How Credit Unions Qualify for the Employee Retention Credit (ERC Credit)

The employee retention credit (ERC, also known as the ERC credit) has proven to be a lucrative benefit for many qualified businesses. State and federal credit unions may be eligible, depending on whether they qualify based on a substantial decline in gross receipts, or have experienced a partial suspension of operations.

Note that this guidance comes well after the enactment of the ERC credit and is based on a continuously evolving understanding of the credit, the nuances of the credit union industry, and an understanding of IRS ERC credit claim substantiation and documentation requirements.

What Is the ERC Credit?

The ERC credit entitles eligible employers to a refundable payroll tax credit for the periods March 13–December 31, 2020, and January 1–September 30, 2021.

State credit unions may be eligible for the ERC credit for the period March 13, 2020, through September 30, 2021, whereas federal credit unions may be eligible for the period January 1, 2021, through September 30, 2021.

The credit can be claimed on an employer’s Form 941. For employers that didn’t claim the ERC credit on their original Form 941, it can be claimed on an amended form, Form 941-X.

The statute of limitations for filing Form 941-X to claim a refund is three years from the date the original return was filed or two years from the date the taxes were paid.

Payroll tax returns for a period ending with or within a calendar year filed before April 15 of the following year are treated as filed on April 15 of that following calendar year.

For a credit union to qualify, they must have experienced one of the following:

  • Reduction of revenue of at least 50% for a single quarter in 2020 or at least 20% reduction for a single quarter in 2021, as compared with the equivalent quarter in 2019, or
  • Full or partial suspension of operations due to governmental order due to COVID-19 limiting commerce, travel, and group meetings.

ERC Credit Employee Requirements

The credit is primarily meant to help small and midsized businesses. Eligibility is based on the average number of full-time employees in the 2019 calendar year. For 2020 quarters, businesses with 100 or fewer full-time employees in 2019 can apply the credit to qualified wages including certain health plan expenses for all employees.

For larger employers, the credit only applies to qualified expenses paid to employees during the time they weren’t providing services. For 2021 quarters, the small employer threshold increased to 500 or fewer full-time employees in 2019.

Amount of Credit

For 2020 quarters, the credit is equal to 50% of these expenses paid to an employee after March 12, 2020, in each qualifying calendar quarter. Qualified expenses up to a total of $10,000 for all quarters per employee are eligible.

For 2021, the credit is equal to 70% of qualified expenses paid to an employee in each qualifying quarter, up to a total of $10,000 per quarter per employee.

ERC Credit for Credit Unions

From March 13, 2020, through September 30, 2021, credit unions were considered essential businesses, and for the most part, continued operations in some capacity. Credit unions, therefore, were unlikely to meet eligibility requirements based on a substantial reduction in gross receipts or operations fully suspended by government order.

However, credit unions may meet the criteria for a partial suspension.

The IRS issued Notice 2021-20 to provide guidance on the ERC credit, including additional information on what constitutes a partial suspension. According to the notice, an employer had a partial suspension if either of the following two circumstances occurred:

  • More than a nominal portion of business operations are suspended, or
  • Government order had a more than nominal effect on operations

For ERC credit purposes, a credit union may be considered to have a partial suspension of operations if, under the facts and circumstances, more than a nominal portion of its business operations are suspended by a governmental order. A portion of a business would be considered more than nominal if during the same calendar quarter in 2019 either of these criteria is met:

  • Gross receipts from the suspended nonessential portion of the business aren’t less than 10% of total gross receipts, determined using those of the same calendar quarter in 2019
  • Hours of service performed by employees in that portion of the business that were suspended aren’t less than 10% of total employee hours, determined using the number of hours of service performed by employees in the same calendar quarter in 2019

Partial Suspension FAQs

The notice contained several questions and answers that provide additional information on partial suspensions.

If a Government Order Suspends Nonessential Business Operations, but Not Essential Ones, Would That Be a Full or Partial Suspension?

An essential business isn’t considered to have had any suspension of operations if all employer operations are allowed to continue. However, more than a nominal portion of operations being suspended would be considered a partial suspension.

For example, an essential business may have a partial suspension if a government order caused the following:

  • Required a business to close for a period during normal working hours
  • Required a credit union to close its lobby
  • Prevented personal bankers who had frequently met with members in-person from doing so
  • Social distancing limitations on member recruitment meetings

An essential business didn’t experience a partial suspension if the following occurred:

  • Voluntarily closing a location for the health and safety of members and employees
  • Increased business expenses due to COVID-19
  • Imposition of mask mandates on members or employees
  • Stickers on the floor directing foot traffic of members or employees

How Do Telework Operations Affect Suspension Status?

Unless the closure of the workplace causes the employer to suspend business operations for certain purposes but not others, telework wouldn’t count as part of a suspension.

The credit union should look at the entirety of facts and circumstances to determine whether telework allowed operations to continue normally.

What Factors Are Considered for Qualifying as Continued Operations?

The notice listed the following factors while also stating that additional factors could apply:

Employer Telework Capabilities

The employer has adequate IT and other support to continue operations from another location.

Employee Work Portability

How much work can be performed remotely?

Need for Employee’s Physical Presence in the Workspace

How does the physical workspace factor into operations? This could range from critical and necessary, beneficial but not necessary, to mere convenience.

Transitioning to Telework Operations

An adjustment period would be expected if an employer’s operations didn’t previously allow for telework, but that doesn’t necessarily cause a partial suspension. A significant delay beyond two weeks while transitioning to telework could be considered a partial suspension.

Modifications That Might Not Qualify

Modifying business operations per government order doesn’t indicate a partial suspension in and of itself unless those modifications had more than a nominal effect on the employer’s business operations.

When Would Limited Business Operations Be Considered Partial Suspension?

If a governmental order requires an employer to close its workplace, an employer’s operations would be considered partially suspended if more than a nominal degree of ceased business operations couldn’t be performed in a comparable capacity otherwise.

What Determines How a Government Ordered Modification Affects Business Operations?

The modifications considered here are those required by a governmental order as a condition to reopen a physical space for business or to serve the public. These modifications include:

  • Limiting occupancy to provide social distancing
  • Requiring services to only be performed on an appointment basis (if walk-in services had previously been offered)
  • Changing the format of service for members

Ordered modifications like these don’t necessarily indicate a partial suspension of operations. Again, they must have had a more than nominal impact.

Can Reduced Hours of Operation Qualify as a Partial Suspension?

Yes. An employer that reduces its operating hours due to a governmental order is considered to have partially suspended its operations.

Can Operational Suspension in Some, but Not All, Business Locations Qualify as Partial Suspension?

Yes. These employers are considered to have a partial suspension.

How Credit Unions Can Start the ERC Credit Application Process

Credit unions considering applying for the ERC credit should carefully document their circumstances to demonstrate a significant decline in gross receipts or the impact of a governmental order that more than nominally affected operations.

Determining partial suspension can be subjective, so gathering as much documentation as possible, and contemporaneous to the filing of a claim will be helpful to an organization, should it come under the scrutiny of the IRS.

We’re Here to Help

Explore more resources around the ERC credit to discover if it’s a good option for your organization. If you have questions about applying for the ERC credit or more information about Tax Credits & Incentives, reach out to your Moss Adams professional.

Contact Us with Questions

Enter security code:
 Security code