The ERTC provisions of the CARES Act provide significant economics for employers who are ineligible or unable to participate in the PPP.
As Congress struggled with trying to help an economy hit by COVID-19, it passed a few bills hoping to help businesses and individuals. One of these, the CARES Act, was passed in March and had several provisions intended to help employers keep their employees on payroll.
The most familiar provision was the Paycheck Protection Program (PPP) – a forgivable loan available for small businesses with less than 500 employees. The Employee Retention Tax Credit (ERTC) provisions of the CARES Act provide significant economics for employers who are ineligible or unable to participate in the PPP. If this is all new information to you, don’t worry – you aren’t alone. The ERTC hasn’t gotten a lot of press because the PPP has been under intense scrutiny as a result of the forgivable nature of the loans and limited availability of funds.
The ERTC, however, is good news for a lot of organizations in healthcare industry – even the single-hospital and rural health systems – which were too large of an employer to qualify for a PPP loan. It was enacted to help businesses who remained open and paid employees, but whose revenue decreased drastically due to the impact of COVID-19. The impact came in different ways: through suspension of elective surgeries and procedures or simply due to the drop in hospital visits due to stay-at-home orders. And with this drop in revenue, hospitals struggled and tried to find creative ways to keep employees on payroll while handling the uncertainty of the future.
This left hospitals with a couple of options:
- They could either keep paying their staff to stand around and do nothing,
- They could furlough people until revenue began to increase, or
- They could shuffle staff around and take the people who were, for instance, dedicated to the cost center of the department that is the elective surgery or procedure, and redeploy them to screen incoming patients for COVID19.
Choosing to go the third route, as many did, meant taking a nurse who might make $35/hr and having them do a job that, under any other circumstance, would have been done for far less. That cost differential allows for analysis to be done in terms of seeing if a hospital was providing services, but providing some of those services at a higher cost to the health system than they usually would be as a result of COVID-19.
According to Brent Johnson and Terracina Maxwell of Clarus Solutions, most hospitals and health systems in the country can benefit from the Employee Retention Tax Credit no matter which options they chose as each creates potentially eligible wages for purposes of the ERTC.
“What we’ve found in the marketplace, is that really large organizations have the financial resources to navigate the ERTC and relationships with people or organizations that kept them informed about this opportunity, allowing them to take advantage of it from the start,” says Johnson, CEO of Clarus Solutions. “We found that it’s the hospital in rural America that only has around 1,000 to 3,000 employees that didn’t even know it was out there for them – and they needed our help.”
Ensuring eligibility
To take advantage of the ERTC opportunity, one of the first thresholds that has to be crossed is to ensure that the organization is an eligible employer. This requires either a 50% decrease in gross receipts or a suspension of services due to a government order.
“We’ve run into two situations where we were in contract with a hospital and they ended up not qualifying because they made the choice to suspend elective procedures, not because of a governor’s order, but because of administrative guidance from a regulatory authority like the American Hospital Association (AHA) or Centers for Disease Control (CDC), and not from a government authority,” Brent says.
And while making that choice was the right thing to do, says Maxwell, COO of Clarus Solutions, unfortunately, “the law is clear on that point – the suspension of services has to be because of a government order.”
Any hospital system that has operations in a state that was impacted by a governor’s order to suspend any part of their operations will likely qualify. This includes organizations that have operations in two states, and at least one state in which they do business was affected by a governor’s order.
Of course, even that isn’t as straightforward as it sounds.
One hospital system didn’t qualify for the tax credit because “it was voluntary, they voluntarily restricted services,” says Maxwell. The governor’s order was written in such a way that it made shutting down a recommendation and not a direct and clear order.
Worth the hassle
The whole situation is complicated and complex and, well, a huge headache. But Johnson and Maxwell are convinced that it’s worth it to figure out.
“We’ve completed four of these kinds of analyses so far and the average tax credits work out to be about $1,200 per employee,” said Brent. “So we’re telling people they can likely count on $1,000. We had one come in lower than that, but the others have all been that or higher.” The difference in credit amounts relate to the length of time for the government order and also the decisions made by the hospital system as it relates to employee pay.
Here’s some quick, back-of-the-napkin math that might paint a better picture: At $1,000 per employee, that’s $700,000 to $1 million for a 700 to 1,000 employee hospital.
“The ones we’ve worked with so far have all been over a thousand employees and most of them have been about 2,500 to 3,000 employees,” says Brent. “One of which received a credit of $5.1 million.”
Getting it done
The numbers are nice, but how arduous is the process for the hospital or health system?
“It’s not terribly hard. What I’m finding is, that if the CFO is on board, the process moves a lot easier because they’re looking for the dollars to help their organization,” says Maxwell. Typically, Clarus Solutions works with the head of HR and the CFO in order to get all the information they need – which includes payroll information and an understanding of what the organization did when the pandemic hit.
Ultimately the wages that qualify are those paid to employees who were not able to perform their jobs due to COVID-19. “Did you re-deploy people, did you furlough people? Tell me your story of what happened when the suspension was put in place,” Johnson says. “It’s not terribly difficult.” The analysis is then done on payroll and other statistics, including work RVUs. This information helps give a picture to the government order on both employees and doctors.
As of the time of press time, the program is set to run through the end of the year. Most hospital systems are likely to see their biggest tax credit be for the second quarter of 2020, says Maxwell.
“That’s when they were really restricted – March and then to April and May, there were serious restrictions. So that’s when the tax credit really adds up,” Maxwell says. “You claim it on your 941, so your employment tax filing. It’s actually already past due, but you can go back and amend it to get the money and it’s refundable, so the IRS will cut a check.”
“You can amend your 941 for three years from the date of filing. Your 941 would have been filed in July for second quarter and you have up to three years to amend it and claim the credit. Now, the reason to file it now, of course, is you get the cash when you make the claim,” Maxwell says. “So for these hospitals that are strapped for cash because of all that happened this year, this is a tool given by Congress to help get cash pretty quickly.”
For more information, contact Brent Johnson at bjohnson@claruscredits.com, or Terracina Maxwell at tmaxwell@claruscredits.com.