Are Your Employee Retention Credit Claims Correct?

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7 Red Flags to Look For

According to the IRS, there’s no time like the present to review your company’s eligibility regarding Employee Retention Credit (ERC) claims. That’s because the agency has issued seven warning signs that could jeopardize a small business’s ERC claims. The ERC is available to eligible employers who paid qualified wages to some or all payroll employees between March 13, 2020 and December 31, 2021, and meet a specific set of criteria.

The suspicious indicators concern misinformation that some ERC promoters (deemed “unscrupulous” by the IRS) used through misleading marketing tactics. These are the common problems the IRS is noting with ERC claims:

  • Claiming the ERC for too many employees, with incorrect calculations. Employers should review the Employee Retention Credit – 2020 vs 2021 Comparison Chart regarding eligible payroll employees, dollar limits, and credit amounts, Additionally, there are certain wage criteria employers must meet. Review your calculations to avoid overclaiming the credit.
  • Claiming too many quarters. If an ERC promoter urged you to claim the credit for all quarters it was available, this may be a problem. You can review the IRS’s eligibility requirements here.
  • Claiming the credit for too much of a tax period. If your business operations were fully or partially suspended due to a government order during a portion of a calendar quarter, you may claim ERC only for wages paid during the suspension period (not the whole quarter).
  • Citing supply chain issues. Supply chain disruptions as a sole criterion do not qualify employers for an ERC claim.
  • Claiming the ERC under improper government orders. Government orders that did not affect business operations do not qualify. Qualifying government orders:
    • must have been in effect and the employer’s operations must have been fully or partially suspended by the government order during the claim period;
    • must have been due to the COVID-19 pandemic;
    • must be a government order. Recommendations, statements, and guidance do not qualify.
  • No wages were paid or the business didn’t exist during the eligibility period. Any claims for tax periods before an EIN was established or with no employees (and therefore, no paid wages) will be disallowed.
  • The ERC promoter urged your business to claim regardless of eligibility. Incorrect ERC claims put businesses at risk for repayments, penalties, and interest as well as audits and the need for amended returns.

Resolving your company’s incorrect ERC claims

The deadline to resolve a claim through the ERC Voluntary Disclosure Program was March 22 but there is still time to handle this matter through claim withdrawal.

  • The Voluntary Disclosure Program was for employers who filed a claim in error and received a payment before December 21, 2023. This disclosure program allows a business to repay 80% of the claim it may have paid an ERC promoter, with the IRS forgiving the 20% balance.
  • Taxpayers whose claim is still in process should pursue the claim withdrawal process immediately if they discover their claim is ineligible. It is important to handle this promptly, as the IRS will treat claims that are withdrawn as if they were never filed, thereby avoiding any imposed penalties or interest.

Have you received an ERC-related notice from the IRS?

If the IRS has contacted you regarding your ERC claims, contact us immediately for assistance. These ERC notices are time sensitive and need to be resolved as quickly as possible to avoid penalties and interest.

Sources: Journal of Accountancy; IRS Press Release

Health Plans for the Self-Employed Owner: ICHRA vs QSEHRA

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Many small-business owners find themselves in a quandary between supporting their employees’ well-being and balancing their operating budget. The self-employed often have businesses that are large enough to offer a health plan but too small to afford a typical group plan, making this balancing act even more difficult.

There are two medical reimbursement benefits on the market that are worth consideration for self-employed business owners. They are the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) and the Individual Coverage Health Reimbursement Arrangement (ICHRA).

They are both owned and funded by the employer and both provide tax-free funds (no payroll or income tax) to reimburse certain qualified medical expenses. Here’s a comparison of what and who they cover.

ICHRA

This arrangement is available to companies of any size—but the business may NOT offer a group health plan to eligible classes of employees.

Any employee, whether full- or part-time, salaried or hourly, or seasonal is eligible. Employees must be enrolled in individual health coverage, as do spouses and dependents to have expenses reimbursed.

Through the ICHRA, the employer can reimburse individual health premiums as well as Medicare, and/or non-insured 213(d) medical expenses. The IRS defines these medical expenses as:

“…the costs of diagnosis, cure, mitigation, treatment, or prevention of disease… affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. They also include the costs of medicines and drugs that are prescribed by a physician.” Read more here.

The ICHRA is considered a group health plan, so it is compatible with Section 125 Plan flexible spending accounts (FSA) and dependent care assistance plans (DCAP). It is also designed to be compatible with health savings accounts (for individuals enrolled in high-deductible health plans).

There are no IRS-specified contribution limits; the amount is determined by the employer.

QSEHRA

The Qualified Small Employer HRA was established after the 21st Century Cures Act was enacted in 2017, which opened the door for employers with fewer than 50 employees to offer the QSEHRA. The business is prohibited from sponsoring a group plan to any of its workers.

To participate, employees must be enrolled in a “Minimum Essential Coverage” (MEC) health plan, as do their spouses and dependents. This is health insurance coverage that satisfies the Affordable Care Act’s individual mandate provision

Unlike the ICHRA, Medicare premiums are excluded from reimbursements; other health insurance premiums and 213(d) medical expenses are allowed.

The IRS sets contribution limits for this arrangement. For 2024, the maximum amount an employer can choose to reimburse through a QSEHRA is $6,150 for a single employee’s coverage and $12,450 for family coverage. The employer decides the maximum benefit amount within this scope.

NOTE: If the QSEHRA is designed to only reimburse individual health plans (and no other medical expenses), it is compatible with health savings accounts.

Need Help Deciding Which Plan Is Right for Your Business?

The team at CHR can walk you through these benefit options and help you evaluate which may be a good fit for your small business. Contact us for a consultation.

Employee Retention Credit

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Have you or your CPA looked into your eligibility?

Read more