IRS Updates Employee Retention Credit FAQs

Introduction

The calculation of “qualified wages” under the Employee Retention Credit varies based on employer size.  Employers with a 2019 average of more than 100 employees include wages paid to employees who are not working due to COVID-19 related shut-down orders as “qualified wages.”  For smaller employers, less than 100 employees in 2019, all wages qualify for the credit, not just those paid for non-working employees. An employer who opened their business in 2020 uses the above test, but applies it to the calendar months the business was open in 2020 instead of 2019.

IRS Clarifies When Health Care Coverage is “Qualified Wages” under the Employee Retention Credit

Under the Employee Retention Credit, “qualified wages” includes “qualified health plan expenses” paid or incurred by the employer.  A qualified health plan expense is an “amount paid or incurred by the eligible employer to provide and maintain a group health plan,” but only to the extent that such amounts are excluded from the employees’ gross income.

FAQs 64 & 65 clarify how qualified health plan expenses are factored into qualified wages in circumstances where an employee is laid off or furloughed, but is still receiving health care coverage. The previous guidance stated that if an eligible employer is not paying employee wages (other than health care coverage), then no portion of the health plan expenses could be treated as qualified wages for Employee Retention Credit purposes. The IRS changes course in the updated FAQs and provides that Eligible Employers may treat health plan expenses as qualified wages even if the employees are not working and the Eligible Employer does not pay the employees any wages for the time they are not working. However, for Eligible Employers with more than 100 employees in 2019, only the portion of health plan expenses allocable to the time that the employees are not providing services are treated as qualified wages and not the health plan expenses attributed to the time the employees are receiving wages for providing services.

Interaction between PPP Repayment and Eligibility for the Employee Retention Credit

FAQ 79 clarifies that an employer that applied for a PPP loan, received payment, and repays the loan by May 14, 2020 will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit if the employer is otherwise an Eligible Employer.

Next Steps

Employers should regularly check for updates to COVID-19 relief related guidance as the agencies continue to revise and issue new information.