In our blog post dated May 7, 2020, we noted that the IRS Question and Answers regarding the Employee Retention Tax Credit (the “ERTC” & the “Q&As”) stated that an employer cannot claim an ERTC for qualified health care expenses, unless it also pays the employee other wages during the relevant time period. We further noted that, in our view, this interpretation may not be consistent with congressional intent.
Within hours of publishing our post the IRS reversed course and revised Q&As 64 and 65. Q&As 64 and 65 now state that employers can claim the ERTC for qualified healthcare expenses, regardless of whether the employee is paid qualified wages. In general, we believe that the IRS’s new interpretation of how qualified healthcare expenses are treated for purposes of the ERTC is more consistent with congressional intent than its previous interpretation.
The revised Q&As clarify this new interpretation with five examples – in each example, qualified healthcare expenses paid to furloughed employees are considered qualified wages for purposes of the ERTC.
Example: Over 100 Employees, Reduced Hours, Reduction in Wages, 100% Healthcare Expenses Paid For
Example 2 in Q&A 64 provides a detailed interpretation of how the qualified wage rules work for large employers. In this example, an employer that averaged over 100 employees in 2019 is subject to a government order that causes a partial suspension of operations. The employer is forced to reduce employee hours by 50%, but continues paying employees 60% of their wages and 100% of their qualified healthcare expenses. The example states that amounts paid with respect to periods when the employee is not providing services are qualified wages; thus, 10% of the wages paid and 50% of qualified healthcare expenses may be treated as qualified wages.
Example: No Wage Payment, 100% Healthcare Expenses Paid For
Example 3 in Q&A 65 further clarifies that if an employer ceases paying wages to employees altogether but continues paying such employee’s healthcare expenses, then the employer may still treat the healthcare expenses as qualified wages. In this example the employer furloughed or laid off the employees, but continued paying their healthcare expenses. The example states that the healthcare expenses can be treated as qualified wages, even though the employees are furloughed.
ERTC Eligibility in the event of Repayment of Paycheck Protection Program Loan
Recall that the CARES Act Section 2301 specifically prohibits the use of an ERTC where an employer utilizes a PPP loan. In Q&A 79, the IRS clarifies that an employer will be eligible to utilize an ERTC if such employer applied for a PPP loan, received payment, and repays the loan by May 14, 2020.