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IRS guidance: Retroactively claiming the 2020 ERC

03.09.21

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

As we previously wrote, the Consolidated Appropriations Act, 2021 expanded, retroactively to March 12th, 2020, the Employee Retention Credit (ERC) to include those otherwise eligible employers who also received Paycheck Protection Program (PPP) loans. For those employers, wages qualifying for the ERC include wages that were not paid for with proceeds from a forgiven PPP loan. 

IRS guidance released

Recently, the Internal Revenue Service (IRS) released guidance under Notice 2021-20 (the Notice) clarifying how eligible employers who also received a PPP loan during 2020 can retroactively claim the ERC. The Notice also formalizes and expands on prior IRS responses to FAQs and addresses changes made since the enactment of the Act; it contains 71 FAQs. The IRS has stated it will address calendar quarters in 2021 in later guidance.

Under the 2020 ERC rules, an eligible employer may receive a refundable credit equal to 50% of qualified wages and healthcare expenses (up to $10,000 of wages/health care expenses per employee in 2020) paid by a business or not-for-profit organization that experienced a full or partial suspension of their operations or a significant decline in gross receipts. For employers that received a PPP loan, Q&A 49 of the Notice outlines the IRS’ position on the interaction with the ERC for 2020. 

An eligible employer can elect which wages are used to calculate the ERC and which wages are used for PPP loan forgiveness. The Notice provides for a deemed election for any qualified wages  included in the amount reported as payroll costs on the PPP Loan Forgiveness Application, unless the included payroll costs exceed the amount needed for full forgiveness when considering only the entries on the application. The text of Q&A 49 appears to treat the minimum amount of payroll costs required for PPP loan forgiveness (i.e., 60%) as being the deemed election as long as there are other eligible non-payroll expenses reported on the application to account for the other 40% of loan forgiveness expenses.

Payroll costs reported on the PPP Loan Forgiveness Application: Examples

The examples make it clear the payroll costs reported on the PPP Loan Forgiveness Application and needed for loan forgiveness are generally excluded from the ERC calculations. The qualified wages included on the PPP Loan Forgiveness Application that may be included in the ERC calculations are partially impacted by the documented non-payroll expenses included in the PPP Loan Forgiveness Application. Following are a few examples from the Notice. Each example outlines the interaction between payroll costs reported on the PPP Loan Forgiveness Application and the qualified wages for the ERC.

Example #1: An employer received a PPP loan of $100,000 and has both payroll and non-payroll costs that far exceed the borrowed amount. The employer only reports payroll costs of $100,000 on the PPP Loan Forgiveness application to simplify the forgiveness process. The employer cannot use any of the $100,000 of payroll costs to claim the ERC. This is notwithstanding the fact that 100% forgiveness may have been achieved by reporting only $60,000 of payroll costs and the remaining $40,000 from non-payroll costs.   

Example #2: An employer received a PPP loan of $200,000. The employer submitted a PPP Loan Forgiveness Application and reported $250,000 of qualified wages as payroll costs in support of forgiveness of the entire PPP loan. The employer is deemed to have made an election not to take into account $200,000 of the qualified wages for purposes of the ERC, which was the amount of qualified wages included in the payroll costs reported on the PPP Loan Forgiveness Application up to (but not exceeding) the minimum amount of payroll costs. The employer is not treated as making a deemed election with respect to $50,000 of the qualified wages ($250,000 reported on the PPP Loan Forgiveness Application, minus the $200,000 PPP loan amount forgiven), and it may treat that amount as qualified wages for purposes of the ERC.

Example #3: An employer received a PPP loan of $200,000. The employer is an eligible employer and paid $200,000 of qualified wages that would qualify for the employee retention credit during the second and third quarters of 2020. The employer also paid other eligible expenses of $70,000. The employer submitted a PPP Loan Forgiveness Application and reported the $200,000 of qualified wages as payroll costs, as well as the $70,000 of other eligible expenses, in support of forgiveness of the entire PPP loan. In this case, the employer is deemed to have made an election not to take into account $130,000 of qualified wages for purposes of the ERC, which was the amount of qualified wages included in the payroll costs reported on the PPP Loan Forgiveness Application up to (but not exceeding) the minimum amount of payroll costs, together with the $70,000 of other eligible expenses reported on the PPP Loan Forgiveness Application, sufficient to support the amount of the PPP loan that was forgiven. As a result, $70,000 of the qualified wages reported as payroll costs may be treated as qualified wages for purposes of the ERC.

Key takeaway:

For purposes of PPP loan forgiveness, an employer must generally submit payroll expenses equal to at least 60% of the loan amount to maximize loan forgiveness and to maximize the available wages for the ERC. If an employer does not report non-payroll costs (or limits the amount it reports) on the PPP Loan Forgiveness Application then doing so will have a direct impact on the wages available for the ERC. 

An employer must also consider the payroll costs reported on the PPP Loan Forgiveness Application and the payroll costs necessary to maximize the ERC. For example, if an employer does not qualify for the ERC until the third quarter of 2020, it should consider limiting the amount of wages reported on the PPP Loan Forgiveness Application that are attributable to the third quarter in order to maximize the wages available for the ERC.

How to claim the Employee Retention Credit

An eligible employer that received a PPP loan and did not claim the ERC may file a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return for the relevant calendar quarters in which the employer paid qualified wages, but only for qualified wages for which no deemed election was made. 

Form 941-X may also be used by eligible employers who did not receive a PPP loan for 2020, but subsequently decide to claim any ERC to which they are entitled for 2020. 

The deadline for filing Form 941-X is generally within three years of the date Form 941 was filed or two years from the date you paid the tax reported on Form 941, whichever is later.

For more information

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

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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.

Article
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. 

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

Read this if you are an employer with basic knowledge of benefit plans and want to learn more. 

This article is the third in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with Employee Retirement Income Security Act (ERISA) requirements. Our first article covers the background of ERISA, while our second article covers the definitions and rules of parties-in-interest and prohibited transactions.

Form 5500 is an informational return filed annually with the US Department of Labor (DOL). The purpose of Form 5500 is to report information concerning the operation, funding, assets, and investments of pension and other employee benefit plans to the Internal Revenue Service (IRS) and DOL. All pension benefit plans covered by the Employee Retirement Income Security Act (ERISA), and, generally, health and welfare plans covering 100 or more participants are subject to filing Form 5500. Any retirement plan covering less than 100 participants at the beginning of the plan year may be able to file Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan. Read on for important filing requirements, as noncompliance can result in substantial penalties assessed by both the DOL and IRS. 

Who has to file, and which Form 5500 is required?

Pension plans

The most common types of pension benefit plan filers include:

  • Retirement plans qualified under Internal Revenue Code (IRC) § 401(a)
  • Tax sheltered annuity plans under IRC § 403(b)(1) and 403(b)(7)
  • SIMPLE 401(k) Plan under IRC § 401(k)(11)
  • Direct Filing Entity (DFE)

Which Form 5500 you should file depends on the type of plan. Small plans covering less than 100 participants as of the beginning of the plan year will normally file a Form 5500-SF. Conversely, large plans, mainly those plans covering 100 or more participants as of the beginning of the plan year, will file Form 5500 as a general rule. 

Participants include all current employees eligible for the plan, former employees still covered, and deceased employees who have one or more beneficiaries eligible for or receiving benefits under the plan.

Welfare plans

Generally, all welfare benefit plans covered by ERISA are required to file a Form 5500. Common types of welfare benefit plans include but are not limited to medical, dental, life insurance, severance pay, disability, and scholarship funds.

Similar to pension plans, the required Form 5500 to be filed typically depends on whether the plan is a small plan with less than 100 participants at the beginning of the year, or a large plan with 100 or more participants at the beginning of the plan year. However, certain welfare benefit plans are not required to file an annual Form 5500, including, but not limited to:

  • Plans with fewer than 100 participants at the beginning of the plan year and that are unfunded, fully insured, or a combination of the two
  • Governmental plans 
  • Employee benefit plans maintained only to comply with workers’ compensation, unemployment compensation, or disability insurance laws

Participants for welfare benefit plans include current employees covered by the plan, former employees still covered, and deceased employees who have one or more beneficiaries receiving or entitled to receive benefits under the plan (e.g., COBRA). 

Required financial schedules for Form 5500

Small plans that do not file Form 5500-SF require the following schedules to be filed along with the Form 5500:

  • Schedule A—Insurance information
  • Schedule D—DFE/Participating plan information
  • Schedule I—Financial information for a small plan

Large plans require the following schedules in addition to small plan schedules:

  • Plan Audit (Accountant’s Opinion)
  • Schedule C—Service provider information
  • Schedule G—Financial transaction schedules
  • Schedule H—Financial information (instead of Schedule I)

Welfare plans with 100 or more participants that are unfunded, fully insured or a combination of the two are not required to attach Schedule H or an Accountant’s Opinion. Also, pension plans will attach Schedule SB or MB reporting actuarial information, if required, along with Schedule R reporting retirement plan information.

When to File

Form 5500 must be filed electronically by the last day of the seventh calendar month after the end of the plan year. However, a two and one-half months’ extension of time to file can be requested. Penalties may be assessed by both the IRS and the DOL for failure to file an annual Form 5500-series return. For 2020, the IRS penalty for late filing is $250 per day, up to a maximum of $150,000 (applies only to retirement plans), and the DOL penalty can run up to $2,233 per day, with no maximum. Therefore, it is very important to track participant counts and ensure compliance with filing deadlines.

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

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Form 5500: An overview

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
  • Assistance to shareholders or owners must not exceed 5% of total amounts paid
  • Eligible employees must be reasonably notified of the plan

Eligible employees include current and laid-off employees, retired employees, disabled employees, and certain self-employed individuals. 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 Section 127 of the IRC: Tax savings for employers