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November 12, 2021

Infrastructure bill will retroactively repeal fourth-quarter 2021 employee retention credits

The Infrastructure Investment and Jobs Act (HR 3684) has been passed by the House and Senate and sent to President Biden for his signature. Among its many provisions, the bill will repeal employee retention credits (ERCs) as of September 30, 2021. The repeal of ERCs will effectively cut the extension under the American Rescue Plan Act of 2021 (ARPA) in half by retroactively eliminating ERCs for the fourth quarter of 2021. Thus, wages paid after September 30, 2021, are not eligible for the credit.


The ARPA added Section 3134 to the Internal Revenue Code (IRC), codifying and extending the ERC as created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and later enhanced and extended by the Consolidated Appropriations Act, 2021 (CAA).

Originally, the CARES Act allowed eligible employers to claim ERCs against applicable employment taxes attributable to qualified wages paid after March 12, 2020 and before January 1, 2021. The CAA later extended the availability of the ERC for qualified wages paid after December 31, 2020 and before July 1, 2021, and the ARPA extended the period again to apply for wages paid before January 1, 2022 (See Tax Alerts 2021-0513, 2021-0724 and 2021-1489).

For 2021, an employer was eligible for the ERC for any quarter in which it experienced a full or partial suspension of operations or its gross receipts were less than 80% of its gross receipts for the same calendar quarter in 2019. Alternatively, for each of the 2021 quarters, employers could elect to compare gross receipts for the prior quarter to the corresponding calendar quarter in 2019. The maximum per-employee qualified wages that could be taken into account increased to $10,000 per quarter. Under the ERC as originally enacted, the credit was 50% of qualified wages, up to $10,000 in wages for all quarters in 2020. For 2021, the ERC was 70% of qualified wages that an eligible employer paid in a calendar quarter (for a maximum total credit of $28,000 for 2021).

An employer that paid qualified wages during a calendar quarter could reduce its otherwise due federal employment tax deposits (including withheld income taxes, and taxes under the Federal Insurance Contributions Act and the Railroad Retirement Tax Act) in anticipation of claiming the ERC by the amount of the anticipated credit. In accordance with Section 2301(k) of the CARES Act, Notice 2020-22 waives IRC Section 6656 failure-to-deposit-penalties for employers that reduced their employment tax deposits by the dollar amount of their anticipated ERC, provided they had not claimed an advance payment of the credit on Form 7200, Advance Payment of Employer Credits Due to COVID-19. Following the extension of the ERC by the CAA and the ARPA, Notice 2021-24 extended this penalty relief through the end of 2021, in accordance with Section 2301(k) of the CARES Act and IRC Section 3134(k).


While the repeal of the fourth-quarter ERC is a disappointment to eligible employers with continuing cash flow issues, the retroactive application is particularly concerning for employers that already reduced their employment tax deposits in the fourth quarter in anticipation of claiming the ERC. The penalty relief provided by Notice 2021-24 seems like it should apply until President Biden signs HR 3684; however, it is not clear that this guidance would allow any fourth-quarter penalty protections after the bill is signed. The relief is premised on the employer having paid qualified wages during the calendar quarter, which retroactively will not be the case for the fourth quarter following enactment. Any subsequent failures to deposit also would not appear to be protected, as the short deposit will not be "in anticipation of the credits" as required by the Notice.

The retroactive repeal also poses challenges for the IRS, which is unlikely to have the capacity to amend the Form 941 in time for fourth-quarter filings and cannot grant credits that have been rescinded by statute. As a result, the IRS might extend any transition relief it is authorized to grant under these unusual circumstances, which may include waiving deposit penalties where the failure was due to reasonable reliance on IRC Section 3134(k) and Notice 2021-24.


Contact Information
For additional information concerning this Alert, please contact:
Compensation and Benefits Group
   • Christa Bierma (
   • Stephen Lagarde (
   • Rachael Walker (
   • Bing Luke (
Workforce Tax Services - Employment Tax Advisory Services
   • Kristie Lowery (
   • Kenneth Hausser (
   • Debera Salam (
National Tax – Accounting Periods, Methods, and Credits
   • Kenneth Beck (
   • Rayth Myers (