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.
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.