As an employer looking to recoup money that was lost throughout the COVID-19 pandemic via the ERC (Employee Retention Credit), you may be wondering what employee-related expenses qualify towards the credit and which do not. One major expense is that of healthcare, and the money spent maintaining a group health plan for your employees. The rules surrounding these costs can be complicated, and there are some caveats and interactions with other pandemic recovery programs such as the FFCRA (Families First Coronavirus Response Act) that employers should be aware of.
Are Health Plan Expenses Qualified Wages?
According to the IRS, expenses paid by an employer to “provide and maintain a group health plan” can count as qualified wages and thus can be included in the expenses used to calculate your ERC credit. However, not all expenses paid towards employee healthcare qualify. The IRS also states that qualified health plan expenses “should not include amounts that the employee paid for with after-tax contributions.” Be sure to keep this rule in mind when calculating your eligible expenses for ERC.
Families First Coronavirus Response Act
The Families First Coronavirus Response Act, or FFCRA mandates that certain employers provide employees with sick leave due to COVID-19 related reasons. The FFCRA requires employers to pay up to two weeks (or 80 hours) worth of sick leave for employees who are quarantined and unable to work due to having COVID-19 symptoms. Additionally, employers must pay for up to 10 weeks of leave if an employee has a “bona fide need” to care for a quarantined individual or child whose school is closed due to COVID-19, at 2/3rds of the employee’s normal salary.
What employers need to know about the FFCRA is that it is not to be included when calculating ERC and does not count as qualified wages or as qualified health plan expenses. However, money paid to employees under the FFCRA can be recouped dollar-for-dollar via refundable tax credits. Be sure to adhere to IRS guidelines in order to avoid any potential penalties or errors.
ERC vs. PPP for Health Plan Expenses
The Paycheck Protection Plan, or PPP loan is a loan granted to small businesses in order to help them retain employees and maintain payroll during economic disruptions. Unlike the ERC, which is a tax credit, the PPP is a loan given out by approved lenders such as banks and must be repaid unless certain conditions are met, in which the loan can be partially or fully forgiven.
Similar to the ERC, health plan expenses and coverage are counted as part of payroll when applying for a PPP, and when applying for loan forgiveness. Also similar to ERC is the fact that proceeds from a PPP loan can not be used to cover expenses incurred by the FFCRA.
Besides the fact that the ERC is a tax credit and the PPP is a loan, the main difference between the ERC and PPP that employers need to consider is eligibility. To be eligible for the ERC, one’s business needs to see a significant decline in gross receipts due to COVID-19. PPP loans require no such decline, and instead are open generally to most types of small businesses. The main criteria for PPP loans are employee headcount, payroll costs, and other industry-specific requirements.
Finally, due to a change to the Consolidated Appropriations Act in 2021, businesses can be eligible and apply for both the PPP and the ERC, with exceptions. Employers are eligible to apply for the ERC even if they’ve received a PPP loan, as long as the wages being identified in order to qualify for the ERC were not paid using the PPP loan. Keep in mind however that the other eligibility criteria for both loans can be quite different. Be sure to consult with a tax professional if you’re wondering whether or not your business qualifies for both programs.
Examples of ERC Qualified Health Plan Expenses
Some examples of qualified health plan expenses that can be considered for the Employee Retention Credit (ERC) include:
Employer Contributions: Employer contributions towards health insurance premiums for eligible employees can be considered as qualified health plan expenses. This may include contributions towards medical, dental, vision, or other health insurance plans.
COBRA Premiums: If an employer pays for or subsidizes the cost of COBRA (Consolidated Omnibus Budget Reconciliation Act) continuation coverage for eligible employees, those expenses may also be eligible for the ERC. COBRA allows employees to continue their employer-sponsored health insurance coverage after leaving employment.
Additional health plan expenses like HRAs (Health Reimbursement Arrangements) and FSAs (Flexible Spending Accounts) may also qualify, but small employer HRAs (QSEHRA) and employer contributions to HSAs (Health Savings Accounts) do not count towards ERC calculation.
Do Social Security and Medicare Expenses Qualify for ERC?
In the third and fourth quarters of 2021 only, ERC could be claimed against the employer portion of Medicare taxes only, which is 1.45% of wages. This change was implemented as part of the ARP to allow employers to claim the credit specifically against the Medicare tax. For all other quarters prior to Q3 and Q4 of 2021, ERC was eligible to be claimed against the employer portion of Social Security taxes, which is 6.2% of wages. As always, be sure to consult with the IRS, DOL, and a qualified tax professional to avoid any confusion about what programs your business may meet the requirements for.