Differentiating Wages and Health Plans When Filing for ERTC
The Employee Retention Tax Credit (ERTC) is a tax credit that many small- and medium-sized businesses can claim if they continued paying employees during the pandemic. This credit is also available for businesses that opened during the pandemic, called “recovery startup businesses.”
What Qualifies an Employer To Claim the ERC?
The ERTC, also known as the Employee Retention Credit (ERC), allows employers to be reimbursed for a portion of qualified wages by filing an adjusted tax return (Form 941-X). Qualified wages include those paid to full-time employees during qualifying quarters of the pandemic. In some cases, this can include expenses paid for an employer-sponsored health plan.
But how do you know if you’re an eligible employer?
To qualify for the ERTC, your business must have been affected by government mandates or seen a significant decline in gross receipts, including:
- Full or partial shutdown due to a local, state, or federal mandate
- Decrease in gross receipts by 50% in a qualifying quarter of 2020 compared to the same quarter in 2019
- Decrease in gross receipts by 20% in a qualifying quarter of 2021 compared to the same quarter in 2019
For new businesses that opened after February 15, 2020, qualification involves comparing gross receipts in a qualifying quarter to the first quarter of business operations.
How Do Expenses Paid Into a Health Plan Affect an ERTC Claim?
Determining qualifying wages for the ERTC vs. health plans for employees to boost your ERTC claim can be difficult. You need to consider the types of plans your company offers, how many employees had each plan during the qualifying quarters of 2020 and 2021, and how you should allocate the expenses paid. Additionally, did you pay both wages and health plan expenses?
For example, if you offer both a health flexible spending arrangement (health FSA) and a group health plan, the expenses are determined separately for each plan your company offered to employees during the pandemic.
There are three ways to allocate these expenses. You could request the premium paid information from the insurer, calculate an average premium rate for all covered employees, or use a similar calculation to determine an average premium rate for self-only and other than self-only plans.
Calculating One Average Premium Rate for All Employees
To calculate an average premium rate to estimate your health plan expenses for each employee, you would need to determine a per diem rate for qualified sick or family leave wages. For example:
- Divide your total annual premium by the number of employees covered by the policy to determine the annual premium per employee.
- Divide the annual premium per employee by the average number of days most covered employees work (260 days for a five-day work week, 52 weeks in a year). Adjust days for covered part-time or seasonal employees. This will give the daily premium per employee.
- Adjust the daily premium to reflect average after-tax employee contributions for their health plans. This is how much you should allocate for sick and family leave days paid in a qualifying period for your ERTC claim.
If you furloughed employees or otherwise didn’t pay them normally during the pandemic, but still paid the employer portion of their health plans, you can use this calculation to determine how much to claim for your ERTC.
Contact Dayes Law Firm for More Information About the ERTC and Health Plans
Calculating qualifying wages for the ERTC vs. health plans and employer contributions can be challenging. Contact us today at Dayes Law Firm at (800) 503-2000 to schedule a consultation with an experienced business tax attorney.