What are the Implications of the ERTC for Furloughed Employees? 

October 5, 2023
Dayes Law Firm

There has been a lot of confusion about the ERTC since it was passed as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES). Part of this confusion is a result of the complex rules, and another potential source of ambiguity for businesses is the fact that the rules keep changing. 

If you furloughed employees during the eligibility years of 2020 and 2021, you might be wondering if you can get a piece of the ERTC employee benefits pie. This article outlines the current rules regarding furloughed employees. 

Does the Employee Retention Tax Credit Cover Furloughed Employees? 

In the original version of the CARES Act, even if you continued to pay for health plan expenses for an employee, if you did not pay wages to a furloughed employee, you would not eligible for the ERTC. This rule was difficult for employers who had to furlough employees due to government mandates that required them to shut down their businesses, and many thought it was unfair. 

The IRS changed that rule within a couple of months after the passage of the CARES Act. Now, employers who covered health plan expenses can count those costs as qualified wages for ERTC employee benefits. 

The Employee Retention Tax Credit was for businesses with fewer than 500 employees (previously, this number was 100). 

Why the Rules Regarding Furloughed Employees Changed 

According to lawmakers, the effect of the pandemic had a severe impact on the economy, resulting in over 30 million unemployment claims within the first few months of the lockdown. While millions of employers were unable to make payroll, the government urged businesses to keep a “connection” to their employees and continue offering benefits like health insurance.   

These lawmakers drafted a letter on May 4, 2020, arguing to the IRS and the Department of Treasury that even though a business might not be paying wages, if an employee was temporarily furloughed and receiving health insurance, those benefits should qualify as wages under the ERTC.

At the time of this letter, businesses were encouraged to pay a small amount of wages to be able to qualify for the tax break. Even a single-digit percentage would have been enough for an employer to be able to claim health plan expenses as qualified wages.

On May 7, 2020, the Treasury Department agreed to revise the rule that did not list health plan expenses as qualified wages. 

Employee Retention Tax Credit Implications 

By updating the rules of the ERTC and the corresponding FAQs that businesses and tax professionals reference when determining eligibility and the amount of the credit, more businesses were able to claim funds. 

It should be noted, however, that expenses related to unsubsidized COBRA continuation coverage do not qualify for the tax credit. 

While the change in the rules is beneficial for employers, it is an indication that the rules regarding ERTC employee benefits can change at any time. On the one hand, this can be encouraging because the trend has been to expand the category of qualified wages and increase the percentage of wages that can be claimed as a tax credit. 

Contact an Experienced Tax Attorney for ERTC Guidance

Did your business furlough employees while continuing to pay health plan expenses? To ensure you get the maximum tax credit while abiding by the complex rules, contact Dayes Law Firm at 866-567-4510 for a free consultation.