The Chairs of both Congressional tax writing committees (House Ways and Means Committee and Senate Finance Committee) and the Ranking Member of the Senate Finance Committee have sent a letter to Secretary of Treasury Mnuchin questioning the IRS’s position on the payment of health insurance benefits for employees no longer receiving payroll and the employee retention credit enacted as part of the CARES Act.[1]

The employee retention credit, found at Section 2301 of the CARES Act, provides employers who meet certain conditions a credit of up to 50% of amounts paid for certain payroll costs. The question the IRS sought to answer in the FAQ on the matter is whether an employer could claim this credit if it was not currently paying wages to the employee but continued to pay for the employee’s health insurance costs.

The IRS held in its FAQ that if no wages are paid to the employee, then no health care costs would qualify for inclusion in the employee retention credit. In the agency’s FAQ on the ERC, the following is stated in question 64:

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.[2]

The IRS provides the following example in FAQ question 64 to illustrate this point:

Example 2: Employer Z averaged 100 or fewer employees in 2019. Employer Z is subject to a governmental order that suspends the operation of its trade or business. In response to the governmental order, Employer Z lays off or furloughs all of its employees. It does not pay wages to its employees for the time they are laid off or furloughed and not working, but it continues the employees' health care coverage. Employer Z may not treat any portion of its health plan expenses as qualified wages for purposes of the Employee Retention Credit.

While question 64 only deals with employers with 100 or fewer employees, the same language is found in question 65 which deals with employers with more than 100 employees.

The FAQ’s position on the matter led to a letter signed by the following three members of Congress who hold the positions noted on the main tax writing committees:

Senator Charles Grassley (R-IA), Chairman Senate Finance Committee
Senator Ron Wyden (D-OR), Ranking Member Senate Finance Committee
Representative Richard Neal (D-MA), Chairman House Ways & Means Committee

The letter was addressed to Treasury Secretary Mnuchin and voiced their displeasure with this position.

Their letter notes:

As of this writing, more than one million Americans have contracted COVID-19, and more than 60,000 have perished. 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.[3]

The letter goes on to ask Treasury to reverse this position and allow the credit to be used to subsidize such payment of medical insurance for furloughed employees:

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.[4]

One interesting person who did not sign the letter is the Ranking Member of the House Ways & Means Committee, Rep. Kevin Brady (R-TX). His absence is important, especially if it is clear he does not endorse this position. Normally the IRS pays special attention to Congressional correspondence if the Chairs and Ranking Members of both tax writing committee write to the agency, since the implied threat is that there will be legislative action with broad support to overturn the agency’s position if the agency doesn’t reverse the position on its own.

For the moment all we have is an FAQ which is not legal authority on its own, but most taxpayers will be uneasy about taking a position that is contrary to the FAQ. While it is not authority, it likely expresses the position the agency is going to take in any examination on the issue, a position the agency will defend using the argument it gave to support the position in the FAQ—that the credit requires wages to allocate the health insurance costs to. A taxpayer would have to be able ultimately to persuade a court that the law does not require wages based on how the law is written, and that the law truly meant to allow the credit for such expenditures.

[1] “Wyden, Grassley, Neal Request Retention Credit Eligibility for Employers Providing Health Insurance,” Senator Chuck Grassley website, May 4, 2020, https://www.grassley.senate.gov/news/news-releases/wyden-grassley-neal-request-retention-credit-eligibility-employers-providing (retrieved May 5, 2020)

[2] “COVID-19-Related Employee Retention Credits: Amount of Allocable Qualified Health Plan Expenses FAQ - Determining the Amount of Allocable Qualified Health Plan Expenses,” IRS website, April 29, 2020 version, https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-amount-of-allocable-qualified-health-plan-expenses-faqs (retrieved May 5, 2020)

[3] “Wyden, Grassley, Neal Request Retention Credit Eligibility for Employers Providing Health Insurance,” Senator Chuck Grassley website, May 4, 2020

[4] “Wyden, Grassley, Neal Request Retention Credit Eligibility for Employers Providing Health Insurance,” Senator Chuck Grassley website, May 4, 2020