On May 28, 2026, a federal judge in Washington State issued an important ruling for businesses that claimed the Employee Retention Credit during the COVID-19 pandemic. In short, the court allowed Tri-State Memorial Hospital’s lawsuit against the federal government to move forward, rejecting the government’s attempt to have the case thrown out. Here is what you need to know about this decision and why it matters.
What Did Tri-State Memorial Hospital Claim?
Tri-State Memorial Hospital is a healthcare facility in Washington State. The hospital argued that it qualified for the ERC because government orders forced it to partially suspend its operations during the first three quarters of 2021.
Specifically, Washington’s Governor issued Proclamation 20-24.2, which imposed restrictions on healthcare facilities in response to COVID-19. The hospital claimed that this order required it to implement more than 30 separate requirements, including screening everyone who entered the facility, isolating patients suspected of having COVID-19, cancelling non-urgent surgeries and procedures when capacity limits were exceeded, converting its Minor Care Center into a COVID-19 testing and vaccination clinic, reducing patient beds and limiting the number of patients it could see each day, requiring single-occupancy rooms and specialized cleaning protocols, and diverting staff from their regular duties to handle vaccinations and COVID-19 protocols.
The hospital said these disruptions resulted in approximately $4.6 million less than anticipated in-patient revenue for 2021. It filed for an ERC refund, but the IRS did not process the claim for sixteen months, prompting the hospital to sue. As such, the hospital had to show that they were “partially suspended” to claim the ERC.
What Did the Government Argue?
The government filed a motion to dismiss relying on two main arguments:
First, the government argued that “partial suspension” should be read narrowly. According to the government, it was not enough for a business to show that some portion of its operations was interrupted. Instead, the government contended that the disruption had to amount to a closure of a “significant portion” of operations, going beyond the basic economic impact that every business experienced during the pandemic.
Second, the government argued that the hospital’s disruptions were not truly “due to” the government order. The government claimed that the phrase “due to” requires proximate causation, meaning the government order had to be the direct, independent, and sufficient cause of the suspension. The government suggested that it was actually the COVID-19 virus itself, not the government’s order, that caused the hospital’s disruptions.
How Did the Court Rule?
The court rejected both of the government’s arguments and denied the motion to dismiss.
On the meaning of “partial suspension,” the court looked at the plain language of the statute and ordinary dictionary definitions. It concluded that a “partial suspension” simply means a temporary delay, interruption, or termination of a more-than-nominal portion of an employer’s business. The court refused to read additional requirements that Congress did not include in the statute. While the court acknowledged IRS guidance suggesting a 10 percent threshold as one way to demonstrate eligibility, it held that failing to meet that threshold does not automatically disqualify an employer. The threshold is a sufficient condition to prove eligibility, but it is not a necessary one.
On the meaning of “due to,” the court found that both parties agreed the phrase means “because of.” Relying on Supreme Court precedent, the court held that “because of” requires only but-for causation, not proximate causation. In practical terms, this means the hospital only needed to show that but for the government order, its operations would not have been partially suspended. It did not need to prove that the government order was the sole or primary cause.
Having established these legal standards, the court then found that the hospital alleged enough facts to keep its case alive. The hospital described specific ways in which the Proclamation 20-24.2 forced it to change its operations, cancel procedures, divert resources, and limit patient access. The court found these allegations plausible and sufficient to survive a motion to dismiss.
Why Does This Matter?
Employers have been grappling with the confusing, and even conflicting, criteria set forth in Notice 2021-20 for what constitutes a “partial suspension.” This ruling provides much needed clarity for employers who were “partially suspended” during the COVID-19 pandemic. For ERC claimants, the decision provides a clear test of what it means to be “partially suspended.” The court’s plain-language approach sets a lower bar than the government advocated for. Specifically, businesses do not need to show that a significant portion of their operations closed entirely. They need to show that a more-than-nominal portion of their business was temporarily interrupted or delayed because of a government order.
It is important to note that this ruling does not mean the hospital has won its case. It only means the case will proceed past the initial pleading stage. The hospital will still need to prove its claims with evidence. But the court’s interpretation of the statute gives the hospital, and similarly situated employers, a viable path forward.
Key Takeaways
The ERC’s Suspension Test requires only that a portion of a business’s operations was temporarily delayed, interrupted, or terminated – not that a significant portion was completely shut down. Further, a suspension is “due to” a government order if the disruption would not have occurred but for the government order. Finally, this decision establishes that IRS guidance, including the 10 percent threshold in Notice 2021-20, does not create mandatory requirements, but instead provides methods of demonstrating eligibility.
