New Guidance on the Paycheck Protection Program and COVID-19 Employer Tax Credits

New Guidance on the Paycheck Protection Program and COVID-19 Employer Tax Credits

The Internal Revenue Service (IRS) and the Small Business Administration (SBA) have released a great deal of new guidance concerning the Families First Coronavirus Response Act (FFCRA) employer-paid leave tax credits, the Paycheck Protection Program, and Employee Retention Tax Credit programs created by the Coronavirus Aid, Relief and Economic Security Act.  The agencies update their guidance regularly, and if your company is interested in, or is accessing, one or more of these economic relief programs, we suggest you review this guidance in detail.  However, we’ve also prepared a summary of the most critical points for each.  As more guidance and regulations are released, we will keep all of our clients apprised of changes that could impact you and your benefit plans.

Paycheck Protection Program

  • The SBA just published the loan forgiveness application, which gives some indication of how the forgiveness process will work. In general, a PPP loan may be fully forgiven if the funds are only used for payroll costs, interest on mortgages, rent, and utilities. At least 75% of the forgiven amount must be used for payroll costs, and forgiveness depends on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be affected if full-time headcount declines, or if salaries and wages decrease.
  • A borrower’s first eight weeks of the PPP loan for forgiveness purposes begins on the first day that loan funds are disbursed to the borrower – no exceptions at present.
  • Independent contractors do not count for purposes of a borrower’s PPP loan forgiveness. Student-workers and paid interns do count unless they are part of the federal work-study program.
  • Employers can have employees on their payroll that make more than $100,000 per year. However, when calculating their payroll costs for PPP borrowing and forgiveness purposes, they can only count $100,000 in compensation. The exclusion of compensation over $100,000 annually applies only to cash payment, not to non-cash benefits like group health insurance coverage.
  • Employers cannot reduce the salary of any employee that made less than $100,000 in annualized pay in 2019 more than 25% and still get full loan forgiveness for that employee.  The way an employer calculates this is to review if the employee’s salary over the first eight weeks of the PPP loans is more or less than 75% of their pay-rate in the most recent quarter in which they were employed before the employer got the PPP loan. If their pay-rate is less, then forgiveness will be reduced by the difference between current pay and 75% of the original payment.
  • If an employer who borrows PPP funds has needed to lay-off or furlough employees due to the COVID-19 economic uncertainty that necessitated the need for the loan, then they must attempt to rehire their employees.  If they do not, it will impact PPP loan forgiveness. At least 75% of PPP loan funds must be spent on payroll costs based on their past year’s payroll.
  • If a borrower offers to rehire a laid-off or furloughed employee as part of their PPP loan, but the employee declines the offer, in general, that situation will not affect the borrower negatively when it comes to documenting payroll spending and costs for loan forgiveness. The borrower must make a good faith written offer of rehire, and the borrower must document the employee’s rejection of that offer. Employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation. 
  • All borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application and certify in good faith that their PPP loan request is necessary.  In addition to the certification required to obtain a PPP loan, borrowers may be subject to federal review and audit. The SBA will automatically review all loans over $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. According to the SBA, additional guidance implementing this procedure will be forthcoming. 

Retention Tax Credit

  • To get the credit, employers must fall into one of two categories:
    1. The business is wholly or partially suspended by government order due to COVID-19
    2. The employer’s gross receipts were below 50% of the comparable quarter in 2019.

The only businesses that do not qualify are:

  1. State and local governments and any agency or instrumentality of those governments
  2. Self-employed individuals, concerning their self-employment earnings.
  3. Household employers
  4. Any company that gets a CARES Act Small Business Administration loan (unless they return it by May 14, 2020)
  • The amount of the credit is 50% of qualifying wagespaid up to $10,000, and wages can include salary and allocated group health benefit costs.  It can apply to wages paid after March 12, 2020, and before January 1, 2021.
  • Credit eligibility ends after the quarter when the employer’s gross receipts exceeded 80% of the revenue from the comparable quarter in 2019.
  • The retention credit is essentially immediately available, with no application or approval process required.
  • To access credit payments, employers reduce their required deposits of payroll taxes withheld from employees’ wages (including federal income tax from employees) by the amount of the credit. Then they document their eligibility and the money they kept on their quarterly tax filings via Form 941. If the tax money does not cover their credit costs, businesses can get the rest refunded by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
  • The way employers are allowed to claim qualified wage costs varies by the number of employees. For smaller companies with 100 or fewer full-time employees in 2019, the retention credit can be claimed for any employee’s wages and healthcare benefits during the COVID-19 hardship, including actively working people, those providing reduced services, and furloughed people. Employers with an average of 100 or more full-time employees during 2019 can only use the retention tax credit money to pay wages and healthcare expenses for furloughed employees or those with reduced hours.
  • Employers of any size can use the retention credit to provide group health care coverage to furloughed employees, even if they are not paying these employees any wages.
  • The definition of the group health plan used for retention tax credit purposes comes from 26 IRC 5000 (b).  It means “a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families.”
  • If a group plan includes multiple options or different choices for an employee to elect, the employer needs to allocate costs for each plan option and then use the costs related to each qualified employee’s elections on a case-by-case basis.
  • Qualified expenses include both the portion of the cost paid by the employer and the part funded by the employee with pre-tax salary reduction contributions.
  • Qualified expenses do not include employee after-tax payments, or employer contributions to an employee’s health savings account, Archer medical savings account, or qualified small employer health reimbursement arrangement.
  • Qualified expenses do include contributions to a traditional health reimbursement arrangement, individual coverage health reimbursement arrangements, or a health flexible spending arrangement.
  • Employers may use any reasonable documented method to determine and allocate group health plan expenses.

Paid Leave Tax Credits

  • A qualified employer can get tax credits to cover certain costs of providing employees with required paid sick leave and expanded family and medical leave for reasons related to COVID-19, from April 1, 2020, through December 31, 2020.
  • Qualified health plan expenses for COVID-19 paid leave credit purposes include all amounts paid or incurred by the employer to provide and maintain the group health plan allocable to the employee’s qualified leave wages.
  • To access the credits, instead of sending the IRS the employer’s share of federal employment taxes equal to the amount of paid leave wages, qualified health plan expenses, and the employer’s share of Medicare tax imposed on those wages, the business just keeps those funds. If the amount of the credit exceeds their employment tax liability, then the excess is fully refundable. To get a refund, an employer files Form 7200, Advance Payment of Employer Credits Due to COVID-19. An employer documents their eligibility and the money they kept on their quarterly tax filings via Form 941.
  • The definition of the group health plan used for retention tax credit purposes comes from 26 IRC 5000 (b).  It means “a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families.”
  • If a group plan includes multiple options or different choices for an employee to elect, the employer needs to allocate costs for each plan option and then use the costs related to each qualified employee’s elections on a case-by-case basis.
  • Qualified expenses include both the portion of the cost paid by the employer and the part paid by the employee with pre-tax salary reduction contributions.
  • Qualified expenses do not include employee after-tax payments, or employer contributions to an employee’s health savings account, Archer medical savings account, or qualified small employer health reimbursement arrangement.
  • Qualified expenses do include contributions to a traditional health reimbursement arrangement, individual coverage health reimbursement arrangements, or a health flexible spending arrangement.
  • Employers may use any reasonable documented method to determine and allocate group health plan expenses.
  • An FFCRA paid leave requirement exemption is available for both types of paid leave for employers that have fewer than 50 employees and can document that compliance would “jeopardize the viability of the small business as a going concern.” This exemption only applies to providing paid leave to parents who need to take care of a child that cannot attend school or daycare due to a COVID-19 related closure. Another exemption permits employers whose employees are health care providers or emergency responders not to provide qualified sick leave or qualified family leave to those employees.
  • Any business that claims either or both of these exemptions is not entitled to tax credits for any qualified leave wages that they are exempt from providing. If an exempt business has request(s) for a type of COVID-19 paid leave for which an exemption does not apply, then they can claim a tax credit for the qualified wages, and group health plan costs they pay related to those paid leave events.
  • Employers can receive tax credits for qualified emergency paid leave wages and health plan costs and benefit from other forms of COVID-19 employer relief too. They just cannot claim the same leave and health insurance costs for more than one tax credit or relief program. If an employer is accessing the Employee Retention credit, then they have to document that they are doing so for other qualified wages and health plan expenses.

If the employer accesses one of the SBA loan programs, then their qualified leave wages and group health plan costs related to the paid leave credit are not eligible as “payroll costs” for purposes of receiving loan forgiveness.

When an employer gets a COVID-19 paid leave request, they need to keep records for at least four years for the IRS to review potentially.  Records must include:

  1. Employee’s name
  2. Dates of the requested leave
  3. COVID-19 related reason for the leave
  4. Employee statement that he/she is unable to work because of COVID-19 qualifying reason.
  5. If an order is involved, the name of the government entity or healthcare provider that issued it.
  6. For school or daycare closures, the name of the child(ren) involved and the name of the school or child care provider.
  7. A statement from the employee that no other suitable person is available to provide childcare.
  8. If a child involved is older than fourteen and the work is during daylight hours, an attestation that exceptional circumstances exist requiring the employee to provide care.
  9. How the employer determined the amount of qualified wages paid to eligible employees, including records of work, telework, and qualified sick leave and qualified family leave.
  10. Documentation showing how they calculated the amount of qualified health plan costs.
  11. Copies of any completed Forms 7200, Advance of Employer Credits Due To COVID-19, and Forms 941, Employer’s Quarterly Federal Tax Return.
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