As part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed by President Donald Trump March 27, the U.S. Treasury Department and the Internal Revenue Service (IRS) launched the employee retention credit program designed to encourage businesses, including many of our for-profit and nonprofit health care clients, to keep employees on their payroll amid the COVID-19 crisis.

The employee retention credit provides a fully refundable tax credit to eligible employers equal to 50% of qualified wages (including allocable qualified health plan expenses) paid to employees between March 13 and Dec. 31. The credit is determined quarterly. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000 (or 50% of $10,000).

Who Are Eligible Employers?

Eligible employers are those that "carry on a trade or business during calendar year 2020," including tax-exempt organizations, that either: fully or partially suspends operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious or other purposes) due to COVID-19; or experience a significant decline in gross receipts compared to the same quarter of the prior year.

The operation of a trade or business is "partially suspended" if an appropriate governmental authority imposes restrictions on the employer's operations by limiting commerce, travel, or group meetings such that the employer can still continue some, but not all of its typical operations. This allows many employers who were affected by state and local shutdown orders to qualify, including those whose operations are impacted by spacing restrictions or stay-at-home orders.

For health care clients, orders restricting elective and nonurgent medical and dental procedures will likely qualify under this test.

Alternatively, if an employer did not fully or partially suspend operations due to a governmental order, the employer can still qualify if it experiences a significant decline in gross receipts during the calendar quarter. A significant decline in gross receipts begins with the first calendar quarter in 2020 in which an employer's gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer's 2020 quarterly gross receipts for the quarter are greater than 80% of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021.

Stated more simply, physician and dental practices and other health care providers remain eligible for the credit during 2020 until it reaches 80% of gross revenues in a quarter compared to the prior year.

Qualified Wages

"Qualified wages" are wages and compensation paid by an eligible employer to employees after March 12, 2020, and before Jan. 1, 2021. Qualified wages include the eligible employer's qualified health plan expenses that are properly allocable to the wages.

Qualifying wages are based on the average number of a business' employees in 2019.

For an eligible employer that had 100 or fewer full-time employees on average in 2019, all employee wages are eligible for the credit (subject to the overall $10,000 per-employee wage cap), regardless of whether employees are furloughed due to COVID-19.

For an eligible employer that had more than 100 full-time employees on average in 2019, only wages of employees who are furloughed or given reduced hours due to the employer's closure or reduced gross receipts are eligible for the credit (subject to the overall $10,000 per-employee wage cap).

The amount of wages eligible for the credit is capped at a cumulative total of $10,000 for each eligible employee. The $10,000 cap includes allocable health plan expenses.

"Qualified health plan expenses" are amounts paid or incurred by an eligible employer that are properly allocable to employees' qualified wages to provide and maintain a group health plan, but only to the extent that these amounts are excluded from the employees' gross income.

Additional Rules and Restrictions

While the employee retention credit will help many employers curb layoffs, it is not allowed for:

• Any eligible employer who receives a Small Business Interruption Loan under the Paycheck Protection Program (PPP).

• Governmental employers.

• Emergency sick leave wages or emergency family leave wages that small employers (those with fewer than 500 employees) are required to pay under the Families First Coronavirus Response Act (FFCRA). Those mandatory leave payments are covered by federal payroll tax credits granted by the FFCRA.

• Wages taken into account for purposes of claiming the preexisting Work Opportunity Credit under Internal Revenue Code (IRC) Section 21.

• Wages taken into account for purposes of claiming the pre-existing employer credit for paid family and medical leave under IRC Section 45S.

How to Claim the Retention Tax Credit

The retention credit may be taken against the employer portion of Social Security (FICA) taxes. Eligible employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees' wages by the amount of the credit. Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer's employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Proposed legislation related to the employee retention credit is being promulgated daily. Therefore, the information contained in this article is subject to change. However, lawmakers recently offered a bill that would expand eligibility to employers who are not directly affected by a governmental order but whose suppliers or customers are, would increase the maximum amount of credit allowable, and would allow employers to use both the credit and PPP, with limitations to prevent double-dipping. These expansions could be significant for our health care clients, particularly those who received a PPP loan.

—Rachel E. Lusk, an associate at Lamb McErlane who focuses on health law and healthcare litigation, assisted with preparing this article.

Vasilios J. Kalogredis is chairman of Lamb McErlane's health law department. He represents many medical and dental groups and thousands of individual physicians and dentists.