how are amounts deferred due to be paid by the employee?
  • Are the amounts deferred repaid in a lump sum or in installments?
  • How does an employer report the deferred taxes to the IRS?
  • What happens if an employee who is deferring taxes stops working for the employer? Is the employer responsible for collecting the taxes that were deferred?
  • How quickly can payroll systems be set up to accommodate the payroll deferral?

At the moment, all employees and employers can do is wait for the relevant guidance. Hopefully, guidance is issued soon but it is unlikely any employees can begin the tax deferral on September 1st. 

As soon as guidance is issued, we will be sure to communicate the requirements and timing.

Article
To withhold or not to withhold payroll taxes―The dilemma facing employers

Read this if you are a Maine business or organization that has been affected by COVID-19. 

The State of Maine has released a $200 million Maine Economic Recovery Grant Program for companies and organizations affected by the COVID-19 pandemic. Here is a brief outline of the program from the state, and a list of eligibility requirements. 

“The State of Maine plans to use CARES Act relief funding to help our economy recover from the impacts of the global pandemic by supporting Maine-based businesses and non-profit organizations through an Economic Recovery Grant Program. The funding originates from the federal Coronavirus Relief Fund and will be awarded in the form of grants to directly alleviate the disruption of operations suffered by Maine’s small businesses and non-profits as a result of the COVID-19 pandemic. The Maine Department of Economic & Community Development has been working closely with affected Maine organizations since the beginning of this crisis and has gathered feedback from all sectors on the current challenges.”

Eligibility requirements for the program from the state

To qualify for a Maine Economic Recovery Grant your business/organization must: 

  • Demonstrate a need for financial relief based on lost revenues minus expenses incurred since March 1, 2020 due to COVID-19 impacts or related public health response; 
  • Employ a combined total of 50 or fewer employees and contract employees;
  • Have significant operations in Maine (business/organization headquartered in Maine or have a minimum of 50% of employees and contract employees based in Maine); 
  • Have been in operation for at least one year before August 1, 2020; 
  • Be in good standing with the Maine Department of Labor; 
  • Be current and in good standing with all Maine state payroll taxes, sales taxes, and state income taxes (as applicable) through July 31, 2020;
  • Not be in bankruptcy; 
  • Not have permanently ceased all operations; 
  • Be in consistent compliance and not be under any current or past enforcement action with COVID-19 Prevention Checklist Requirements; and 
  • Be a for-profit business or non-profit organization, except
    • Professional services 
    • 501(c)(4), 501(c)(6) organizations that lobby 
    • K-12 schools, including charter, public and private
    • Municipalities, municipal subdivisions, and other government agencies 
    • Assisted living and retirement communities 
    • Nursing homes
    • Foundations and charitable trusts 
    • Trade associations 
    • Credit unions
    • Insurance trusts
    • Scholarship funds and programs 
    • Gambling 
    • Adult entertainment 
    • Country clubs, golf clubs, other private clubs 
    • Cemetery trusts and associations 
    • Fraternal orders 
    • Hospitals, nursing facilities, institutions of higher education, and child care organizations (Alternate funding available through the Department of Education and Department of Health and Human Services for hospitals, nursing facilities, child care organizations, and institutions of higher education.)

For more information

If you feel you qualify, you can find more details and the application here. If you have questions about your eligibility, please contact us. We’re here to help. 

Article
$200 Million Maine Economic Recovery Grant Program released

Read this if you are a business with employees working in states other than their primary work location.

The COVID-19 pandemic has forced many of us to leave our offices to work remotely. For many businesses, that means having employees working from home in another state. As telecommuting become much more prevalent, due to both the pandemic and technological advances, state income tax implications have come to the forefront for businesses that now have a remote workforce and employees that may be working in a state other than their primary work location. 

Bipartisan legislation known as the Remote and Mobile Worker Relief Act of 2020 (S.3995) was introduced in the US Senate on June 18, 2020 to address the state and local tax implications of a temporary or permanent remote workforce. The legislation addresses both income tax nexus for business owners and employer-employee payroll tax responsibilities for a remote workforce. Here are some highlights:

Business income tax responsibility

The legislation would provide a temporary income tax nexus exception for businesses with remote employees in other states due to COVID-19. The exception would relieve companies from having nexus for a covered period, provided they have no other economic connection to the state in question. The covered period begins the date employees began working remotely and ends on either December 31, 2020 or the date on which the employer allows 90% of its permanent workforce to return to their primary work location, whichever date comes first.

The temporary tax nexus exception is welcome news for many business owners and employers, as a recent survey by Bloomberg indicated that three dozen states would normally consider a remote employee as a nexus trigger. Additional nexus would certainly add further income tax compliance requirements and potentially additional tax liabilities, complications that no businesses need in this already challenging environment.

Employee and employer tax responsibility

The tax implications for telecommuting vary wildly from state to state and most have not addressed how current laws would be adjusted or enforced due to the current environment. For example, New York implements a “convenience of the employer” rule. So if an out-of-state business has an employee working from home in New York, whether or not those wages are subject to New York state income tax depends on the purpose for the telecommuting arrangement. 

New York’s policy is problematic in the current environment. Arguments could be made that the employee is working for home at their convenience, at the employer’s convenience, or due to a government mandate. It is unclear which circumstance would prevail and as of this writing, New York has not addressed how this rule would apply.

If enacted, the Remote and Mobile Worker Relief Act would restrict a state’s authority to tax wage income earned by employees for performing duties in other states. The legislation would create a 90-day threshold for determining nonresident income tax liability for calendar year 2020, enhancing a bill in the House which proposes a 30-day threshold.

The 90-day threshold applies specifically to instances where the employee work arrangement is different due to the COVID-19 pandemic. For future years, the bill would put in place a standardized 30-day bright-line test, making it easier for employees to know when they are liable for non-resident state income taxes and for employers to know which states they need to withhold payroll taxes. 

What do you need to do?

With or without legislation, the year-end income tax filings and information gathering will be very different for tax year 2020. It’s more important than ever for business owners to have proper record keeping on where their employees are working on a day-to-day basis. This information is crucial in determining potential tax exposure and identifying a strategy to mitigate it. The Remote and Mobile Worker Relief Act would provide needed guidance and restore some sense of tax compliance normalcy.

If you would like more information, or have a question about your specific situation, please contact your BerryDunn tax consultant. We’re here to help.
 

Article
The remote worker during COVID-19: Tax nexus and the new normal

Read this if your company is seeking assistance under the PPP.

The rules surrounding PPP continue to rapidly evolve. As of June 22, 2020, we are anticipating some additional clarifications in the form of an interim final rule (or IFR) and additional answers to frequently asked questions (FAQ). The FAQs were last updated on May 27, 2020. For the latest information, please be sure to check our website or the Treasury website.

A few important changes:

  1. The loan forgiveness application, and instructions, have been updated.
  2. There is a new EZ form, designed to streamline the forgiveness process, if borrowers meet certain criteria.
  3. Changes now allow for businesses to use 60% of the PPP loan proceeds on payroll costs, down from 75%.
  4. Businesses now have 24 weeks to use the loan proceeds, rather than the original eight-week period (or by December 31, 2020, whichever comes earlier).
  5. The rules around what is a full-time equivalent (FTE) employee and the safe harbors with respect to employment levels and forgiveness have been clarified.
  6. Entities can defer payroll taxes through the ERC program, even if forgiveness is granted.

These changes are designed to make it easier to qualify for loan forgiveness. In the event you do not qualify for loan forgiveness, you may be able to extend the loan to five years, as opposed to the original two years.

The relaxation on FTE reductions is significant. The reductions will NOT count against you when calculating forgiveness, even if you haven’t restored the same employment level, if you can document that:

  • you offered employment to people and they refused to come back, or
  • HHS, CDC, OSHA or other government intervention causes an inability to “return to the same level of business activity” as of 2/15/2020.

As of June 20, 2020, there was still an additional $128 billion in available funds. The program is intended to fund new loans through June 30, 2020. 

We’re here to help.
If you have questions about the PPP, contact a BerryDunn professional.

Article
PPP loan forgiveness: Updates

Read this if your organization, business, or institution has leases and you’ve been eagerly awaiting and planning for the implementation of the new lease standards.

Ready? Set? Not yet. As we have prepared for and experienced delays related to Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 842, Leases, and Governmental Accounting Standards Board (GASB) Statement No. 87, Leases, we thought the time had finally come for implementation. With the challenges that COVID-19 has brought to everyone, the FASB and GASB recognize the significant impact COVID-19 has had on commercial businesses, state and local governments, and not-for-profits and both have proposed delays in effective dates for various accounting standards, including both lease standards.

But wait, there’s more! In response to feedback FASB received during the comment period for the lease standard, the revenue recognition standard has also been extended. We didn’t see that coming, and expect that many organizations that didn’t opt for early adoption will breathe a collective sigh of relief.

FASB details and a deeper dive

On May 20, 2020, FASB voted to delay the effective date of the lease standard and the revenue recognition standard. A formal Accounting Standards Update (ASU) summarizing these changes will be released early June. Here’s what we know now:

  • Revenue recognition―for entities that have not yet issued financial statements, the effective date of the application of FASB Accounting Standards Codification (ASC) Topic 606, Revenue Recognition, has been delayed by 12 months (effective for reporting periods beginning after December 15, 2019). This does not apply to public entities or nonpublic entities that are conduit debt obligors who previously adopted this guidance.
  • Leases―for entities that have not yet adopted the guidance from ASC 842, Leases, the effective date has been extended by 12 months (effective for reporting periods beginning after December 15, 2021).
  • Early adoption of either standard is still allowed.

FASB has also provided clarity on lease concessions that are highlighted in Topic 842. 

We recognize many lessors are making concessions due to the pandemic. Under current guidance in Topics 840 and 842, changes to lease contracts that were not included in the original lease are generally accounted for as lease modifications and, therefore, a separate contract. This would require remeasurement of the new lease contract and related right-of-use asset. 

FASB recognized this issue and has published a FASB Staff Questions and Answers (Q&A) Document, Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic. Under this new guidance, if lease concessions are made relating to COVID-19, entities do not need to analyze each contract to determine if a new contract has been entered into, and will have the option to apply, or not to apply, the lease modification provisions of Topics 840 and 842.

GASB details

On May 8, 2020, GASB issued Statement No. 95, Postponement of the Effective Dates of Certain Authoritative Guidance. GASB 95 extends the implementation dates of several pronouncements including:
•    Statement No. 84, Fiduciary Activities―extended by 12 months (effective for reporting periods beginning after December 15, 2019)
•    Statement No. 87, Leases―extended by 18 months (effective for reporting periods beginning after June 15, 2021)

More information

If you have questions, please contact a member of our financial statement audit team. For other COVID-19 related resources, please refer to BerryDunn’s COVID-19 Resources Page.
 

Article
May 2020 accounting standard delay status: GASB and FASB

Read this if you are an employer looking for more information on the Employee Retention Credit (ERC).

If you are an employer who did not qualify for or request a Paycheck Protection Plan (PPP) loan, the ERC provisions of the CARES Act may be available to you.

The ERC is a fully refundable tax credit for eligible employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) an eligible employer pays their employees. This ERC applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages (including allocable qualified health plan expenses) taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an eligible employer can receive on qualified wages paid to any employee is $5,000.

Eligibility

Eligible employers for the ERC carry on a trade or business during calendar year 2020, including tax-exempt organizations, that either:

  • Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; or
  • Experience a significant decline in gross receipts during the calendar quarter.

Self-employed individuals are not eligible for this credit for their own self-employment earnings, though they may be able to claim the credit for wages paid to their employees.

If an eligible employer averaged more than 100 full-time employees in 2019, qualified wages are limited to wages paid to an employee for time that the employee is not providing services due to an economic hardship, specifically, either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. If the eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (1) or (2) above.

As with most provisions of the CARES Act, very limited formal guidance has been issued by the IRS. Instead, the IRS issues and updates FAQs on the IRS website. 

One area where eligible employers have been seeking advice is what qualifies as wages and allocable health insurance costs. Qualified wages include an allocable portion of the qualified health plan expenses paid or incurred by an eligible employer to provide and maintain a group health plan. For purposes of the ERC, this also includes employee pre-tax contributions. 

IRS FAQs

The IRS recently updated the Employee Retention Credit FAQs to indicate an eligible employer can claim the ERC for qualified health plan expenses, regardless of whether the employee is paid qualified wages. Updated FAQs 64-65 clarify that health plan expenses paid to laid off or furloughed employees are considered qualified wages for purposes of the ERC. This is welcome news since most employers continue to a pay their share (if not the full amount) of the health insurance premiums for employees who have been laid off or furloughed. 

Read specific examples in the updated FAQs here.

How are qualified health plan expenses determined and allocated?

Qualified health plan expenses are determined separately for each plan sponsored by an employer. For employers sponsoring more than one health plan, for example a group health plan and a health flexible spending arrangement, expenses for each plan are allocated to the employees who participate in that plan. Allocated expenses will be aggregated for those employees who participate in more than one plan. 

Qualified health plan expenses may be allocated using any reasonable method by those employers sponsoring a fully-insured group health plan, including (1) the COBRA applicable premium for the employee, (2) one average premium rate for all employees, or (3) a substantially similar method that takes into account the average premium rate determined separately for employees with self-only and other than self-only coverage. An eligible employer allocating expenses using the average premium rate for all employees may determine a daily rate as detailed in FAQ 67.

Example

An employer sponsors an insured group health plan that covers 400 employees, some with self-only coverage and some with family coverage. Each employee is expected to have 260 work days a year (5 days/week for 52 weeks). The employees contribute a portion of their premium by pre-tax salary reduction, with different amounts for self-only and family. The total annual premium for the 400 employees is $5.2 million. Using the one average premium rate method, the annual premium rate is $13,000 ($5.2 million divided by 400 employees). For each employee expected to have 260 work days a year, the resulting daily average premium is $50 ($13,000 divided by 260 days). The $50 daily rate represents qualified health plan expenses allocated to each day of the qualified wages per employee.

For those employers sponsoring self-insured group health plans, qualified health plan expenses may be allocated using any reasonable method, including (1) the COBRA applicable premium for the employee, or (2) any reasonable actuarial method to determine the estimated annual expenses of the plan. 

An eligible employer sponsoring a self-insured group health plan and allocating expenses using a reasonable actuarial method to determine estimated annual expenses may determine a daily rate similar to the rules for fully-insured plans—that is, taking the estimated annual expenses, dividing by the number of employees covered, and then dividing by the average number of work days during the year by the employees. 

For both fully-insured and self-insured plans, paid-time off days are considered work days when determining the average daily rate.

FAQs 69 and 70 provide that qualified health plan expenses do not include eligible employer contributions to health savings accounts (HSA), Archer medical saving accounts (Archer MSA), or a qualified small employer health reimbursement arrangement (QSEHRA). 

However, qualified health plan expenses may include contributions to a health reimbursement arrangement (HRA), including an individual coverage HRA, or a health flexible spending account (FSA). To allocate contributions to an HRA or a health FSA, eligible employers should use the amount of contributions made on behalf of the particular employee.

Additionally, qualified health plans expenses do not include health plan expenses allocated to any sick leave and family medical wages under the FFCRA (FAQ 71). 

Summary

For those eligible employers with 100 or more employees, the guidance that can be inferred from the available FAQs appears to be the following:

  • If an employer is paying an employee for more than the hours the employee is actually working then a credit would be available for the difference between wages paid and the wages for the hours worked.
  • If an employer has decreased the hours worked by an employee but continues to pay the same (or greater) cost for health insurance, a credit would be available for the allocable health insurance costs while the employee is not working. For example, if an employee is only working 60% of the his/her normal hours, an employer would be able to receive a credit equal to 40% of the health insurance costs paid for that employee.

For more information

If you have more questions, or have a specific question about your particular situation, please call us. We’re here to help. 

Article
Employee Retention Credit―Updated IRS FAQs provide clarification