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Employee Retention Credit―Updated IRS FAQs provide clarification

05.29.20

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. 

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Read this if you are an employer that provides educational assistance to employees.

Under Section 127 of the Internal Revenue Code (IRC), employers are allowed to provide tax-free payments of up to $5,250 per year to eligible employees for qualified educational expenses. To be considered qualified, payments must be made in accordance with an employer’s written educational assistance plan. 

The Coronavirus Aid, Relief and Economic Security (CARES) Act amended Section 127 to include student loan repayment assistance as a qualified educational expense. The expansion of Section 127 allows employers to make payments for student loans without the employee incurring taxable income and the payment is a deductible expense for the employer, resulting in tax advantages to both parties.  

Originally, the CARES Act was a temporary measure allowing tax-free principal or interest payments made between March 27, 2020 and December 31, 2020.  Due to the difficulties in adopting a formal education assistance plan, many employers were unable to take advantage of the temporary incentive. As a result, the Consolidated Appropriations Act, signed into law on December 27th, 2020 extended the provision for five years through December 31, 2025.  

Employer requirements

For payments to qualify as tax-free under Section 127, you (the employer) must meet the following requirements: 

  • The employer must have a written educational assistance plan
  • The plan must not offer other taxable benefits or remuneration that can be chosen instead of educational assistance (cash or noncash)
  • The plan must not discriminate in favor of highly compensated employees
  • An employee may not receive more than $5,250 from all employers combined
  • Eligible employees must be reasonably notified of the plan

Eligible employees include current and laid-off employees, retired employees, and disabled employees. Spouses or dependents of employees are not eligible. Payments of principal or interest can be made directly to employees as reimbursement for amounts already paid (support for student loan payments should be provided by the employee) or payments can be made directly to the lender. Other educational expenses that qualify under Section 127 include:

  • Tuition for graduate or undergraduate level programs, which do not have to be job-related
  • Books, supplies, and necessary equipment, not including meals, lodging, transportation, or supplies that employees may keep after the course is completed

The five-year extension of this student loan repayment assistance can provide tax savings to both employers (employer portion of FICA) and employees (federal and state withholding, and FICA). Additionally, offering a qualified educational assistance program may help strengthen an employers’ recruitment and retention efforts. 

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

Article
CARES Act expansion of IRC Section 127: Tax savings on student loan repayment assistance

Read this if you are a plan sponsor of employee benefit plans.

The Department of Labor (DOL) is preparing to finalize a proposed rule that changes the way environmental, social, and governance (ESG) factors are viewed in a plan sponsor’s investment process and proxy voting methods. The proposal, which was issued in October 2021, aims to help plan sponsors understand their responsibilities when investing in ESG strategies and makes significant changes to two previously issued ESG rules.

Here, we provide an update on the DOL’s proposed rule and seek to help plan sponsors understand their potential new responsibilities when considering ESG investments. 

Background on ESG rules

For many years, the DOL has considered how non-financial factors, such as the effects of climate change, may affect plan sponsors’ fiduciary obligations. Amid an increasing focus on ESG investments, the Trump administration issued a final rule on ESG in November 2020 that required plan fiduciaries to only consider financial returns on investments—and to disregard non-financial factors like environmental or social effects. The rule also banned plan sponsors from using ESG investments as the Qualified Default Investment Alternative (QDIA).

A separate ruling issued in December 2020 said that managing proxy and shareholder duties (for investments within the plan) should be done for the sole benefit of the participants and beneficiaries—not for environmental or social advancements. It also stated that fiduciaries weren’t required to vote on every proxy and exercise every shareholder right.

In March 2021, the Biden Administration said it would not enforce the previous year’s rulings until it finished its own review. The current proposed rule is the result of that research.

Overview of the new proposed ESG rule

In October 2021, the DOL proposed a new rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” According to the proposed rule, fiduciaries may be required to consider the economic effects of climate change and other ESG factors when making investment decisions and exercising proxy voting and other shareholder rights. The proposal states that fiduciaries must consider ESG issues when they are material to an investment’s risk/return profile. The rule also reversed a previous provision on QDIAs, paving the way for ESG investment options to be used in automatic enrollment as long as such investment options meet QDIA requirements.

The new ESG rule also made several changes to fiduciaries’ responsibilities when exercising shareholder rights. First, it changed a provision on proxy voting, giving fiduciaries more responsibility in deciding whether voting is in the best interest of the plan. Second, it removed two “safe harbor” examples of proxy voting policies. Next, the proposed rule eliminated fiduciaries’ need to monitor third-party proxy voting services. Lastly, the proposal removed the requirement to keep detailed records on proxy voting and other shareholder rights.

In addition, the DOL updated the “tie-breaker test” to allow fiduciaries the ability to choose an investment that has separate benefits (e.g., ESG factors) if competing investments equally serve the financial interests of the plan.

Comment letter analysis shows broad support for the proposed rule

The DOL received more than 22,000 comment letters for the proposed regulation. Ninety-seven percent of respondents support the proposed changes according to an analysis of the comment letters by the Forum for Sustainable and Responsible Investment (US SIF), a membership association that promotes sustainable investing. While some respondents asked the DOL to revisit the tie-breaker provision and other specifics of the proposed rule, many respondents agreed that the proposed rule clears the way for fiduciaries to consider adding ESG investment options to benefit plans.

Insight: Consider how the proposed ESG rule affects your plan today

Based on the typical timeline for similar rule changes, the DOL is expected to issue its final version of the proposed rule by mid- to late-2022. This means that plan sponsors shouldn’t have to wait long for clarification on their ability to add ESG investments to their plans. To prepare for the potential changes, plan sponsors should review the proposed rule and consider creating a prudent selection process that reviews all aspects that are relevant to an investment’s risk and return profile. As always, documentation is a critical step in this process.

If you have any questions about your specific situation, please reach out to our employee benefit consulting team. We're here to help.

Article
DOL proposes changes to ESG investing and shareholder rights: What plan sponsors need to know

Read this if you are not familiar with the expansion of eligibility for employee retention credits (ERC).

Are you familiar with the IRS’ recent additional, taxpayer-friendly guidance that provides some clarity in claiming the employee retention credit (ERC)? 

Employee Retention Credits in the CARES Act: Background

Congress originally enacted the ERC in the CARES Act in March of 2020 to encourage employers to hire and retain employees during the pandemic. At that time, the ERC applied to wages paid after March 12, 2020 and before January 1, 2021. However, Congress later modified and extended the ERC to apply to wages paid before July 1, 2021. Then with the American Rescue Plan Act (ARPA) signed into law on March 11, 2021, the ERC was modified to apply to wages paid through December 31, 2021. The recently passed infrastructure bill eliminates the ERC the quarter ending December 31, 2021.

The rules are complex but there may be some limited ability for your organization to benefit, based on some late changes to the rules. Originally, taxpayers who received PPP loans were not eligible, but the rules changed and now provide that employers who received PPP loans may qualify for the ERC with respect to wages that were not paid for with proceeds from a forgiven PPP loan. This change is retroactive to March 12, 2020. 

The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to COVID-related governmental order or that experienced a significant reduction in gross receipts.  

Regarding the reduction in gross receipts, for any quarter in 2020, a greater than 50% reduction in gross receipts is required during the calendar quarter compared to the same quarter of 2019 in order to qualify. For 2021, the eligibility threshold for employers is reduced from a greater than 50% to a greater than 20% decline in gross receipts for the same quarter of 2019 in order to qualify for the ERC for any quarter. There is an alternative quarter election for 2021 that allows employers to use prior quarter gross receipts compared to the same quarter for 2019 to determine eligibility. For example, for the first calendar quarter of 2021, an employer may elect to use its gross receipts for the fourth quarter of 2020 compared to those for the fourth calendar quarter of 2019 to determine if the decline in gross receipts test is met.

The IRS recently clarified that in determining gross receipts an employer does not need to include forgiven PPP loans, shuttered venue operator grants, or restaurant revitalization grants as gross receipts. Gross receipts for exempt organizations are calculated in the same manner as gross receipts on page 1 of Form 990 in Box G, which includes proceeds from the sales of investments as well as all contribution, program and investment revenue.

The amount of the credit can be substantial. For 2020, the credit is 50% of the first $10,000 of qualified wages per employee for the qualifying period beginning as early as March 12, 2020 and ending December 31, 2020 (thus the max credit per employee is $5,000 in 2020). For 2021, the credit is 70% of the first $10,000 of qualified wages per employee, per qualifying quarter (thus the potential max credit is $21,000 per employee in 2021).  

For 2021, employers with 500 or fewer full-time employees in 2019 may include all wages and health plan expenses as qualified wages. For 2020, employers with 100 or fewer full-time employees in 2019 may include all wages and health plan expenses as qualified wages while employers with more than 100 full-time employees in 2019 may only claim the credit for qualified wages paid to employees who did not provide services. For purposes of determining full-time employees, an employer only needs to include those that work 30 hours a week or 130 hours a month in the calculation. Part-time employees working less than this would not be considered in the employee count.

There is additional interplay between claiming the ERC and the wages used for PPP loan forgiveness that will need to be considered.  

What should you do now? 

It makes sense to determine your eligibility for the ERC. We recommend that you compile your business gross receipts by calendar quarter for 2019, 2020, and the first three quarters of 2021. Let us know if you want a template to do this. We can then help you evaluate whether you have any quarters where you might qualify for the ERC.  

Keep in mind that if your business operations were either fully or partially suspended due to a COVID-related government order then you will likely already qualify for that quarter but the eligible wages will only be for the wages paid during the shutdown period.  

Please let us know if you have any questions or need any assistance.

Article
CARES Act: Eligibility for employee retention credits

Read this if you paid wages for qualified sick and family leave in 2021.

The IRS has issued guidance to employers on year-end reporting for sick and family leave wages that were paid in 2021 to eligible employees under recent federal legislation.

IRS Notice 2021-53, issued on September 7, 2021, provides that employers must report “qualified leave wages” either on a 2021 Form W-2 or on a separate statement, including:

  • Qualified leave wages paid from January 1, 2021 through March 31, 2021 (Q1) under the Families First Coronavirus Response Act (FFCRA), as amended by the Consolidated Appropriations Act, 2021 (CAA).
  • Qualified leave wages paid from April 1, 2021 through September 30, 2021 (Q2 and Q3) under the American Rescue Plan Act of 2021 (ARPA).

The notice also explains how employees who are also self-employed should report such paid leave. This guidance builds on IRS Notice 2020-54, issued in July 2020, which explained the reporting requirements for 2020 qualified leave wages.

Employers should work with their IT department and/or payroll service provider as soon as possible to review the payroll system, earnings codes configuration and W-2 mapping to ensure that these paid leave wages are captured timely and accurately for year-end W-2 reporting.

FFCRA and ARPA tax credits background

In March 2020, the FFCRA imposed a federal mandate requiring eligible employers to provide paid sick and family leave from April 1, 2020 to December 31, 2020, up to specified limits, to employees unable to work due to certain COVID-related circumstances. The FFCRA provided fully refundable tax credits to cover the cost of the mandatory leave.

In December 2020, the CAA extended the FFCRA tax credits through March 31, 2021, for paid leave that would have met the FFCRA requirements (except that the leave was optional, not mandatory). The ARPA further extended the credits for paid leave through September 30, 2021, if the leave would have met the FFCRA requirements.

In addition to employer tax credits, under the CAA, a self-employed individual may claim refundable qualified sick and family leave equivalent credits if the individual was unable to work during Q1 due to certain COVID-related circumstances. The ARPA extended the availability of the credits for self-employed individuals through September 30, 2021. However, an eligible self-employed individual may have to reduce the qualified leave equivalent credits by some (or all) of the qualified leave wages the individual received as an employee from an employer.

Reporting requirements to claim the refundable tax credits

Eligible employers who claim the refundable tax credits under the FFCRA or ARPA must separately report qualified sick and family leave wages to their employees. Employers who forgo claiming such credits are not subject to the reporting requirements.

Qualified leave wages paid in 2021 under the FFCRA and ARPA must be reported in Box 1 of the employee’s 2021 Form W-2. Qualified leave wages that are Social Security wages or Medicare wages must be included in boxes 3 and 5, respectively. To the extent the qualified leave wages are compensation subject to the Railroad Retirement Tax Act (RRTA), they must also be included in box 14 under the appropriate RRTA reporting labels.

In addition, employers must report to the employee the following types and amounts of wages that were paid, with each amount separately reported either in box 14 of the 2021 Form W-2 or on a separate statement:

  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of Section 5102(a) of the Emergency Paid Sick Leave Act (EPSLA)1  with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $511 per day limit paid for leave taken after December 31, 2020, and before April 1, 2021.”
  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $200 per day limit paid for leave taken after December 31, 2020, and before April 1, 2021.”
  • The total amount of qualified family leave wages paid to the employee under the Emergency Family and Medical Leave Expansion Act (EFMLEA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021. The following, or similar language, must be used to label this amount: “Emergency family leave wages paid for leave taken after December 31, 2020, and before April 1, 2021.”
  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $511 per day limit paid for leave taken after March 31, 2021, and before October 1, 2021.”
  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), and (6) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $200 per day limit paid for leave taken after March 31, 2021, and before October 1, 2021.”
  • The total amount of qualified family leave wages paid to the employee under the EFMLEA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: Emergency family leave wages paid for leave taken after March 31, 2021, and before October 1, 2021.”

If an employer chooses to provide a separate statement and the employee receives a paper 2021 Form W-2, then the statement must be included with the Form W-2 sent to the employee. If the employee receives an electronic 2021 Form W-2, then the statement must be provided in the same manner and at the same time as the Form W-2.

In addition to the above required information, the notice also suggests that employers provide additional information about qualified sick and family leave wages that explains that these wages may limit the amount of the qualified sick leave equivalent or qualified family leave equivalent credits to which the employee may be entitled with respect to any self-employment income.

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.

 1Employees are eligible for qualified sick leave under EPSLA if the employee:

  • Was subject to a federal, state or local quarantine or isolation order related to COVID-19;
  • Had been advised by a health-care provider to self-quarantine due to concerns related to COVID-19;
  • Experienced symptoms of COVID-19 and was seeking a medical diagnosis;
  • Was caring for an individual who was subject to a quarantine order related to COVID-19, or had been advised by a health-care provider to self-quarantine due to concerns related to COVID-19;
  • Was caring for a son or daughter of such employee, if the school or place of care of the son or daughter had been closed, or the child-care provider of such son or daughter was unavailable, due to COVID-19; or
  • Was experiencing any other substantially similar condition specified by the Secretary of Health and Human Services.

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IRS guidance to employers: Year-end reporting requirements for qualified sick and family leave wages

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

The IRS recently released Notice 2021-49, providing updated guidance on the ERC. Here are a few of the more important points from the Notice.

Timing of qualified wages deduction disallowance. The general rule is an employer's deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the employee retention credit. The new guidance indicates an employer should file an amended federal income tax return or administrative adjustment request (AAR), if applicable, for the taxable year in which the qualified wages were paid or incurred to correct any overstated deduction taken with respect to those same wages on the original federal tax return.

This means that an employer who filed an amended Form 941 in 2021 to claim the ERC for 2020 would be required to file an amended 2020 tax form to correct an overstated deduction for the credit amount if the wage/health plan deductions on the originally filed tax return for 2020 were not reduced by the amount of the credit.

Wages of majority owners and spouses. If the majority owner (owns more than 50%) of a corporation has no brother or sister (whether by whole or half blood), ancestor, or lineal descendant then neither the majority owner nor the spouse is a related individual and the wages paid to the majority owner and/or the spouse are qualified wages for purposes of the ERC, assuming the other requirements for qualified wages are satisfied. In most cases, the wages of a majority owner and spouse will not be considered qualified wages. The Notice provides a number of examples to clarify this issue, including an example where wages of a majority owner or spouse may not be treated as qualified wages.

Calculation of fulltime employees. For purposes of determining whether an eligible employer is a large eligible employer (i.e., more than 100 in 2019 for 2020 or more than 500 in 2019 for 2021) or a small eligible employer, eligible employers are not required to include fulltime equivalents when determining the average number of full-time employees. This is great news for employers with a large part-time or variable hour employee workforce.

One final note
It appears the infrastructure bill that just passed in the US Senate would eliminate the ERC for the fourth quarter of 2021. If this provision holds, it would limit the total ERC that could be claimed for 2021.

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
Updated guidance on the Employee Retention Credit (ERC): Important considerations for employers

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

The IRS on April 2, 2021, issued additional guidance for employers claiming the employee retention credit (ERC) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as modified in December 2020 by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act). The ERC is designed to help eligible businesses retain employees by offering a credit against employment taxes when qualified wages and healthcare expenses are paid during the COVID-19 pandemic.
 
Notice 2021-23 provides additional guidance for taxpayers to use when preparing credit claims and explains the changes to the employee retention credit for the first two calendar quarters of 2021, including:

Increased credit amount 

  • Eligible employers may now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages and qualified health plan expenses paid to employees after December 31, 2020 and before January 1, 2022.
  • The maximum employee retention credit available is $7,000 per employee per calendar quarter, for a total of $28,000 for all four calendar quarters of 2021.

Broadened eligibility requirements 

  • Employers who suffered a greater than 20% decline in quarterly gross receipts compared to the same calendar quarter in 2019 are now eligible.
  • A safe harbor is provided allowing employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility. For example, for the first calendar quarter of 2021, an employer may elect to use its gross receipts for the fourth quarter of 2020 compared to those for the fourth calendar quarter of 2019 to determine if the decline in gross receipts test is met.
  • Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility.
  • The credit is available to some government instrumentalities, including colleges, universities, amd organizations providing medical or hospital care and certain organizations chartered by Congress.

Determination of qualified wages 

  • Employers with 500 or fewer full-time employees in 2019 may include all wages and health plan expenses as “qualified wages.”
  • The Relief Act strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).

Items to consider

It is extremely important that employers refer to the various form instructions to ensure they are eligible for and claiming the correct amount of credits. The IRS issued the following common errors that employers should avoid in COVID Tax Tip 2021-64:

  • Ensure line 1 on Form 941-X is accurate (refer to Line 1 instructions).
  • Report advanced credits actually received, not the requested payment of credits on Form 941, Line 13f.
  • Use Form 7200 to request the advance payment of a credit only, not for reporting the credit.
    • Employers use this form to request the advance payment of employer credit. It is not used to claim the credit. An employer must claim the credit on the applicable employment tax return, typically Form 941.
    • If an employer has received the advance payment requested, they must reconcile it on Form 941 by reporting the advance payments received and claiming the credits for which they're eligible.
    • If an employer receives an advance payment of a credit but doesn't claim a corresponding credit on their employment tax return, they may receive a balance due notice.
    • If an employer filed an employment tax return and did not report a credit they were otherwise entitled to, they will need to file an amended return using Form 941-X to claim those eligible credits. 
  • Complete all lines associated with the credit being claimed on Form 941-X. For example, if an employer is amending a return to claim additional employee retention credits, they must complete the lines that relate to qualified wages for the credit and qualified health plan expenses allocable to those wages, if applicable.

Final thoughts

Employers have an opportunity to plan for how they will allocate qualified wages and health care expenses for the ERC from wages covered by PPP loan proceeds. Careful planning could result in additional monies available to the employer. IRS Notice 2021-20 includes guidance on the interplay between the PPP and ERC. Lastly, employers should consider whether to request a refund or reduce future deposits when filing Form 941 to claim the ERC. Reducing future deposits may provide a more immediate benefit to cash flow.

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: Additional guidance for employers claiming it under the CARES Act

Read this if you are an employer in Massachusetts.

Governor Baker signed Bill H.3702 into law on May 28th (after vetoing an earlier version) that requires employers to provide emergency paid sick leave (up to 40 hours) for employees if they can’t work due to reasons related to the pandemic. MA EPSL is available from June 7, 2021 until Sept. 30, 2021 or until funds run out. Here are some things to know. 

Weekly cap

The law limits the weekly amount an employee may receive and an employer may be reimbursed. The law states “no employee shall receive, and no employer shall be eligible for reimbursement for such employee, COVID-19 emergency paid sick leave in excess of $850 per week.”

Specific, qualified reasons to receive benefit

Employers are required to provide up to 40 hours of MA EPSL to Massachusetts-based employees who are unable to work due to any of the following reasons:

  1. An employee’s need to: (i) self-isolate and care for oneself because of the employee’s COVID-19 diagnosis; (ii) seek or obtain medical diagnosis, care, or treatment for COVID-19 symptoms; or (iii) obtain immunization related to COVID-19 or the employee is recovering from an injury, disability, illness, or condition related to such immunization; 
  2. An employee’s need to care for a family member who: (i) is self-isolating due to a COVID-19 diagnosis; or (ii) needs medical diagnosis, care, or treatment for COVID-19 symptoms;
  3. A quarantine order, or other determination by a local, state or federal public official, a health authority having jurisdiction, the employee’s employer, or a health care provider that the employee’s presence on the job or in the community would jeopardize the health of others because of the employee’s exposure to COVID-19 or exhibiting of symptoms, regardless of whether the employee has been diagnosed with COVID-19;
  4. An employee’s need to care for a family member due to a quarantine order, or other determination by a local, state, or federal public official, a health authority having jurisdiction, the family member’s employer, or a health care provider that the family member’s presence on the job or in the community would jeopardize the health of others because of the family member’s exposure to COVID-19, regardless of whether the family member has been diagnosed with COVID-19; or
  5. An employee’s inability to telework because the employee has been diagnosed with COVID-19 and the symptoms inhibit the ability of the employee to telework.

Eligible employees

Employees that work 40 hours a week are entitled to the full amount per week (up to $850). Part-time employees, those working less than 40 hours per week, can receive an amount equal to the average number of hours they normally work in 14 days (maximum of $850 per week). Special rules must be followed for those employees who regularly work fewer than 40 hours per week with varying hours per week.

How to claim reimbursement

The state will develop an application employer’s may use to request reimbursement from the COVID-19 Emergency Paid Sick Leave Fund. It is anticipated that the application will require, but not be limited to, the following:

  • employee’s name;
  • date or dates for which leave is requested and taken;
  • statement of the COVID-19 related reason the employee is requesting leave and, written support for such leave; and
  • statement that the employee is unable to work, including by means of telework, for such reason.

Importantly, an employer cannot seek reimbursement from the State if the paid leave will be reimbursed under the federal Families First Coronavirus Response Act (FFCRA).

The law states reimbursement will be paid directly to eligible employers within 30 business days of the employer submitting the application.

Next Steps:

  • The new MA EPSL benefit is in addition to existing paid time-off benefits offered by an employer and required by law, subject to some limited exceptions.
  • Unlike the FFCRA, this requirement applies to all Massachusetts employers regardless of the number of employees.
  • Although MA EPSL is in addition to other required forms of paid time off, it may be reduced if the aggregate amount the employee receives would exceed the employee’s average weekly wage.
  • Employers are required to provide a Notice to all employees and post a notice regarding MA EPSL. The notice is expected to be available on or before June 14, 2021.
  • The state as allocation $75 million for this benefit. The requirement to provide these benefits would end prior to September 30th if the funds run out before September 30, 2021.

For more information

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

Article
Massachusetts emergency paid sick leave (MA EPSL)

Read this if you are an employer with employees on COBRA. There are tax credits available to you. 

The American Rescue Plan Act of 2021 (ARP) creates a requirement that employers treat the total payment for Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage due from certain eligible individuals as being “paid in full” for April 1 through September 30, 2021 (Subsidy Period). The eligible individuals with COBRA coverage will not receive the subsidy directly from the government; rather, they will have a premium holiday during which time the employer pays 100% of the applicable COBRA premium. The employer will be reimbursed in full through refundable payroll tax credits.

The ARP provisions do not apply to all COBRA-eligible individuals; eligibility is limited to employees who lost health care benefits due to an involuntary termination or reduction in hours. While the loss of coverage event can be linked to COVID-19, it is not required to be. A loss of coverage event could have occurred as far back as November 1, 2019, since the law requires an employer to offer a continuation of COBRA coverage for 18 months after an involuntary termination (18 months from November 1, 2019 is April 30, 2021). Eligible individuals who opted not to pay for COBRA coverage will be given another opportunity to elect the free coverage.

Employers and COBRA administrators should prepare to distribute new COBRA election and subsidy notices and to make operational changes soon after further guidance is released. Eligible individuals not already on COBRA will need to act quickly after receiving the notice to elect subsidized COBRA coverage. Failing to timely elect COBRA coverage could result in forfeiting this valuable benefit.

It is expected many people will rush to take advantage of this opportunity, which can provide up to six months of health insurance at no cost. However, employers should keep in mind that the subsidy is available only for certain limited situations.

Which employers are eligible for the new subsidy?

Employers subject to federal COBRA provisions or to a state program that provides comparable group health care continuation coverage are not allowed to charge eligible individuals for COBRA coverage during the Subsidy Period. The subsidy applies to workers in every industry, most tax-exempt employers (except churches who are exempt from COBRA) and union, governmental, and Indian tribal government workers. The federal COBRA provisions generally apply to all private-sector group health plans maintained by employers that had at least 20 employees on more than 50% of its typical business days in the previous calendar year. Both full- and part-time employees are counted to determine whether a plan is subject to federal COBRA coverage. Many states have “mini-COBRA” laws that apply to employers who have fewer than 20 employees. The subsidy is mandatory for all employer-sponsored group health plans (i.e., all employers must offer the subsidy, regardless of whether the plan is fully or partially insured, or self-insured).

During the Subsidy Period, generally, the federal government will reimburse COBRA costs to employers by allowing credits against employers' Medicare (not Social Security or income) taxes (but for union plans, the plan would receive the subsidy and for insured, state “mini-COBRA” plans, the insurer would receive the subsidy). Guidance is needed to clarify how the flow of funds for the subsidy would work. The full cost of COBRA continuation coverage (including up to a 2% administrative fee) at any coverage level (e.g., single, “single-plus-one”, or family coverage) for employees and former employees and their spouses and dependents is eligible for the subsidy via the payroll tax credit. The subsidy applies to health, prescription drug, dental and vision plans, but does not apply to health flexible spending accounts (FSAs), health savings accounts (HSAs), or long-term care plans (further guidance is needed to clarify the scope of the subsidy).  

Due to the fact that most individuals who elect COBRA group health care continuation coverage usually pay 100% of those premiums (and in many cases they must also pay up to a 2% administrative fee), the new subsidy via the employment tax credit keeps the free COBRA coverage at zero cost to the employer. While the employment tax credit is taxable income, it will be offset by the employer’s deductible payment of the healthcare premiums.

Impact on eligible individuals

An eligible individual with an existing or new COBRA election will be provided tax-free health care coverage (both the premium and any administrative charge) at no charge for their remaining COBRA period that overlaps with the Subsidy Period.   

The free COBRA provided during the Subsidy Period would be “affordable” coverage under the Affordable Care Act (ACA). But it is not clear how this “affordable” coverage affects an individual who has purchased coverage on the exchange before they had an offer of affordable coverage.

A recipient of the free health care coverage must notify the employer or plan administrator when they become eligible for Medicare or another group health plan—other than coverage under an excepted benefit, an FSA or a qualified small employer health reimbursement arrangement (QSEHRA). Individuals who fail to promptly give this notice could be subject to a $250 fine and other penalties.

Who is eligible?

Generally, individuals are eligible for free COBRA coverage if (1) they are involuntarily terminated or have a reduction in hours that qualifies them for federal or state COBRA coverage and (2) the Subsidy Period overlaps with their COBRA coverage period.

The new COBRA premium assistance is not available to the following individuals:

  • Employees who are terminated for gross misconduct.
  • Employees who voluntarily terminated their employment or who retired.
  • Individuals who are eligible for COBRA due to other reasons, like divorce, death, or loss of dependency status.
  • Individuals who are eligible for other group health care coverage (such as from a new employer) or Medicare.
  • Individuals who are beyond their normal COBRA coverage period connected to the original qualifying event (i.e., the employee’s involuntary termination or reduction in hours that caused a loss of group health plan coverage).
  • Domestic partners who are not federal income tax dependents of the employee.

What’s the coverage?

Generally, the COBRA coverage will be the same as the coverage elected just prior to the involuntary termination or reduction in hours. However, employers can (but are not required to) allow individuals who are eligible for premium assistance to change their coverage provided it does not result in an increased premium cost. Further guidance is needed regarding the scope of who can change to a lower cost health plan as a result of the new law.

Eligible individuals who lost health care coverage after October 31, 2019 but do not have COBRA coverage on April 1, 2021 due to nonelection or lapse of payment will have a new, 60-day opportunity to elect COBRA coverage. If timely elected, the COBRA covered period will begin on the date of the individual’s qualifying event, but it appears that no payment is due for months prior to April 2021 and no claims can be filed prior to April 1, 2021. For the months remaining in the COBRA period that coincide with April 1 through September 30, 2021, the employee makes no payment but will have claims paid in accordance with the plan’s provisions. To have continued coverage after September 30, 2021, the employee must make the payments required under the plan. If the individual finds this unaffordable, they can simply drop the coverage.

What notices are needed?

The federal government is expected to issue model required notices addressing the existence of the subsidy, the availability of the 60-day election period and advance notice of when the Subsidy Period will be ending. In the meantime, employers should prepare for the following new notice requirements.

  • Group health plans must modify their COBRA election notices for individuals who become eligible for federal or state COBRA during the Subsidy Period to notify them of the premium assistance (and, if applicable, the option to enroll in a lower priced plan).
  • By May 31, 2021, individuals who previously rejected (or terminated) COBRA coverage and to whom a new election period must be offered, must be notified of their new election period and the availability of the premium assistance. This essentially creates a special COBRA enrollment period for such individuals.
  • Between August 17 and September 15, 2021, group health plans must provide a notice to individuals receiving the premium assistance stating that the subsidy will expire on September 30, 2021, and that they may be eligible for COBRA coverage without the subsidy. But if the subsidy would end earlier for any individual, the plan must provide a notice that the subsidy is expiring no earlier than 45 days and no later than 15 days before the subsidy expiration date.

It is not clear how these required notices must be delivered (sending paper mail to former employees may be needed).

How does the subsidy work?

Individuals who are eligible for COBRA premium assistance do not receive a payment from the federal government, group health plan, employer, or insurer. Rather, their COBRA costs are waived during the Subsidy Period.

Employers that sponsor a fully insured plan would continue paying the full premium to the insurer for the assistance eligible participants. Employers that sponsor a self-insured plan would pay the claims incurred by the assistance eligible participants. In both cases, the employer would receive no payment from the eligible individual during the Subsidy Period but would instead recover its COBRA costs (102% of the COBRA premium) for the assistance-eligible individuals by claiming a refundable federal tax credit against the employer’s Medicare taxes.

The COBRA subsidy is prospective only and cannot begin before April 1, 2021.

Although the law does not require employers to pay for any COBRA coverage, some employers pay for some or all of COBRA coverage (for example, as part of a severance package). Such employers can cease those contributions during the Subsidy Period and the federal government will provide the subsidy for 6 months. And although the subsidy is tax-free to employees, employers who take the COBRA premium tax credit must increase their gross income by the amount of such credit for the taxable year which includes the last day of any calendar quarter with respect to which such credit is allowed.
 
Also, under a “no double dipping” rule, employers cannot take the COBRA premium tax credit for any amount which is taken into account as qualified wages for the employee retention credit (ERC) under the Coronavirus Aid, Relief, and Economic Security Act (CARES) and Consolidated Appropriations Act, 2021 (CAA), or as qualified health plan expenses for the Families First Coronavirus Response Act (FFCRA), as amended by CAA and ARP. Likewise, amounts attributable to the COBRA premium tax credit would not be eligible payroll costs under the Paycheck Protection Program (PPP).

Guidance from the Internal Revenue Service (IRS) is needed to clarify how exactly employers would claim the tax credit, but it appears that employers would claim the credit on their quarterly IRS Form 941 or in advance on IRS Form 7200 if the actual or estimated amount of the credit exceeds the employer's Medicare taxes for any calendar quarter. Further guidance is also needed regarding the mechanics of the subsidy for employers that have insured state COBRA coverage, since under Section 9501(b) of the ARP the tax credits reimbursements would go to the insurer, not the employer.

Other considerations

For past COVID-19 relief tax credits, such as the ERC and FFCRA, IRS guidance allowed employers to dip into withheld income and Social Security taxes as a source of claiming those refundable tax credits. But the IRS has not yet authorized such actions for the ARP COBRA subsidy tax credit. Social Security taxes may not be available as a source for the new COBRA tax credits, since the ARP was enacted under budget reconciliation rules which prohibit any changes to Social Security.

Employers are not allowed to voluntarily expand the group of people who are eligible for the special COBRA premium subsidy, because the federal government is paying the full COBRA premium for the designated class of assistance-eligible individuals.

We expect the IRS to issue FAQs on the new COBRA Medicare tax credits, similar to the FAQs that the IRS issued on the ERC and FFCRA payroll tax credits.

This new COBRA subsidy may be economically more valuable than using qualified health care expenses for the ERC, because ERC nets 70% on the dollar whereas the COBRA subsidy is 102% (premium plus administrative charge).

What should employers do now?

Employers should immediately identify all employees who lost group health plan coverage after October 31, 2019 due to an involuntary termination or reduction in hours, without regard to their COBRA elections, because such event would have entitled the individual to 18 months of COBRA coverage (i.e., through April 30, 2021). Guidance is needed on whether notices must be given to individuals in this group that declined COBRA due to eligibility in another employer’s plan or Medicare. Employers will need to notify individuals who have an unexpired COBRA period that premium assistance is available, and they have a right to reconsider their original COBRA election.  

Employers will also need to review and perhaps modify any existing, automatic processes that might otherwise terminate COBRA coverage when premiums are not received during the Subsidy Period.

Year-end reporting on health benefits should also be reviewed to ensure these increased COBRA participants receive the appropriate Form 1095-B or C for 2021.

Employers should develop a procedure to identify COBRA recipients who are eligible for the premium assistance and those who do not qualify (for example, employers will need to distinguish a voluntary quit from an involuntary termination of employment and whether the employee was fired for gross misconduct). For premium-assistance eligible individuals, employers must refund within 60 days any premiums paid during the Subsidy Period. Not all COBRA participants will qualify for the subsidy, so the plan administrator will still need to handle some premium payments from non-eligible individuals.

Vendor outreach

Many employers use outside service providers for their COBRA administration, so employers should reach out to their vendors as soon as possible to coordinate their response to the ARP changes to current COBRA rules, especially the special election period for certain assistance-eligible individuals.

Keep in mind that, separate from the ARP COBRA subsidy, many employees (and their family members) may currently have extended COBRA election rights due to COVID-19 deadline extensions. For example, ERISA Disaster Relief Notice 2021-1 issued on February 26, 2021, announced an individualized one-year deadline extension for COBRA elections, which begins on the date the clock for the particular deadline would have started running (i.e., the one-year extension is applied on a rolling basis to each deadline for each affected individual). But individuals electing retroactive COBRA coverage under those extended deadlines will generally have to pay the full COBRA premiums for such periods. Guidance is needed on how the deadline extension coordinates with the new COBRA subsidy.

Employers may recall that in February 2009, under the American Recovery and Reinvestment Act of 2009 (ARRA), the federal government subsidized 65% of COBRA premiums for certain individuals who were terminated or laid off between September 1, 2008 and March 31, 2010 due to the financial crisis linked to the bursting of the home mortgage lending bubble. The ARRA subsidy was extended through May 31, 2010, so perhaps with Democrats currently controlling both Congress and the White House, the ARP COBRA subsidy may be extended beyond September 30, 2021. Also, the ARRA may be a model for how the flow of funds will work for the ARP premium tax credits for insured state COBRA coverage.

If you have specific questions about your situation, please contact our Employee Benefits consulting team. We’re here to help. 

Article
"Free" COBRA for some employees: Employers may benefit, too