Infrastructure Bill Would Cut the Employee Retention Tax Credit Short

The legislation also eases requirements for pension funding

Stephen Miller, CEBS By Stephen Miller, CEBS August 17, 2021

A $1.2 trillion infrastructure bill passed by the U.S. Senate last week includes a provision for an earlier end to the COVID-19-related Employee Retention Tax Credit (ERTC). The legislation now moves to the U.S. House of Representatives following its 69-30 passage by the Senate on Aug. 10.

Ending the ERTC

The bill would move the deadline for the ERTC to Sept. 30 instead of Dec. 31, 2021, ending eligible employers' ability to claim the credit a quarter early. "This would effectively reduce the maximum credit available to employers from $28,000 to $21,000," according to the Society for Human Resource Management's legislative analysis.

Limiting access to the credit is one way the bill raises revenue and offsets spending increases.

Startup recovery businesses, which include any company that began operations after Feb. 15, 2020, and has average annual gross receipts of $1 million or less, would remain eligible for the credit through the end of 2021, under the bill.

Reviewing the Basics: What Is the ERTC?

The Employee Retention Tax Credit, also referred to as the Employee Retention Credit, was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 to encourage businesses to keep employees on their payroll. Subsequent legislation amended and extended the credit and the availability of certain advance credit payments through the end of 2021.

Qualifying employers—such as those forced to suspend operations due to the COVID-19 outbreak and those that experienced a significant decline in gross receipts—can claim up to 70 percent ($7,000) of the first $10,000 in pay and health benefits in each qualifying quarter.

The American Rescue Plan Act (ARPA), enacted March 2021, allows small employers that received a Paycheck Protection Program loan to also claim the ERTC.

[Related SHRM article: There's Still Time to Claim the Employee Retention Tax Credit]

Political Pressures

Ending the ERTC early would save the federal government more than $8 billion, which is "included in the funding arithmetic for the legislation," said Michael Trabold, director of compliance at payroll and HR services firm Paychex. "The relatively low take-up rate of the credit was noted as a justification," he added. "However, as more businesses became aware of the credit and acquainted with its specifics, especially how beneficial it could be for businesses that still may be struggling financially, interest in it appears to have been recently increasing."

Enactment of the measure, while widely expected, is not certain. Trabold noted, for instance, that "House Speaker [Nancy] Pelosi continues to indicate that she does not intend to take up the bipartisan infrastructure bill until the Senate passes the $3.5 trillion and more politically controversial spending bill. Thus, depending how negotiations in Congress evolve, ultimate enactment of the infrastructure bill and associated early discontinuation of the ERTC may extend beyond the Sept. 30 end date included in the infrastructure bill."

He added, "It is not currently clear how this would impact the application of the credit, particularly as the [more than] $8 billion targeted from the early end to the credit is a 'pay-for' for the overall bill."

Brent Johnson, co-founder and CEO of Clarus R+D, a maker of tax credit software, noted that "although the eligibility period for the credit would sunset on Oct. 1, 2021, if the infrastructure bill becomes law, the time frame for making a claim under the program would continue for at least three years thereafter."

Johnson pointed out that "although the infrastructure bill looks like it will end this program early, there are other [legislative] proposals that would significantly enhance the Work Opportunity Tax Credit program in ways that would encourage employers to more aggressively hire from certain labor pools. More clarity on these proposals is likely to come out this fall."

Pension Funding Eased Further

The infrastructure bill would also lower how much employers must contribute to single-employer pension plans by extending the interest rate stabilization period.

In brief, the minimum required contribution for a plan year is based on the interest rates used by the plan actuary to determine the present value of expected future benefit payments. By "smoothing," or averaging, interest rates over longer periods, the rate used to determine minimum funding can be reduced, giving plan sponsors more flexibility. The risk is that plans will end up with insufficient assets to pay pensioners, putting pressure on the Pension Benefit Guaranty Corp., which insures private-sector pension plans.

Congress last smoothed pension interest rates for plan sponsors under the American Rescue Plan Act in March.

"ARPA provided substantial funding relief for plan sponsors over the next decade," said Brian Donohue, a partner with retirement plan advisory firm October Three.

"Additional relief in the infrastructure bill that passed the Senate would reduce required contributions for plans beginning in 2031," Donohue noted. However, he pointed out, "given the magnitude of the ARPA relief and the fact that the new relief won't have any effect before 2031, this is minor news for most pension sponsors."



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