Treasury will revisit guidance on the new employee retention tax credit regarding health plan expenses, according to a letter sent to a top taxwriter.
After considering lawmaker criticism of a recent FAQ on the credit, Treasury will be “revising the applicable guidance,” it said in a May 7 letter to Senate Finance Committee Chair Chuck Grassley, R-Iowa.
“This decision will encourage employers to help employees keep their health insurance while temporarily furloughed due to the shutdown,” Grassley said in a statement praising the decision. “The decision also aligns Treasury’s policy with the original congressional intent behind the employee retention tax credit.”
At issue is the FAQ the IRS issued on the employee retention credit created by the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136). The refundable credit, which was intended to encourage employers to keep employees on their payroll during the coronavirus pandemic, is equal to 50 percent of qualified wages, which includes allocable qualified health plan expenses.
But in FAQ 65, the IRS said an employer can’t treat health plan expenses as qualified wages if the employer isn’t otherwise paying the employee wages because “no portion of the health plan expenses would be allocable to wages paid to its employees.”
Grassley, along with Finance Committee ranking member Ron Wyden, D-Ore., and House Ways and Means Committee Chair Richard E. Neal, D-Mass., asked Treasury to reconsider the FAQ in a May 4 letter to Treasury Secretary Steven Mnuchin.
“The intent [was] to provide an incentive for employers to continue providing health benefits to their employees, even if the employer was otherwise unable to continue paying regular wages,” the letter said.
Treasury issued a less encouraging response to Grassley on IRS guidance denying a tax deduction for expenses associated with the Paycheck Protection Program.
“We are taking your views under consideration and will follow up with your office,” Treasury said in a separate May 7 letter to Grassley.
Statute Trumps FAQ
Brian J. Tiemann of McDermott Will & Emery said during a May 6 webinar hosted by his firm that the FAQ on health expenses was a surprising and unusual interpretation of the provision. He noted that it conflicts with the interpretation of the Joint Committee on Taxation (JCX-12R-20).
“Qualified health plan expenses are allocated to qualified wages in such manner as the Secretary (or the Secretary's delegate) may prescribe,” according to the JCT. “This broad grant of authority permits the Secretary (or the Secretary’s delegate) to treat qualified health plan expenses as qualified wages in a situation where no other qualified wages are paid by the eligible employer or to the particular employee to which such expenses are allocable.” Tiemann said many employers were following the JCT’s approach early on.
The proliferation of FAQs in response to coronavirus relief legislation has been a source of concern for practitioners, particularly when they seem to conflict with the statute or the JCT.
David Fuller, also of McDermott, said the limited weight of FAQs is a fundamental consideration for employers looking to take advantage of the retention credit.
“As you look at the retention tax credit, focus on the statute itself,” said Fuller, a former manager of the IRS National Office’s employment tax/fringe benefits branch. “The Internal Revenue Code is the ultimate arbiter of how you make your decision. It is what controls.”
Fuller noted that the employee retention credit FAQ carries a warning that it can’t be relied upon as legal authority. “This means that the information cannot be used to support a legal argument in a court case,” the FAQ says. That applies to both taxpayers and the IRS, Fuller said.
The FAQs are relevant to the IRS’s thinking and possible audit positions, but the statute is the “trump card” as it relates to the positions taxpayers ultimately take, Fuller said.