CARES Act Employee Retention Credit for Hospitals, Medical Groups, and Healthcare
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, provides several incentives for hospitals and healthcare organizations. The Employee Retention Credit (ERC) is one of them. The ERC provides a refundable credit of up to $5,000 per employee to eligible employers. The credit is equal to 50% of qualified wages (including compensation and health benefits), up to a maximum of $10,000, and may be used to offset applicable employer payroll taxes by an eligible employer whose business has been affected by COVID-19 for wages paid from March 13, 2020, through December 31, 2020. Payments for healthcare costs on behalf of laid off or furloughed employees are treated as qualified wages.
Employers may use employee retention credits to offset payroll taxes, including employee income tax withholding. If the employer’s employment tax deposits are less than the credit applied for, the employer may receive an advance payment from the IRS using Form 7200, Advance Payment of Employer Credits Due to COVID-19.
The calculation of the credit amount is dependent on the number of company employees. For employers with 100 or more full-time employees, qualified wages include those paid to employees while not providing services due to COVID-19. Employers with fewer than 100 full-time employees may count all employee wages as qualified wages, regardless of whether the employer is open for business or subject to a shutdown order. Aggregation rules apply to determine whether entities under common control are treated as a single employer.
The ERC can be taken in addition to any Department of Health and Human Services (HHS) grants to healthcare providers under the CARES Act and is applicable to tax-exempt organizations.
An employer may be classified as an eligible employer in one of two ways:
- The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter, or
- The employer’s gross receipts are below 50% of the comparable quarter in 2019. (Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, it no longer qualifies after the end of that quarter.)
Employers in the healthcare industry have generally been deemed “essential businesses” by local, state, and federal government authorities, leading them to question their eligibility for the ERC. Recent updates to the Internal Revenue Service FAQs provide clarification specific to businesses deemed essential under the CARES Act to claim the ERC. Specifically, the FAQs provide examples regarding when an essential business may be considered to have a partial suspension of business.
FAQ #30 clarifies that an essential business may have a partial suspension if more than a nominal portion of its business operations are suspended by a governmental order. For example, an employer that maintains both essential and non-essential business operations may suffer a partial suspension if a governmental order restricts the operations of the non-essential business, even if the essential business is unaffected. Additionally, an essential business that is permitted to continue its operations may be considered to have a partial suspension of its operations if a governmental order requires the business to close for a period during normal working hours.
FAQ #34 provides that if an employer is closed by a governmental order for only certain purposes but remains open for other purposes or is operational for limited purposes, then there is a partial suspension.
To illustrate, in Example 4, a hospital operates an essential business under a governmental order with respect to its emergency department, intensive care, and other services for conditions requiring urgent medical care. Relevant governmental orders prevent Employer H from performing elective and non-urgent medical procedures as non-essential business operations. Although the employer is deemed an essential business, it is considered to have a partial suspension of operations due to the governmental order that is preventing elective and non-urgent medical procedures.
These recent IRS updates clearly show that a healthcare industry essential business may suffer a partial suspension as a result of applicable local, county or state governmental orders.
For businesses that continue to operate in a limited capacity in a remote manner, the IRS has provided clarifying guidance in FAQ #33. FAQ #33, which discusses employers whose business operations continue because their employees telework, provides that if the workplace closure causes the suspension of business operations for certain purposes, there may be a partial suspension.