UPDATED 5/11/20 with revised guidance from the IRS on the Employee Retention Credit. The IRS reversed its stance on employer eligibility for tax credits when providing healthcare under the Employee Retention Credit, which previously appeared in the 5/7/20 update to this article.
UPDATED 5/7/20 with additional guidance from the IRS on the Employee Retention Credit. Specifically, the IRS provided additional details on when employers would be eligible for tax credits from providing healthcare coverage.
Congress recently passed the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the coronavirus (COVID-19) pandemic. The FFCRA and the CARES Act provide a variety of tax credits, forgivable loan programs, and grants to employers. This article discusses the following:
- FFCRA Tax Credits: Tax credits available for wages and health plan expenses provided to employees from April 1, 2020 through December 31, 2020 for emergency paid sick and/or emergency family leave required under the FFCRA;
- Employee Retention Credit: Tax credits available for wages and health plan expenses provided to employees from March 12, 2020 to December 31, 2020 during a partial/full shutdown or 50% decrease in business (based on gross receipts) under the CARES Act Employee Retention Credit;
- How employers can use the tax credits to reduce their federal employment tax liability and/or request an advance from the IRS; and
- Interaction between FFCRA and CARES Act Employee Retention Credit, Paycheck Protection Program, Emergency Injury Disaster Loan, and Payroll Tax Deferral.
FFCRA Tax Credits
The FFCRA requires employers with less than 500 employees to provide paid emergency sick leave (EPSL) and emergency family leave (EFMLA) to eligible employees from April 1, 2020 through December 31, 2020 for COVID-19 qualifying reasons. For more on employer requirements under the FFCRA, see our blog article.
Employers can receive a refundable tax credit for the cost of providing the EPSL and EFMLA leave required under FFCRA. The tax credit can be used to reduce an employer’s federal payroll liability and/or the employer can request an advance of the tax credit (see “How Employers Can Claim the Tax Credits” section below).
Each quarter, employers can receive a tax credit for the following:
- Wages paid to employees during EPSL and/or EFMLA leave;
- The employer-share of Medicare taxes on the wages paid to employees during EPSL and/or EFMLA leave (the employer share of Social Security taxes is already waived on these wages); and
- The cost of maintaining health care continuation during the EPSL and/or EFMLA leave.
Employers can receive a tax credit up to the amount of employee wages and healthcare provided during the leave that FFCRA requires (employers can provide more wages than the law requires but they will not receive a tax credit for any amount that exceeds the statutory requirements), as outlined below:
Required Employee Pay
Tax Credit Amounts
Emergency Paid Sick Leave (EPSL)
Employers who paid for EPSL benefits for employees who are:
(1) Subject to a federal, state, or local quarantine order
(2) Advised by a health care provider to self-quarantine
(3) Experiencing symptoms of the virus and seeking medical diagnosis
100% of pay, up to $511/day, for up to 80 hours for full-time employees (for part-time employees, up to the average number of hours they work over a 2-week period)
Amounts paid, up to $511 per employee, per day (up to $5,110 total)
(4) Caring for an individual who is subject to, or advised by a healthcare provider, to self-quarantine
(5) Caring for a child if the school, place of care, or childcare provider, is closed or unavailable due to COVID-19 precautions
(6) Experiencing “other substantially similar conditions”
2/3 of pay, up to $200/day, for up to 80 hours for full-time employees (for part-time employees, up to the average number of hours they work over a 2-week period)
Amounts paid, up to $200 per employee, per day (up to $2,000 total)
Emergency FMLA Leave (EFMLA)
Employers who paid employees who are unable to work (or telework) to care for a child due to a school or childcare closure as a result of a COVID-19 emergency declaration
2/3 of pay, up to $200/day, for up to 12 weeks (first 2 weeks of EFMLA leave are unpaid, but an employee can receive the first 2 weeks paid through EPSL)
Amounts paid, up to $200 per employee, per day (up to $10,000 total)
Qualified Health Plan Expenses During Leave
All employers are required to continue group health coverage while employees are taking EPSL and/or EFMLA leave
Employers must provide coverage under the same conditions as if they were working
Cost of maintaining a health plan during the leave (discussed below)
Tax Credits for Qualified Health Plan Expenses During FFCRA Leave
Employers are required to continue health benefits for employees who are taking EPSL and/or EFMLA under the same conditions as if they were working (same eligibility and waiting periods). For information on required healthcare continuation, see Q&A 30 and 51 in the Department of Labor (DOL) FFCRA FAQ.
Employers can receive tax credits for “qualified health expenses” incurred during EPSL and EFMLA leave, in addition to the tax credits for wages paid during the leave. “Qualified health expenses” are amounts paid or incurred by an employer to maintain a group health plan during the leave, which include:
- The average cost of maintaining a group health plan. Note that this is not the actual cost of providing healthcare to the employee who is taking leave. Rather, the credit is based on the employer’s average cost of providing healthcare to all employees, which can be calculated a number of ways, as discussed below.
- Employer contributions toward the employee’s HRA or health FSA (employer contributions to the employee’s HSA are not qualified health expenses). See Q&A #35 and #36 of the IRS guidance on FFCRA tax credits (“IRS FFCRA guidance”).
Average Cost of Maintaining a Group Health Plan
The IRS released guidance on how employers can calculate the tax credit for providing healthcare to employees during FFCRA leave. The available tax credit is based on the daily average cost of maintaining a group health plan (GHP) multiplied by the number of days an employee is on FFCRA leave.
Tax Credit = Daily Average Cost of Maintaining a GHP x Number of Days of Leave
The method for determining daily average cost differs between fully-insured and self-insured GHPs:
For self-insured plans, the daily average cost can be based on (1) the COBRA applicable premium for the employee typically available from the administrator, or (2) to determine the estimated annual expenses of the plan. See Q&A #34, IRS FFCRA guidance.
For fully insured plans, the daily average cost can be based on (1) COBRA premium rate, (2) average premium rate for all employees; or (3) a substantially similar method for calculating average premium rates. See Q&A #33, IRS FFCRA guidance.
Under option (2) for fully insured plans, the employer would take into account the total cost of premiums for the plan that the employee is enrolled in, including the amount paid by the employer and by employees through a salary reduction (but does not include amounts the employee paid with after-tax contributions), as explained in the below example. See Q&A #31, IRS FFCRA guidance.
Example: Joe takes EPSL and continues coverage under his PPO plan during the leave. The PPO plan is fully insured and covers 400 employees in total. The total annual premium for all employees (and their dependents) enrolled in the PPO plan is $5,200,000 (this includes both the amounts paid by the employer and by employees through a salary reduction). The daily average cost of maintaining a GHP is the average premium rate per employee divided by 260, or the number of work days in a year (52 weeks/year x 5 days/week).
Average Premium Rate Per Employee = $5,200,000/400 employees = $13,000
Daily Average Cost of Maintaining a GHP = $13,000/260 work days = $50 per day
This means that Joe’s employer can receive a $50 tax credit for each day Joe is on EPSL, in addition to any tax credit for the wages paid to Joe during that time. Assuming Joe was on EPSL for 5 days, the tax credit for the qualified health plan expenses would be $250, based on the following calculation:
Tax Credit = $50/day x 5 days = $250
The employer can also receive additional credits if they contribute to Joe’s HRA or FSA during the leave period.
FFCRA and Worksite Closure, Furloughs and Reductions in Hours
It is important to note that FFCRA leave is not available to employees in the event of a worksite closure or furlough. In addition, if an employee has their hours reduced, they cannot use FFCRA leave for the hours they are no longer scheduled to work (but can take the FFCRA leave if a COVID-19 qualifying reason prevents them from working their reduced schedule).
As such, employers will not be eligible for tax credits for wages paid or healthcare benefits provided during a worksite closure or furlough. However, employers in these situations may be able to take advantage of a tax credit or loan program under the CARES Act, as discussed below.
CARES Act Tax Credits
The CARES Act provides a variety of programs and tax credits for employers:
Paycheck Protection Program (PPP)
Employers with less than 500 employees (or who meet the “alternative size standard” or requisite size standards for certain industries) can receive up to 2.5 times their average monthly payroll costs in 2019, up to $10 million, in loans from the Small Business Administration (SBA). See the PPP FAQs for additional information on size requirements (Q#2) and how to calculate payroll costs (Q #14).
Amounts spent within the first 8 weeks of the loan on payroll costs (which includes payments for healthcare coverage), interest on mortgage, rent, and utilities, are eligible for loan forgiveness (at least 75% of the forgiven amount must be used for payroll). The loan forgiveness will be reduced if, during the first 8 weeks of the loan:
Emergency Injury Disaster Loan (EIDL)
Employers with less than 500 employees (or who meet the SBA size criteria) who incurred a temporary loss in revenue due to the COVID-19 emergency declaration can apply for an EDIL loan up to $2 million. Employers can receive a loan under both the PPP and EIDL loans, subject to certain restrictions (as discussed below).
The loan is based on the actual economic injury suffered by an employer, which is determined by the SBA. Employers who apply can receive an emergency grant of up to $10,000 within 3 days of the SBA receiving their loan application.
Deferment of Social Security Taxes
All employers are eligible unless they receive loan forgiveness under the PPP (those who have not yet received PPP loan forgiveness can defer taxes until they do receive such forgiveness). For additional information, see the IRS FAQ on payroll deferrals.
Employers can defer 50% of Social Security taxes that are incurred from March 27, 2020 until December 31, 2020, with the first half due in 2021 and the other half due in 2022. The IRS will revise Form 941 (Employer’s Quarterly Federal Tax Return) for the second quarter of 2020 to include the option for the tax deferments. The IRS will release additional instructions to employers on how to reflect deferred taxes for amounts due after March 27, 2020, during the first quarter of 2020.
Employee Retention Credit
All employers can receive a tax credit for continuing to pay employees while they are fully or partially shut down due to a government COVID-19 order, or while they experience a 50% or more loss in gross receipts (as compared to the same quarter in 2019). Employers who receive a loan through the PPP are not eligible.
A tax credit of 50% of “qualified wages” paid from March 12, 2020 through December 31, 2020 during a shutdown or 50% loss in business (up to $5,000 tax credit per employee). For additional information, see the IRS FAQ on the Employee Retention Credit.
Employee Retention Credit
Employers can receive a 50% tax credit on the “qualified wages” (including health plan expenses) provided to employees from March 12, 2020 through December 31, 2020 during a full/partial shutdown or significant loss in gross receipts. The CARES Act does not require employers to pay employees during this time, but rather, provides a tax incentive for employers to do so.
Eligible employers are those who continue to pay their employees during a:
(1) partial/full shutdown due to a government COVID-19 order limiting commerce, travel, or group meetings; or
(2) significant decline in gross receipts (as compared to the same quarter the prior year).
A “significant decline in gross receipts” occurs when a business experiences at least a 50% decline in gross receipts, as compared to the same calendar quarter in 2019, and continues until the gross receipts increase to greater than 80%, as compared to the same calendar quarter in 2019.
Example provided by the IRS: An employer’s gross receipts were the following quarters in 2019 and 2020:
Q1 2019: $210,000 Q2 2019: $230,000 Q3 2019: $250,000
Q1 2020: $100,000 Q2 2020: $190,000 Q3 2020: $200,000
Change: 48% Change: 83% Change: 92%
The employer experienced a significant decline in gross receipts starting with the first quarter of 2020 (because there was a decline of more than 50% in Q1) and ending after the second quarter of 2020 (ending after Q2, the quarter in which gross receipts were more than 80% of the comparable quarter). Thus, the employer can claim employee retention credits on “qualified wages” during the first and second quarters of 2020. The amounts that are included in “qualified wages” are discussed below.
“Qualified Wages” Under the Employee Retention Credit
Employers are eligible for a tax credit on the “qualified wages” (including “qualified health plan expenses”) they provide to employees during the situations described in (1) or (2) in the section above. The “qualified wages” that are eligible for a tax credit are based on the employer’s average number of full-time employees in 2019:
- Less than 100 employees: Wages and health plan expenses provided to employees during a partial/full shutdown or significant decline in gross receipts, regardless of whether employees worked or not.
- More than 100 employees: Wages and health plan expenses provided to employees who did not work during a shut down or significant decline in gross receipts. These wages cannot exceed what the employee would have been paid for working during the 30 days immediately preceding the period of hardship.
Maximum Tax Credit: Employers can receive a tax credit on up to $10,000 in qualified wages and health plan expenses per employee, for a maximum of $5,000 tax credit per employee (50% of $10,000).
Tax Credit for Qualified Health Plan Expenses
UPDATED on 5/11/20 with revised guidance from the IRS.
Employers can receive a 50% tax credit on “qualified health plan expenses” (up to the maximum tax credit) during a shutdown or 50% decrease in business. “Qualified health plan expenses” are calculated the same way qualified health expenses are calculated under the FFCRA, as discussed above.
Employers may treat health plan expenses as qualified wages even if the employer does not pay any wages for the time they are not working. This means that employers can receive a tax credit for health care expenses provided to furloughed employees. This is a reversal by the IRS, who previously stated employers could not receive tax credits for health plan expenses unless they also paid wages to employees.
Examples provided by the IRS (See Questions 64-66, which were updated on May 7, 2020):
For employers that had less than 100 full-time employees in 2019:
Example 1: Employer is subject to a government order and partially suspends their business. Employer reduces their employees’ hours by 50%. Employer only pays wages for the hours that employees work but continues to provide employees with full health coverage. Employer’s health expenses paid during their partial suspension are treated as qualified wages for purposes of the Employee Retention Credit.
Example 2: Employer is subject to a government order and suspends their business. Employer lays off or furloughs all of their employees. They do not pay wages to its employees for the time they are laid off or furloughed but they do continue on providing health care coverage. Employer’s health expenses paid during their partial suspension are treated as qualified wages for purposes of the Employee Retention Credit.
Important Note: The IRS revised this example on May 7, 2020. In the prior version, the Employer could not receive a tax credit for the health plan expenses incurred during the suspension. In the revised example, the Employer can receive a tax credit for the health plan expenses provided to furloughed employees.
For employers that had more than 100 full-time employees in 2019:
Example 3: Employer is subject to a government order and partially suspends their business. Employer reduces their employees’ hours by 50%. Employer only pays wages for the hours that employees work but continues to provide employees with full health coverage. Employer can receive a tax credit for the health care provided to employees for the time they are not working. Employer cannot receive a tax credit for the health care provided to employees for time they are working.
Important Note: The IRS revised this example on May 7, 2020. In the prior version, Employer could not receive any tax credits because they were not paying wages to employees for the time they were not working. In the revised version, Employer can receive tax credits for the health care provided to employees for the time they were not working.
Example 4: Employer is subject to a government order and partially suspends their business. Employer reduces their employees’ hours by 50%. Employer still pays employees 60% of their wages (for 50% of work). Employer continues to provide 100% of employees’ health plan expenses. In this scenario, Employer can claim the following for purposes of the Employee Retention Credit: (1)10% of the wages for the time employees are not providing services plus (2) 50% of the health plan expenses (because the health plan expenses are provided for time that employees were not working).
Example 5: Employer is subject to a government order and fully suspends their business. Employer furloughs employees but continues to provide their employees with 100% of their health plan expenses. Employer can receive a tax credit for the health plan expenses provided to its furloughed employees (because they are providing them health care for time when they are not working).
For additional information, see the IRS FAQs on Determining the Amount of Qualified Health Expenses.
The CARES Act Employee Retention Credit and the FFCRA Credit
Employers can receive Employee Retention Credits and FFCRA tax credits but cannot claim both credits for the same wages. An employer may be eligible for both tax credits on the same wages if they paid an employee during a full/partial shutdown or 50% reduction in business and that employee was taking EPSL and/or EFMLA during that time. If wages are eligible for both types of tax credits, the employer would likely want to choose the higher tax credit, which will be based on the employee’s wages:
- The FFCRA tax credit is 100% of qualifying wages during EPSL and/or EFMLA, but only up to $200 or $511 per day, depending on the type of leave.
- The Employee Retention Credit is 50% of qualifying wages (with no maximum per day), up to $10,000 in wages.
Example: An employer is paying an employee $500 per day for EPSL in May 2020. During that time, the employer is also experiencing a shutdown due to a COVID-19 state order. Assuming the employer meets all eligibility criteria, they could receive tax credits under either the FFCRA or the Employee Retention Credit.
Since the employer cannot receive both credits for the same wages paid, the employer would need to choose which credit to apply. Under the FFCRA, the employer could receive a 100% credit for the $500/day; whereas under the Employee Retention Credit, the employer would receive 50% of wages, or $250/day. Therefore, the employer should claim the FFCRA credit instead of the Employee Retention Credit for the amounts paid to the employee during their EPSL.
How Employers Can Claim the Tax Credits
The FFCRA and/or CARES Act tax credits can be used to offset the amount an employer owes in federal employment taxes on a quarterly basis. If the tax credit exceeds what an employer owes for that quarter, the employer can request a payment for the balance of the tax credit by submitting a IRS Form 7200.
Employers should do the following on a quarterly basis to claim their tax credit:
- Employers must report tax credits on their federal employment tax return (which is usually Form 941, Employer’s Quarterly Federal Tax Return).
- For FFCRA: Employers will report the total qualified leave wages, the Medicare tax on the qualified leave wages, and qualified health plan expenses during the leave for that quarter (an employer can claim the credits only after they pay their employee for the FFCRA leave).
- For the CARES Act Employee Retention Credit: Employers will report their total qualified wages (including qualified health plan expenses) and the related tax credits that quarter.
- Important Note: Employers can receive tax credits for FFCRA and the Employee Retention Credit but not on the same wages.
- Employers can use the tax credits to offset the amount the employer owes that quarter for employment taxes, including federal income tax withheld from employees, the employees’ share of social security and Medicare taxes, and the employer’s share of social security and Medicare taxes with respect to all employees.
- The employer can file a request for accelerated payment by filing a Form 7200 with the IRS if the amount of the tax credit is greater than what an employer owes in payroll taxes for any quarter in 2020. The IRS expects to process these payments within 2 weeks of a request.
Example: During the second quarter (Q2) of 2020, an employer pays Sarah the following for 10 weeks of EFMLA: $10,000 in wages; $145 in Medicare taxes (1.45% of the $10,000); and $1,500 in qualified medical expenses provided during the EFMLA leave.
Tax Credit= Wages + Medicare Taxes on Wages + Qualified Medical Expenses
Tax Credit= $10,000 + $145 + $1,500
Tax Credit= $11,645
The employer is eligible for a tax credit for the wages paid, Medicare taxes on the wages paid, and the qualified medical expenses provided to Sarah during the EFMLA leave. The tax credit for Sarah’s EMLA leave would be $11,645. Sarah’s employer can use this tax credit to offset their federal employment taxes in Q2 of 2020. Assuming their tax liability is $20,000 for Q2, they would only be required to deposit $9,855 ($20,000 – $11,645) in taxes for Q2.
If instead, the employer owes $6,000 in employment taxes in Q2, the $11,645 tax credit would exceed the employer’s tax liability and the employer could request an accelerated credit from the IRS in the amount of $5,645 ($11,645 – $6,000) by filing out Form 720.
Interaction Between the FFCRA and the CARES Act
The CARES Act Employee Retention Credit and the FFCRA Credit
As discussed above, employers can receive Employee Retention Credits and FFCRA tax credits but cannot claim both credits for the same wages.
The Paycheck Protection Program (PPP) and the FFCRA Tax Credit
Employers with fewer than 500 employees (or who meet the “alternative size standard” or requisite size standards for certain industries) can receive up to $10 million in loans from the SBA under the CARES Act Paycheck Protection Program (PPP). Employers are eligible for loan forgiveness for the amounts incurred during the first 8 weeks of the loan related to payroll costs and payments for rent, utilities, and mortgage interest payments if they maintain their employee count and compensation (see the CARES Act table above).
Employers can receive FFCRA tax credits and a loan under the PPP. However, if an employer receives tax credits for wages and health plan expenses paid during an FFCRA leave, those amounts will not be eligible for loan forgiveness. In other words, an employer can use their PPP loan to pay for wages during an FFCRA leave and either receive loan forgiveness on those amounts or a tax credit for the wages, but not both.
The PPP and the Employee Retention Credit
Employers who receive a PPP loan are ineligible for the employee retention credit.
PPP and Payroll Tax Deferment
In addition, employers who receive loan forgiveness under a PPP loan are ineligible to defer their payroll taxes under the CARES Act. However, employers who have received a PPP loan, but whose loan has not yet been forgiven, may defer payroll taxes that were required to be made from March 27, 2020 until the date the lender issues a decision to forgive the PPP loan. The deferred amounts before the loan is forgiven will be due by the same time periods as other employers who did not receive a PPP loan—half by December 31, 2021 and the remaining amount by December 31, 2022. See Q&A #4 in the IRS FAQ on payroll deferrals.
EDIL Loan and the PPP Loan
Generally, employers can apply for an EDIL and PPP loan as long as they don’t use the loan amounts on the same expenses. On April 15, 2020, the SBA released the PPP Interim Final Rule which sheds the following additional guidance on the interaction between COVID-19 related EDIL and PPP loans.
Employers who received an EDIL loan from January 31, 2020 through April 3, 2020 can apply for a PPP loan. If employers did not use their EDIL loan for payroll costs, it does not affect their eligibility to apply for a PPP loan. Employers who used their EDIL loan for payroll costs, and subsequently applied for a PPP loan, must use their PPP loan to refinance their EDIL loan. In addition, the $10,000 EDIL grant will be deducted from the loan forgiveness amount on the PPP loan.
Employers who are interested in applying for both loans should contact the SBA directly for additional guidance.
- The FFCRA provides a 100% tax credit for wages and healthcare that employers are required to provide under the law.
- The CARES Act provides a 50% tax credit (up to $5,000 per employee) on wages and healthcare provided to employees during a partial/full shutdown or 50% loss in business under the Employee Retention Credit.
- Employers can take advantage of tax credits under the FFCRA and Employee Retention Credit, but cannot apply both credits on the same wages.
- Employers who receive a CARES Act PPP loan are ineligible for the Employee Retention Credit or Social Security payroll tax deferral.
- Employers can receive a PPP loan and FFCRA tax credits but cannot receive PPP loan forgiveness on wages that are eligible for a FFCRA tax credit.
As always, employers should consult with their tax advisor or their legal counsel with additional questions on the available tax credits, loan programs and grants available to them under the FFCRA and CARES Act.
Families First Coronavirus Response Act (FFCRA) Resources
The CARES Act
Employee Retention Credit
Deferral of Employment Tax Deposits
Economic Injury Disaster Loan
Paycheck Protection Program
IRS Tax Credits
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