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Lawmakers want guidance on retention credit for employer health insurance reversed

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Three leaders of Congress’s tax-writing committees have sent a letter to Treasury Secretary Steven Mnuchin asking him to reverse guidance from the Internal Revenue Service that denies the Employee Retention Credit in the CARES Act to employers who continue providing health insurance to their furloughed employees unless they continue paying other wages. They also asked in a separate letter for him to allow small businesses to deduct their expenses under the Paycheck Protection Program even if their loans are forgiven.

The IRS recently updated its Frequently Asked Questions page for the Employee Retention Credit with a new item that said employees aren’t eligible for the tax credit if they aren’t paying wages to their employees, but they’re still paying for health coverage, a common situation for many employees who have been furloughed.

“If an Eligible Employer that averages 100 or fewer full-time employees in 2019 pays wages to its employees during the period its trade or business operations are suspended due to a governmental order or during the quarters in which it had a significant decline in gross receipts, then the Eligible Employer may allocate its health plan expenses to the wages paid and treat the amount of allocable health care expense as qualified wages for the purposes of the Employee Retention Credit,” said the guidance. “However, if the Eligible Employer lays off or furloughs its employees and continues the employees' health care coverage, but does not pay the employees any wages for the time they are not working, the employer may not treat any portion of the health plan expenses as qualified wages for purposes of the Employee Retention Credit because no portion of the health plan expenses would be allocable to wages paid to the employees.”

In a letter Monday, the lawmakers pointed out that this guidance runs counter to their intent when putting together the stimulus package. The letter came from Senate Finance Committee ranking member Ron Wyden, D-Ore., chairman Charles Grassley, R-Iowa, and House Ways and Means Committee chairman Richard E. Neal, D-Mass.

They noted that the guidance prohibits employers who provide health insurance to furloughed workers from receiving the credit, making it harder to preserve health coverage.

“As of this writing, more than one million Americans have contracted COVID-19, and more than 60,000 have perished,” they wrote. “It is absolutely critical that American families have access to health care during this crisis. Allowing employees to retain their employer-provided health insurance, even while furloughed, is an important component in ensuring millions of Americans access to affordable health care.”

They noted that the Employee Retention Credit provides a fully refundable payroll tax credit that’s equal to 50 percent of qualifying wages paid to an eligible employee (see story). In drafting the provision, Congress explicitly expanded qualified wages to incorporate certain qualified health benefits, with the goal of offering an incentive to employers to continue providing health benefits to their employees, even if the employer otherwise couldn’t continue paying regular wages because of the coronavirus pandemic. The economic contraction caused by the coronavirus pandemic has resulted in over 30 million unemployment claims, making incentives that keep the connection to employment and employee benefits critical, they added.

“After the passage of the CARES Act, we reiterated this intent in subsequent communications with Treasury,” the lawmakers wrote. “We are, therefore, disappointed with the recent determination that an employer that is no longer paying regular wages but continues to provide full health benefits would not be able to treat any portion of those health benefits as qualifying wages eligible for the retention credit. We urge you to reconsider this determination in light of congressional intent and the importance of providing access to affordable health care during the ongoing health crisis.”

The three lawmakers sent a separate letter Tuesday to Mnuchin asking him to allow small businesses to deduct their expenses under the Paycheck Protection Program even if their loans are forgiven.

The request comes in response to Notice 2020-32, which the IRS issued last week, denying deductions for forgiven PPP loans (see story).

“Providing assistance to small businesses, only to disallow their business deductions as provided in Notice 2020-32, reverses the benefit that Congress specifically granted by exempting PPP loan forgiveness from income,” wrote Grassley, Wyden and Neal. “This interpretation means that whatever income a small business is able to produce will be taxed on a gross basis to the extent of the loan forgiveness, leaving substantially less after-tax capital for the swift economic recovery we hope is on the horizon.”

As with the Employee Retention Credit, they contended that the determination adopted by the IRS and the Treasury runs contrary to congressional intent underlying the PPP program and the CARES Act overall.

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