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04.13.20

Valuing health plan cost for COVID-19-related employment tax credits

BY Damian A. Myers

In response to the coronavirus (COVID-19) pandemic and its impact on the U.S. economy, Congress passed (and the president signed into law) two pieces of legislation—the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Both the FFCRA and CARES Act establish credits against employment-related taxes for certain payments made to employees. Under the FFCRA, certain employers are eligible for employment tax credits for wages (including allocable qualified health plan expenses) paid during emergency sick or family leave. Under the CARES Act, eligible employers can receive an employment tax credit (referred to as the “employee retention credit”) for wages (including allocable qualified health plan expenses) paid to employees during a full or partial suspension of business operations.

The full mechanics of the FFCRA’s and the CARES Act’s employment tax credit programs are outside the scope of this blog. Instead, this blog post focuses on how employers should determine “qualified health plan expenses” for purposes of the tax credit. The FFCRA and CARES Act use the same definition—amounts paid or incurred under a group health plan (as defined in section 5000(b)(1) of the Internal Revenue Code (the Code) but only to the extent these amounts are excluded from employees’ income under Code section 106(a). Code section 5000(b)(1) defines a  “group health plan” broadly to mean any plan (including a self-insured plan) sponsored by an employer or employee organization to provide health care to employees, former employees, or their families.

Fortunately, the IRS has published Frequently Asked Questions (FAQs) regarding the employment tax credits under the FFCRA and CARES Act (note that only the FFCRA FAQs provide detail on how to determine qualified health plan expenses, but that guidance would likely apply to the CARES Act’s employee retention credit as well). The FAQs provide the following clarifications when calculating qualified health plan expenses:

Given the broad scope of Code section 5001(b)(1), expenses related to medical, dental, and vision plans would be included in the credit.

  • However, expenses related to employee assistance programs, wellness programs, and onsite medical clinics are included only if the benefits available cause these programs to be group health plans. Employers should consult with counsel when determining if any of these programs are group health plans under the relevant facts and circumstances.
  • Qualified health plan expenses include contributions by the employer as well as pre-tax salary reduction contributions made by employees.
  • Fully-insured group health plans may calculate expenses by (i) using the applicable COBRA premium for each employee, (ii) using a blended average rate for all employees, or (iii) using two separate blended average rates, one for self-only coverage and one for other than self-only coverage.
  • Self-insured health plans may determine expenses by using (i) the applicable COBRA premium for each employee or (ii) any reasonable actuarial method to determine estimated annual expenses of the plan. Use of a reasonable actuarial method allows employers to use a single blended rate for all employees, as the estimated annual expenses would be divided by the number of covered employees to determine the annual cost-per-covered employee.
  • Pre-tax employee contributions and employer flex contributions to health flexible spending accounts are included in qualified health plan expenses.
  • Employer contributions to health reimbursement arrangements (HRAs), including individual coverage HRAs (but not qualified small employer HRAs), are qualified health plan expenses.
  • Contributions to health savings accounts and Archer medical savings accounts are not included in group health plan expenses.

Determining the amount of qualified health plan expenses is but the first step in determining the expenses subject to the employment tax credit. The FFCRA and CARES Act require that qualified health plan expenses be allocated on a pro rata basis to the wages paid pursuant to the leave or retention requirements, as applicable. Employers evaluating the extent to which qualified health plan expenses can be allocated to wages should consult with their tax and benefits advisors.

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Damian A. Myers

Counsel

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