DC Tax Flash: Treasury to Revise Guidance on Employee Retention Credit

Tax Alert

In a letter to Senate Finance Committee Chairman Charles Grassley (R-IA), the Treasury Department yesterday said it intends to revise its initial guidance on determining allocable qualified health plan expenses for purposes of the Employee Retention Credit (ERC).

Enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), the ERC provides a refundable tax credit to eligible employers for certain employment taxes equal to 50 percent of up to $10,000 in qualified wages paid to employees, effective March 12, 2020 through December 31, 2020. Employers that access loans under the Payroll Protection Program (PPP) are not eligible for ERC.

In its FAQs on the ERC, the IRS advised that qualified health plan expenses "are amounts paid or incurred by the Eligible Employer to provide and maintain a group health plan (as defined in section 5000(b)(1) of the Internal Revenue Code (the "Code")), but only to the extent that those amounts are excluded from the gross income of employees by reason of section 106(a) of the Code." 

In a letter to Treasury Sec. Steve Mnuchin, Chairman Grassley took issue with the guidance, noting "employers who continue providing qualified health benefits to their employees do not qualify for the retention credit unless they continue paying other qualifying wages." This interpretation "runs directly counter to congressional intent," the letter asserts. Ranking Member Ron Wyden (D-OR) and House Ways and Means Committee Chairman Richard Neal (D-MA) also signed the letter

Treasury's reply to Chairman Grassley from Frederick Vaughn, Principal Deputy Assistant Secretary in the Office of Legislative Affairs, says the Treasury Department "has taken your views under consideration and will be revising the applicable guidance." As such, the Internal Revenue Service is expected to reverse course and modify its FAQs on this subject.

A press release issued by Chairman Grassley on the issue is posted here. The text of Vaughn's letter to the Chairman is posted here.

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