Credit unions that meet the necessary criteria can claim the employee retention credit (ERC) for wages paid in 2021. However, they are ineligible for such claims for wages paid in 2020, as outlined in an IRS Chief Counsel Advice (CCA 202333001).[1]

The memorandum points out that the ERC, as detailed in the CARES Act, was not applicable to entities acting as instrumentalities of the US Government.

Section 2301(a) of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), Pub. L. No. 116-136, 134 Stat. 281 (March 27, 2020), allowed a credit (“employee retention credit”) against applicable employment taxes, as defined by section 2301(c)(1) of the CARES Act, for eligible employers, defined by section 2301(c)(2) of the CARES Act, that pay qualified wages, including certain health plan expenses, to some or all employees after March 12, 2020 and before January 1, 2021. However, section 2301(f) of the CARES Act provided that “[t]his credit shall not apply to the Government of the United States, the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing.” (emphasis added). Section 206 of the Relief Act made retroactive amendments to section 2301 of the CARES Act but did not amend section 2301(f) for wages paid after March 12, 2020, and before January 1, 2021.[2]

Upon reviewing the legislation governing the establishment of credit unions, the memo determines that these unions are, in fact, instrumentalities of the US Government.

We conclude that federal credit unions are instrumentalities of the United States government under the factors enumerated in Rev. Rul. 57-128. In particular, federal credit unions are created by federal statute. They further governmental purposes by promoting the economic health of underserved populations. They perform governmental functions in that they act as fiscal agents and as depositories of public money, and they perform such services as the Secretary of the Treasury may require in connection with the collection of taxes and other obligations as well as lending, borrowing, and repayment of money by government. These functions are performed on behalf of the United States.

Further, control and supervision of federal credit unions is vested in public authority. The Court of Appeals for the Sixth Circuit observed to this end the “sweeping regulatory supervision” to which federal credit unions are subject, such as their scope and purpose being defined by federal law, their organizing documents being subject to investigation and approval by the National Credit Union Administration Board, and that the National Credit Union Administration Board has the power to suspend or revoke their charters or place them into involuntary liquidation.

This holding conforms to previous rulings that federal credit unions are instrumentalities of the United States government. See Rev. Rul. 89-94, 1989-2 C.B. 233; Rev. Rul. 69-283, 1969-1 C.B. 156; Rev. Rul. 60-169, 1960-1 C.B. 621, (obsoleted by Rev. Rul. 89-94); Rev. Rul. 55-133, 1955-1 C.B. 138 (superseded by Rev. Rul. 60-169); Office Decision, 1937-1 C.B. 428; Notice 2005-58, 2005-33 I.R.B. 295.[3]

The memorandum determines that this classification prevents credit unions from claiming the employee retention credit for wages disbursed in 2020.

In light of the foregoing, for wages paid after March 12, 2020, and before January 1, 2021, federal credit unions may not claim the employee retention credit. Section 2301(f) of the CARES Act, as amended by section 206 of the Relief Act, prohibits instrumentalities of the United States government from claiming such credit.

In late 2020, Congress amended and extended the ERC. This amendment altered the restrictions concerning government instrumentalities for 2021 ERC claims. Specifically, it excluded entities defined under IRC §501(c)(1) that enjoy tax exemptions as per IRC §501(a). This legislative change was not made retroactive for 2020 claims, but did apply to the third and fourth quarter version of the credit added by the American Rescue Plan Act.

Section 2301 of the CARES Act was amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“Relief Act”), which was enacted as Division EE of the Consolidated Appropriations Act, 2021, Pub. L. No. 116-260, 134 Stat. 1182 (December 27, 2020). Section 207 of the Relief Act amended section 2301(m) of the CARES Act to extend the application of the employee retention credit to qualified wages paid before July 1, 2021. It also amended section 2301(f) of the CARES Act. As amended, section 2301(f)(1) of the CARES Act provided that the “credit shall not apply to the Government of the United States, the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing.” However, section 2301(f)(2)(A) of the CARES Act, as amended by section 207(d)(3)(A) of the Relief Act, provided that paragraph (1) shall not apply to “any organization described in section 501(c)(1) of the Internal Revenue Code of 1986 and exempt from tax under section 501(a) of such Code . . . ” Section 207(k) of the Relief Act provided that this amendment applied to calendar quarters beginning after December 31, 2020.

Section 9651 of the American Rescue Plan Act of 2021 (“ARP”), Pub. L. No. 117-2, 135 Stat. 4 (March 11, 2021) added section 3134 to the Internal Revenue Code (“Code”) which provided an employee retention credit for qualified wages paid after June 30, 2021, and before January 1, 2022. However, section 80604 of the Infrastructure Investment and Jobs Act, Pub. L. No. 117-58, 135 Stat. 429 (November 15, 2021), amended section 3134(n) of the Code to provide that the employee retention credit under section 3134 of the Code applied only to wages paid after June 30, 2021, and before October 1, 2021 (or, in the case of wages paid by an eligible employer which is a recovery startup business, January 1, 2022). Section 3134(f)(1) of the Code provided that no employee retention credit shall apply to the Government of the United States, the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing. However, section 3134(f)(2)(A) provided that this limitation “shall not apply to any organization described in section 501(c)(1) and exempt from tax under section 501(a).”[4]

Given that credit unions are covered by IRC §501(c)(1) and exempt from tax under IRC §501(a), the memorandum concludes they are eligible for the credit in 2021. This includes potential qualification as a recovery startup business for Q3 and Q4 of 2021, provided other requirements are met.

For wages paid after December 31, 2020, and before July 1, 2021, federal credit unions may claim the employee retention credit. Although section 2301(f)(1) of the CARES Act, as amended by section 207 of the Relief Act, prohibits instrumentalities of the United States government from claiming the employee retention credit, section 2301(f)(2) of the CARES Act, as amended by the section 207 of the Relief Act, specifies that this prohibition does not apply to organizations described in section 501(c)(1) of the Code and exempt from tax under section 501(a) of the Code. Federal credit unions are such organizations.

For wages paid after June 30, 2021, and before October 1, 2021 (or in the case of wages paid by a federal credit union which is a recovery startup business, January 1, 2022), federal credit unions may claim the employee retention credit. Although section 3134(f)(1) of the Code prohibits instrumentalities of the United States government from claiming the employee retention credit, section 3134(f)(2) specifies that this prohibition does not apply to organizations described in section 501(c)(1) of the Code and exempt from tax under section 501(a) of the Code. Federal credit unions are such organizations.[5]

[1] CCA 202333001, August 18, 2023, https://www.irs.gov/pub/irs-wd/202333001.pdf (retrieved August 19, 2023)

[2] CCA 202333001, August 18, 2023

[3] CCA 202333001, August 18, 2023

[4] CCA 202333001, August 18, 2023

[5] CCA 202333001, August 18, 2023