Lawmakers Urge IRS to Rethink Tax-Credit Rule Affecting Furloughed Workers
Bipartisan letter says administration misinterpreted tax break for employee retention
A closed restaurant in New York City on April 30.
PHOTO: STEPHANIE KEITH/GETTY IMAGES
WASHINGTON—The IRS and Treasury Department misinterpreted a new tax credit in a way that could discourage businesses from offering health benefits to their furloughed workers, the leaders of the congressional tax-writing committees said Monday.
In a letter to Treasury Secretary Steven Mnuchin, Sen. Chuck Grassley (R., Iowa), Sen. Ron Wyden (D., Ore.) and Rep. Richard Neal (D., Mass) urged the administration to reverse its decision. The Internal Revenue Service said last week that employers would be ineligible for the tax credit if they are paying no wages but are still paying health benefits, a decision that could affect many large retailers and travel-industry companies operating that way during the coronavirus pandemic.
“This interpretation runs directly counter to congressional intent,” the lawmakers wrote. “Allowing employees to retain their employer-provided health insurance, even while furloughed, is an important component in ensuring millions of Americans access to affordable health care.”
Mr. Neal is chairman of the House Ways and Means Committee. Mr. Grassley is the chairman of the Senate Finance Committee and Mr. Wyden is its top Democrat.
The employee retention tax credit at issue offers employers a partial subsidy for the wages and benefits they pay to employees who aren’t working. The credit is worth 50% of expenses, up to $10,000 of such costs per employee.
That credit is particularly attractive to larger companies with low-wage workers. Those firms can’t qualify for a separate small-business loan program, and the retention credit can offset a significant share of the cost of keeping their workers tangentially attached. Many large retailers, facing partial or full shutdowns, have furloughed workers but continued to pay health insurance costs.
But the IRS, in a set of frequently asked questions posted last week, said employers couldn’t get the credit for benefit costs if they were not paying any wages. A Treasury Department spokesman didn’t immediately comment on the lawmakers’ letter.
Representatives for CarMax Inc. and Marriott International Inc., which have both furloughed workers, said they were reviewing the IRS guidance. Jeff Gennette, the CEO of Macy’s Inc., said generally last week that the company was exploring “tax opportunities.”
The IRS guidance is somewhat unclear. On one hand, it says that employers can’t get the credit for health expenses without paying wages. On the other hand, it gives an example of a company getting the full credit for health benefits when it is paying just 25% of wages.
“People will try to design around this,” said Edward Renn, a partner at the law firm Withers, who suggested that some might pay 5% of wages to make themselves eligible for the credit for health benefits if the IRS doesn’t reverse course.
This ruling, he said, was an exception to the generally fast and taxpayer-friendly decisions coming out of the IRS in interpreting the new laws Congress has written to fight the economic fallout of the coronavirus pandemic.
The explanation of the law from the nonpartisan congressional Joint Committee on Taxation had suggested that companies could qualify if they paid no wages but did pay benefits.
That left employers surprised when the IRS reached the opposite conclusion, and the U.S. Chamber of Commerce last week urged the administration to reverse course.
Other IRS interpretations surrounding the credit were favorable for employers, including rules for companies that have their operations suspended in one part of the country but not others, said Marna Ricker, Americas vice chair of tax at accounting firm EY LLP.
The IRS FAQs aren’t formal or legally binding guidance, but companies and their lawyers do watch them closely.
“Business has to temper its enthusiasm or displeasure,” Ms. Ricker said.
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