COVID Relief Legislation: Employee Retention Credit

The COVID relief legislation, signed into law on December 27, 2020, includes an extension and enhancements to the Employee Retention Credit (ERC) along with technical corrections. Most notable is a retroactive change allowing eligible employers to take the ERC in addition to a Paycheck Protection Program (PPP) loan, which was previously prohibited.

We’ve broken down the key provisions from the new COVID relief legislation.

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Retroactive Changes to the ERC and Technical Corrections
The new legislation includes three changes that are made effective retroactive to the date of the CARES Act, which was March 27, 2020.

• First, eligible employers can claim the ERC on wages to the extent the wages were not paid with forgiven PPP loan proceeds. Many employers were forced to choose between the ERC and a PPP loan under the CARES Act. A forgiven PPP loan generally provided a better benefit to those that qualified, but now employers can layer in the ERC for wages not covered by a PPP loan if they meet the criteria to qualify as an eligible employer.
• Second, the legislation clarifies that exempt entity gross receipts for calculation of the ERC are determined under IRC 6033, or more plainly, what is reported on IRS Form 990 is what is used
• Finally, the legislation clarifies that group health plan expenses, not included as gross income to an employee, may be treated as qualified wages.

Extension of the ERC to July 1, 2021 and Enhancements to the Credit
The legislation extends the ERC through the first two quarters of 2021. In addition, the credit rate is increased from 50% to 70% and the limit on qualified wages is increased from $10,000 in 2020 to $10,000 per quarter in 2021, with the available credit per employee increasing from $5,000 in 2020 to $14,000 over two quarters in 2021.

Background
In the original law, employers with 100 or fewer employees could take the credit on each employee, regardless of whether they were performing services.

For employers with greater than 100 employees, the credit could only be taken for employees not providing services. These were often furloughed employees or individuals working a reduced schedule but still being paid their full rate.

The new legislation now allows employers with 500 or fewer employees to take the credit in 2021 on all employees regardless of whether they performed services. This will provide a sizeable increase of the ERC for employers in the 100 to 500 employee range. In addition, an advance refund of the credit can be claimed for employers with 500 or fewer employees.

Qualification Criteria
Another enhancement to the ERC includes the qualification criteria.

Initially, an employer could qualify for the credit if there was a reduction in gross receipts of 50% compared to the same quarter in 2020 versus 2019, or a full or partial suspension of the business due to a government order. The gross receipts test has been reduced from 50% to 20% for 2021, making it noticeably easier to qualify for the credit. The legislation also provides a safe harbor, in which an employer can use prior-quarter gross receipts to qualify for the credit.

Three Enhancements
Three enhancements to the credit have been added in the new legislation.

• Employers not in existence for all, or part of, 2019 can use the ERC.
• The 30-day wage limit has been removed to allow for bonuses to be included in the credit.
• The ERC is now available to certain government instrumentalities that were left out of the original act. These include governmental entities with separate tax-exempt status and/or state colleges, universities, or hospitals.

The Takeaway
Most of the enhancements in the new legislation apply to the ERC only during the extension period, which is the first two quarters of 2021. However, the benefit could be particularly significant for employers with 100-500 employees. And, for many employers, the ability to claim the ERC in addition to taking a PPP loan in 2020 will provide an opportunity to recoup cash as well as provide an opportunity to claim both the PPP and ERC in 2021.