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    Time Theft: What it Is and How to Stop It

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  • Does Your 401(k) Plan Allow Loans?

    In the spectrum of employee benefits, 401(k) savings plans are one of the most widely used ways to help employees save for retirement.  401(k) plans (see: different types of 401k plans) are meant to be long term savings vehicles, and the IRS has many rules in place for discouraging use of this money for short term needs.  But it’s no secret in today’s economy that employees are turning to their 401(k) accounts for some relief from mounting debt.  There are limited circumstances where an employee must show a financial hardship in order to access their money sooner than retirement.  But taking a hardship withdrawal also means that the employee may have to pay a 10% early withdrawal tax penalty if they are under age 59-1/2, and the employee is suspended from contributing any more money for another six months.  This should be the absolute last resort because it really hinders the goal of saving enough money for retirement.

    But what about loans?  What if an employee is in a bind, and wants to borrow money from their 401(k)?  Although not the ideal place to borrow money, 401(k) loans aren’t as damaging to the employee’s retirement nest egg as hardship withdrawals because:

    1. There are no income taxes on the loan, as long as they pay the money back.
    2. There is no 10% early withdrawal penalty, as long as they pay the money back.
    3. Unless your plan says otherwise, there is no suspension of contributions.  The employee can continue to make salary deferrals and contribute to their 401(k) account at the same time they are repaying their loan.
    4. The process for obtaining a 401(k) loan is quicker and the cost is cheaper than applying for a bank loan.
    5. The employee is paying themselves back with interest.
    6. Normally the employee can borrow up to 50% of their vested account balance, up to $50,000.

    When an employee takes a loan on their 401(k) money, they essentially are paying themselves back at an interest rate that’s outlined in the plan document.  A common interest rate used is the Wall Street Journal Prime Rate or Prime + 1% or 2%.  With the Prime Rate being so low these days (3.25% as of right now), 401(k) loans are a popular choice among employees to access their money.

    There are definitely some drawbacks and limitations that employees need to be made aware of before taking a loan:

    1. Taking a loan reduces the money in your account.  Therefore this reduces the ability for your account balance to grow, and this loan money will miss out on investment gains.
    2. If your employment terminates before you are able to pay back the entire loan, the remainder of the unpaid loan does become taxable, and subject to the 10% penalty if under age 59-1/2 .
    3. The maximum time to repay a loan is five years.  If you are borrowing to purchase a home, the term loan can be extended.
    4. If you are borrowing to purchase a home, the interest you pay is not tax deductible.
    5. The loan is repaid with after-tax payroll deductions.  So your take home pay will be reduced by the actual amount of your loan repayment.

    If you don’t currently allow for loans and are considering adding them to your 401(k) plan, there may be additional expenses and will be additional administration for each loan request.  The administration steps go something like this:

    • Step 1:  The employee completes a loan request form.  This can either be a piece of paper, or online if your 401(k) provider has a website that allows for this.
    • Step 2:  The plan administrator normally approves the request before submitting it to the 401(k) provider.  I can’t speak for all 401(k) providers, but nowadays, the loan processing time should take less than a week.
    • Step 3:  Upon receiving the loan request, the 401(k) provider will create a loan amortization schedule and send the employee a check (or wire the money) along with their repayment schedule.  Sometimes the employee is required to sign a separate promissory note, sometimes the employee agrees to the terms of the loan simply by endorsing the back of the check.
    • Step 4:  The 401(k) provider will also send a copy of the loan repayment schedule to the plan administrator.
    • Step 5:  This employee’s loan repayment will need to be set up as an after-tax deduction in your payroll system.   If your payroll software has the ability to track a “lifetime limit” or “goal, the deduction will automatically turn off once it has reached the limit.
    • Step 6:  The loan repayment will need to be remitted to the 401(k) provider each pay, along with salary deferrals and company contributions.  It’s very important to make sure these repayments get submitted, or else the loan could go into default.

    Be sure to keep all documentation for each employee’s loan request, as you will need this if/when your 401(k) plan is audited.

    It’s important for both the plan administrator and employees to be aware of the caveats of 401(k) loans.  Although borrowing from a 401(k) should not be encouraged, it could be a better alternative for the employee than an early withdrawal.

    There are a ton of details involved in 401k withholding, are you prepared to deal with that while running payroll? Don’t worry, our easy payroll software has you covered. We automatically update our software for policy changes, so that you don’t have to stress over it. Try it for free today!

    W-2 Health Cost Reporting Delayed One Year

    Good news for employers and payroll administrators!  According to an IRS News Release posted earlier this week, employers will have an additional year to comply with the Affordable Care Act requirement to show total healthcare costs on the W-2.  Originally, this requirement was to begin with 2011 W-2’s, but now the employer has the option to either begin reporting in 2011, or can wait until 2012 with no penalties.  The IRS has issued a draft 2011 Form W-2 showing how the W-2 will look for next year’s wages.  This will give employers and payroll providers more time to ensure that payroll systems are set up properly to comply with this requirement.

    The IRS expects to issue further guidance on this reporting requirement before the end of the year for employers who do choose to report in 2011.

    Reminder: EEO-1 Reports Due September 30

    As a reminder, EEO-1 Reports are due September 30th every year for private employers with at least 100 employees, or federal contractors with 50 employees.  Employers will need to select a pay period between July and September and report demographic information for active employees in that pay period.  Information includes total number of employees broken down by gender, ethnicity, and job class.  If you use HR software to keep track of these employee statistics, you most likely have a report that you can run to give you these totals.

    Reporting is done online at the EEO-1 Survey Website.

    DOL Explains how Target Date Funds Work

    If you offer a 401(k) plan in your employee benefits package, you may have the option of including certain mutual funds called target date funds in your list of investment choices.  A target date fund is a mutual fund that contains a mixture of high risk and low risk assets such as stocks and bonds.  Target date funds are geared for those who want to save towards a certain date in the future, such as retirement.  If the target date is far into the future, the money would be invested in higher risk investments that have the potential for a greater return. As the target date gets closer, the proportion of high risk and low risk investments are managed to change over time so that by a certain date, the money is invested in more conservative assets to lessen the risk of losing money.  Like all mutual funds, however, there is no guarantee that you won’t lose money.

    The advantages of investing money in a target date fund is that the asset mix automatically changes over time, which makes it convenient for the investor by taking a more hands-off approach and letting the investment changes happen automatically.  But critics of target date funds are concerned that a one-size-fits-all approach may not work for everyone.  It’s important for anyone who invests money in mutual funds, especially 401(k) plan participants, to understand that not all target date funds are alike, and each company that offers target date funds can take a different approach to managing the money in that fund.

    Earlier this year, the DOL and SEC issued a four page bulletin called Investor Bulletin:  Target Date Retirement Funds to educate investors about target date funds.  It explains what target date funds are, and how different funds with the same target date can have very different objectives for managing money up to retirement (where the asset mix will have little or no changes after the target date), verses through retirement (where the asset mix continues to change for many years after the target date).

    Note the last page of the bulletin contains links to further information from the DOL and SEC about saving for retirement, investing basics, mutual fund information, and a guide to 401(k) plan fees.  This document can be distributed to plan participants or posted on your website.

    No More Advance Earned Income Credit in 2011

    As part of government budget cuts for next year, qualified employees will no longer have the option to receive their Earned Income Tax Credit (EITC) as part of an advance in their paycheck throughout the year.  These low income workers can still take the tax credit as a lump sum at the time that they file their federal income taxes each year, but won’t have the option to spread out the tax credit as a payment in their checks. 

    This elimination is part of H.R. 1586 (the Education, Jobs and Medicaid Assistance Act), which was signed into law by President Obama in August.  The Advance Earned Income Tax Credit (AEITC) program will be terminated effective for all tax years beginning after December 31, 2010.  Government research suggests the program is underutilized, with only 3% of eligible employees taking advantage of the advance program, and 20% of claimants have invalid social security numbers.

    What Do Employers Need To Do?
    Be aware that this credit is ending starting with paychecks dated January 1, 2011 and later.  Confirm that your payroll software will change so that the Advance Earned Income Credit does not calculate on checks next year.  If you have employees who take the AEIC, communicate to them that this option is going away, but they will still be able to take a lump sum credit when they file their federal income taxes.  IRS payroll forms are expected to be changing as well, although they have not be issued yet.  This includes the elimination of Form W-5 and changes to Forms W-2, W-3, 941 and 944.

    DOT Drug Test Standards to Change October 1st

    The Department of Health & Human Services (HHS) and Department of Transportation (DOT) have revised their Mandatory Guidelines for Federal Workplace Drug Testing Programs that will take effect October 1st, 2010.  These revisions pertain to federal workplace drug testing governed by HHS and include the following changes to laboratory analysis of urine specimens.  Note that these changes only apply to urine specimen drug testing, and not hair or saliva.

    1. Lower initial screen and confirmation cutoff levels for cocaine
    2. Lower initial screen and confirmation cutoff levels for amphetamines
    3. Initial screening for 6AM (Acetylmorphine – a heroin-specific metabolite).  Previously heroin was only screened if the initial screening came back positive.
    4. Initial screening for MDMA (Ecstasy).  Previously this was not detected in an initial screen.

    Sometimes these HHS and DOT regulations serve as a guideline for employers with non-DOT drug testing programs.  Various states have rules that reference using DOT guidelines for Non-DOT programs.  Some non-DOT employers choose to follow DOT guidelines even if they are not required.

    Here is a list of states/jurisdictions that reference compliance with HHS and/or DOT regulations (in whole or in part).  Note this list is based on currently available information and is not intended to provide legal advice:

    • Alabama (if employer is receiving state incentive)
    • Alaska (if employer is receiving state incentive)
    • California
    • Connecticut
    • Delaware
    • Florida (if employer is receiving state incentive)
    • Iowa
    • Kansas
    • Kentucky
    • Maryland (if employer is receiving state incentive)
    • Montana
    • North Carolina
    • North Dakota
    • Ohio (if employer is receiving state incentive)
    • Oklahoma
    • Puerto Rico
    • Tennessee (if employer is receiving state incentive)
    • Vermont
    • Virginia (if employer is receiving state incentive)
    • West Virginia
    • Wisconsin
    • Wyoming

    If your company has a non-DOT drug testing program, it is suggested that you seek legal counsel to discuss whether adopting the new drug test limits for your organization is recommended.  If you have a formal drug testing policy in your employee handbook, check to see whether the policy states that the company will follow federal or state regulations.  If you choose to adopt these new standards, your drug testing provider should advise you on any procedural changes, such as updated chain of custody forms.

    For more information see the Substance Abuse and Mental Health Services Administration Website.

    IRS Guidance on OTC Meds for FSAs in 2011

    The IRS has issued official guidance on the ability to purchase over-the-counter (OTC) medicine with an FSA or HSA. To summarize the basics of the rules that will be changing next year, as of January 1, 2011, OTC medicine can only be purchased using an FSA or HSA with a prescription.  This change is part of the healthcare reform laws.

    The IRS has issued Questions and Answers on Over-The-Counter Medicines.  These Q&A’s clarify a few items:

    Non-drug Purchases
    The IRS clarifies that this change will only apply to OTC medicine, and not supplies.  So you can continue to purchase items such as crutches, bandages, and blood sugar test kits with your FSA or HSA without a prescription.

    Copays and Deductibles
    The IRS has confirmed that FSA’s and HSA’s can still be used to pay for out-of-pocket medical insurance expenses, such as co-pays and deductibles.

    Plans With Grace Periods
    Some FSA plans have chosen to offer a 2.5 month grace period at the end of each plan year, to allow employees to use up any leftover money in the first 2.5 months of the following plan year.  The IRS has clarified that even though a plan may have this grace period, OTC medicine costs cannot be reimbursed during this grace period, as the rule starts on January 1, 2011.

    If the plan’s grace period only allows employees to submit expenses in the first months of the following plan year that happened in 2010, then the OTC medicine still qualifies for reimbursement as long as it was purchased on 12/31/10 or before.

    Debit Cards
    Any plan that offers a debit card must have their cards reprogrammed by 1/15/11 so that the cards will not work for OTC medicines.

    DOL Offers Info for Expiring Cobra Subsidies

    Those who involuntarily lost their jobs from September 1, 2008 to May 31, 2010 are eligible (if they meet certain criteria) to pay a lower amount for COBRA coverage, only 35% of the full premium.  The employer will then be reimbursed by the federal government in the form of a payroll tax credit for the remaining 65%.   Individuals are eligible for this subsidy for a maximum period of 15 months.

    In response to those who have 15-month COBRA subsidies expiring or soon to be expired, the Department of Labor has recently issued a fact sheetand new FAQs addressing issues to be aware of when the subsidy period expires.  There has been no recent talk of Congress possibly extending the COBRA subsidy to anyone who involuntarily lost their job after May 31st.  The 15-month subsidy periods have started expiring back in May 2010 and the last group will expire in August of 2011.  After the COBRA subsidy expires, individuals will need to start paying the full COBRA premium instead of 35% for the remainder of the time they have their COBRA coverage.  The maximum period of COBRA in most cases is 18 months, so many will have a three month period that they will need to pay the full premium.

    The DOL’s fact sheet contains tips for those affected by the expiring subsidy, including a warning that plans are not required to send reminder notices that the subsidy period is ending.  Individuals are encouraged to contact their employer if they have questions about their subsidy end dates or full premium amounts.  The fact sheet also emphasizes the importance of paying the full COBRA premium for the remainder of months.  Otherwise, coverage could be cancelled due to nonpayment.

    The DOL also gives suggestions for other places to look for coverage, if the individual has already lost COBRA coverage because of their failure or inability to pay the full COBRA premium amount.

    If you have former employees on COBRA who are currently eligible for the subsidy, be sure to confirm the date each person’s subsidy expires, so that you are collecting the correct amount of full premium.

    Payroll Update: Health Costs Reported on 2011 W-2s

    The other day, I received an email with some propaganda-like information about the impending tax hikes coming in 2011 as a result of the tax cuts that are set to expire this December 31st.  At the end of the email was a rant about how you will be taxed on your health insurance costs next year because of the new W-2 reporting requirement.  I’m not sure how prevalent this belief is, but this is not true! The employee will not be taxed on the employer’s cost of health insurance, and the employee’s tax liability will not change.  As of right now, the only tax on health insurance will be on the high cost “Cadillac plans” starting in 2018.

    As a background, part of the PPACA healthcare reform laws is a new requirement for employers beginning in 2011.  Employers will need to calculate the total cost of providing health insurance for each individual employee, and report this number on the employee’s W-2.  Just because this number is reported on the W-2, it does not mean the employee will be taxed on this money.  The W-2 form contains boxes used for informational purposes.  The IRS has yet to issue specific guidance on where exactly this number needs to be reported, but we suspect it will either be Box 12 or 14, or perhaps the W-2 will be redesigned to accommodate this new number.  Regardless, this new reporting requirement will not increase taxes to the employee or employer.

    The IRS says the main purpose of this reporting requirement is to show employees the true cost of their health insurance costs, so they may be more informed consumers.  Other purposes are said to be served as well, including the government getting a better idea of exactly how many people are covered by employer-provided healthcare coverage, the loss of tax revenue as a result of this tax sheltered money, and the values of the high cost Cadillac plans that will begin to be taxed in 2018.

    Two Things To Start Preparing Now:

    1. Prepare Your Payroll System:  Check with your payroll service provider or internal IT staff to confirm that the health insurance cost can be tracked in your payroll software for W-2 reporting purposes.  In our case, we use “Company Contributions” that show informational numbers such as 401(k) match and the employer share of benefits.  Make sure that wherever the amount is stored in your payroll system that it does not affect the employee’s gross pay.  Also, make sure that your payroll system gives you the capability to report such non taxable money in a specific box on the W-2 Form.  If the IRS ends up using Box 12 or 14, you will also need the ability to apply a label or code (whichever is applicable).
    2. How To Calculate:  A total annual amount of both the employee plus employer costs needs to be calculated for each individual employee.  You can use the COBRA premium amount, minus the 2% administration fee, as the monthly base amount.  This amount will then need to be annualized for the number of months they were covered under the health plan.  Note that if the employee had a coverage change some time during the year, whether it was changing the number of people covered in the family, or changing plan choices, this will need to be taken into account.  Every single employee could have a different number, based on their activity.  So fire up your spreadsheets now!  Here are the types of group health plans that need to be included in the aggregate number:
      •   Medical plans
      •   Prescription Drug Plans
      •   Executive Physicals
      •   Onsite clinics providing more than “de minimus” care
      •   Medical Supplemental Policies
      •   Employee Assistance Programs

    If your dental or vision coverage is part of your group medical plan, these costs must be included too.  If they are stand-alone plans, meaning your employees can individually elect or decline coverage independent of their medical coverage, these do not need to be included.  Contributions to FSA’s, HSA’s, long term care, disability, and voluntary supplemental policies are also not included.

    Even though technically these health insurance costs don’t have to be reported until January of 2012, when W-2’s are issued for the year 2011, there may be a situation where you need to issue a W-2 to a terminating employee who leaves before the end of 2011.  Therefore, your company must be ready by February 1, 2011 to report these costs.  Now is the time to plan how your company will meet this requirement.

    Over the Counter Meds and FSAs in 2011

    One of the provisions of the Patient Protection and Affordable Care Act (PPACA) is the elimination of over-the-counter medicines as eligible expenses that can be paid for tax-free through a Flexible Spending Account (FSA), Health Reimbursement Account (HRA), or Health Savings Account (HSA).  The addition of over-the-counter medicine to the list of tax free medical items was added back in 2003.  So the rules are simply reverting to how they were eight years ago.

    Beginning January 1, 2011, FSA participants will need to be more careful in estimating their annual election amount.  With the “use it or lose it” rule, there may be a greater chance of “losing” instead of “using” the money since they won’t have the option to use up any FSA balance by going to the pharmacy and buying seven boxes of sinus medicine at the end of the year.

    There will be a couple of exceptions to the new OTC rules.

    1)      Insulin for diabetics that is currently purchased over-the-counter can still be purchased tax free with an FSA.

    2)      If you have a doctor’s prescription for a specific over-the-counter medicine, you can continue to use your FSA/HSA to purchase this medicine.  If your FSA provider offers you a debit card, you most likely will not be able to use your debit card to pay for this.  Instead, you will need to request reimbursement from your FSA provider.  Your FSA provider will ask you for a copy of the doctor’s prescription and a letter of medical necessity.

    So there are ways to still pay for OTC medicine with your FSA, but your doctor must agree that you need it for medical purposes.  HSA participants must also keep their doctor’s documentation on file, in case of a personal IRS audit.

    The IRS has yet to come out with the specific list of what will be excluded beginning next year, but the general rule is any over-the-counter medicines used to treat an ailment will no longer be an eligible item.  Examples would be medicines for allergies, sinus and colds, digestive ailments, and pain relievers.  Other medical supplies, such as bandages and thermometers, are still eligible expenses.

    Two other changes made by the PPACA affecting tax free accounts:

    HSA’s:  Beginning January 1, 2011, the tax penalty for HSA funds spent on non-approved medical expenses will increase from 10% to 20%.  So you’ll want to think twice before using your HSA money to buy that large screen TV.  This penalty is reported to the IRS at the time you file your income taxes.

    FSA’s:  Beginning January 1, 2013, employees can only elect up to $2500.00 per year.  While this limit may not affect those who usually don’t elect that much, it will affect those who put away higher amounts for orthodontia and other upcoming big ticket medical expenses.   Currently, there is no IRS imposed limit on the amount of money you can elect to contribute to an FSA.  The employer has the option to set their own limit for their employees, since the employer takes the risk of paying out the entire amount if the employee leaves mid-year, and is not able to recoup the rest of the money through payroll deductions.

    Does Your 401(k) Plan Allow Loans?

    In the spectrum of employee benefits, 401(k) savings plans are one of the most widely used ways to help employees save for retirement.  401(k) plans (see: different types of 401k plans) are meant to be long term savings vehicles, and the IRS has many rules in place for discouraging use of this money for short term needs.  But it’s no secret in today’s economy that employees are turning to their 401(k) accounts for some relief from mounting debt.  There are limited circumstances where an employee must show a financial hardship in order to access their money sooner than retirement.  But taking a hardship withdrawal also means that the employee may have to pay a 10% early withdrawal tax penalty if they are under age 59-1/2, and the employee is suspended from contributing any more money for another six months.  This should be the absolute last resort because it really hinders the goal of saving enough money for retirement.

    But what about loans?  What if an employee is in a bind, and wants to borrow money from their 401(k)?  Although not the ideal place to borrow money, 401(k) loans aren’t as damaging to the employee’s retirement nest egg as hardship withdrawals because:

    1. There are no income taxes on the loan, as long as they pay the money back.
    2. There is no 10% early withdrawal penalty, as long as they pay the money back.
    3. Unless your plan says otherwise, there is no suspension of contributions.  The employee can continue to make salary deferrals and contribute to their 401(k) account at the same time they are repaying their loan.
    4. The process for obtaining a 401(k) loan is quicker and the cost is cheaper than applying for a bank loan.
    5. The employee is paying themselves back with interest.
    6. Normally the employee can borrow up to 50% of their vested account balance, up to $50,000.

    When an employee takes a loan on their 401(k) money, they essentially are paying themselves back at an interest rate that’s outlined in the plan document.  A common interest rate used is the Wall Street Journal Prime Rate or Prime + 1% or 2%.  With the Prime Rate being so low these days (3.25% as of right now), 401(k) loans are a popular choice among employees to access their money.

    There are definitely some drawbacks and limitations that employees need to be made aware of before taking a loan:

    1. Taking a loan reduces the money in your account.  Therefore this reduces the ability for your account balance to grow, and this loan money will miss out on investment gains.
    2. If your employment terminates before you are able to pay back the entire loan, the remainder of the unpaid loan does become taxable, and subject to the 10% penalty if under age 59-1/2 .
    3. The maximum time to repay a loan is five years.  If you are borrowing to purchase a home, the term loan can be extended.
    4. If you are borrowing to purchase a home, the interest you pay is not tax deductible.
    5. The loan is repaid with after-tax payroll deductions.  So your take home pay will be reduced by the actual amount of your loan repayment.

    If you don’t currently allow for loans and are considering adding them to your 401(k) plan, there may be additional expenses and will be additional administration for each loan request.  The administration steps go something like this:

    • Step 1:  The employee completes a loan request form.  This can either be a piece of paper, or online if your 401(k) provider has a website that allows for this.
    • Step 2:  The plan administrator normally approves the request before submitting it to the 401(k) provider.  I can’t speak for all 401(k) providers, but nowadays, the loan processing time should take less than a week.
    • Step 3:  Upon receiving the loan request, the 401(k) provider will create a loan amortization schedule and send the employee a check (or wire the money) along with their repayment schedule.  Sometimes the employee is required to sign a separate promissory note, sometimes the employee agrees to the terms of the loan simply by endorsing the back of the check.
    • Step 4:  The 401(k) provider will also send a copy of the loan repayment schedule to the plan administrator.
    • Step 5:  This employee’s loan repayment will need to be set up as an after-tax deduction in your payroll system.   If your payroll software has the ability to track a “lifetime limit” or “goal, the deduction will automatically turn off once it has reached the limit.
    • Step 6:  The loan repayment will need to be remitted to the 401(k) provider each pay, along with salary deferrals and company contributions.  It’s very important to make sure these repayments get submitted, or else the loan could go into default.

    Be sure to keep all documentation for each employee’s loan request, as you will need this if/when your 401(k) plan is audited.

    It’s important for both the plan administrator and employees to be aware of the caveats of 401(k) loans.  Although borrowing from a 401(k) should not be encouraged, it could be a better alternative for the employee than an early withdrawal.

    There are a ton of details involved in 401k withholding, are you prepared to deal with that while running payroll? Don’t worry, our easy payroll software has you covered. We automatically update our software for policy changes, so that you don’t have to stress over it. Try it for free today!

    W-2 Health Cost Reporting Delayed One Year

    Good news for employers and payroll administrators!  According to an IRS News Release posted earlier this week, employers will have an additional year to comply with the Affordable Care Act requirement to show total healthcare costs on the W-2.  Originally, this requirement was to begin with 2011 W-2’s, but now the employer has the option to either begin reporting in 2011, or can wait until 2012 with no penalties.  The IRS has issued a draft 2011 Form W-2 showing how the W-2 will look for next year’s wages.  This will give employers and payroll providers more time to ensure that payroll systems are set up properly to comply with this requirement.

    The IRS expects to issue further guidance on this reporting requirement before the end of the year for employers who do choose to report in 2011.

    Reminder: EEO-1 Reports Due September 30

    As a reminder, EEO-1 Reports are due September 30th every year for private employers with at least 100 employees, or federal contractors with 50 employees.  Employers will need to select a pay period between July and September and report demographic information for active employees in that pay period.  Information includes total number of employees broken down by gender, ethnicity, and job class.  If you use HR software to keep track of these employee statistics, you most likely have a report that you can run to give you these totals.

    Reporting is done online at the EEO-1 Survey Website.

    DOL Explains how Target Date Funds Work

    If you offer a 401(k) plan in your employee benefits package, you may have the option of including certain mutual funds called target date funds in your list of investment choices.  A target date fund is a mutual fund that contains a mixture of high risk and low risk assets such as stocks and bonds.  Target date funds are geared for those who want to save towards a certain date in the future, such as retirement.  If the target date is far into the future, the money would be invested in higher risk investments that have the potential for a greater return. As the target date gets closer, the proportion of high risk and low risk investments are managed to change over time so that by a certain date, the money is invested in more conservative assets to lessen the risk of losing money.  Like all mutual funds, however, there is no guarantee that you won’t lose money.

    The advantages of investing money in a target date fund is that the asset mix automatically changes over time, which makes it convenient for the investor by taking a more hands-off approach and letting the investment changes happen automatically.  But critics of target date funds are concerned that a one-size-fits-all approach may not work for everyone.  It’s important for anyone who invests money in mutual funds, especially 401(k) plan participants, to understand that not all target date funds are alike, and each company that offers target date funds can take a different approach to managing the money in that fund.

    Earlier this year, the DOL and SEC issued a four page bulletin called Investor Bulletin:  Target Date Retirement Funds to educate investors about target date funds.  It explains what target date funds are, and how different funds with the same target date can have very different objectives for managing money up to retirement (where the asset mix will have little or no changes after the target date), verses through retirement (where the asset mix continues to change for many years after the target date).

    Note the last page of the bulletin contains links to further information from the DOL and SEC about saving for retirement, investing basics, mutual fund information, and a guide to 401(k) plan fees.  This document can be distributed to plan participants or posted on your website.

    No More Advance Earned Income Credit in 2011

    As part of government budget cuts for next year, qualified employees will no longer have the option to receive their Earned Income Tax Credit (EITC) as part of an advance in their paycheck throughout the year.  These low income workers can still take the tax credit as a lump sum at the time that they file their federal income taxes each year, but won’t have the option to spread out the tax credit as a payment in their checks. 

    This elimination is part of H.R. 1586 (the Education, Jobs and Medicaid Assistance Act), which was signed into law by President Obama in August.  The Advance Earned Income Tax Credit (AEITC) program will be terminated effective for all tax years beginning after December 31, 2010.  Government research suggests the program is underutilized, with only 3% of eligible employees taking advantage of the advance program, and 20% of claimants have invalid social security numbers.

    What Do Employers Need To Do?
    Be aware that this credit is ending starting with paychecks dated January 1, 2011 and later.  Confirm that your payroll software will change so that the Advance Earned Income Credit does not calculate on checks next year.  If you have employees who take the AEIC, communicate to them that this option is going away, but they will still be able to take a lump sum credit when they file their federal income taxes.  IRS payroll forms are expected to be changing as well, although they have not be issued yet.  This includes the elimination of Form W-5 and changes to Forms W-2, W-3, 941 and 944.

    DOT Drug Test Standards to Change October 1st

    The Department of Health & Human Services (HHS) and Department of Transportation (DOT) have revised their Mandatory Guidelines for Federal Workplace Drug Testing Programs that will take effect October 1st, 2010.  These revisions pertain to federal workplace drug testing governed by HHS and include the following changes to laboratory analysis of urine specimens.  Note that these changes only apply to urine specimen drug testing, and not hair or saliva.

    1. Lower initial screen and confirmation cutoff levels for cocaine
    2. Lower initial screen and confirmation cutoff levels for amphetamines
    3. Initial screening for 6AM (Acetylmorphine – a heroin-specific metabolite).  Previously heroin was only screened if the initial screening came back positive.
    4. Initial screening for MDMA (Ecstasy).  Previously this was not detected in an initial screen.

    Sometimes these HHS and DOT regulations serve as a guideline for employers with non-DOT drug testing programs.  Various states have rules that reference using DOT guidelines for Non-DOT programs.  Some non-DOT employers choose to follow DOT guidelines even if they are not required.

    Here is a list of states/jurisdictions that reference compliance with HHS and/or DOT regulations (in whole or in part).  Note this list is based on currently available information and is not intended to provide legal advice:

    • Alabama (if employer is receiving state incentive)
    • Alaska (if employer is receiving state incentive)
    • California
    • Connecticut
    • Delaware
    • Florida (if employer is receiving state incentive)
    • Iowa
    • Kansas
    • Kentucky
    • Maryland (if employer is receiving state incentive)
    • Montana
    • North Carolina
    • North Dakota
    • Ohio (if employer is receiving state incentive)
    • Oklahoma
    • Puerto Rico
    • Tennessee (if employer is receiving state incentive)
    • Vermont
    • Virginia (if employer is receiving state incentive)
    • West Virginia
    • Wisconsin
    • Wyoming

    If your company has a non-DOT drug testing program, it is suggested that you seek legal counsel to discuss whether adopting the new drug test limits for your organization is recommended.  If you have a formal drug testing policy in your employee handbook, check to see whether the policy states that the company will follow federal or state regulations.  If you choose to adopt these new standards, your drug testing provider should advise you on any procedural changes, such as updated chain of custody forms.

    For more information see the Substance Abuse and Mental Health Services Administration Website.

    IRS Guidance on OTC Meds for FSAs in 2011

    The IRS has issued official guidance on the ability to purchase over-the-counter (OTC) medicine with an FSA or HSA. To summarize the basics of the rules that will be changing next year, as of January 1, 2011, OTC medicine can only be purchased using an FSA or HSA with a prescription.  This change is part of the healthcare reform laws.

    The IRS has issued Questions and Answers on Over-The-Counter Medicines.  These Q&A’s clarify a few items:

    Non-drug Purchases
    The IRS clarifies that this change will only apply to OTC medicine, and not supplies.  So you can continue to purchase items such as crutches, bandages, and blood sugar test kits with your FSA or HSA without a prescription.

    Copays and Deductibles
    The IRS has confirmed that FSA’s and HSA’s can still be used to pay for out-of-pocket medical insurance expenses, such as co-pays and deductibles.

    Plans With Grace Periods
    Some FSA plans have chosen to offer a 2.5 month grace period at the end of each plan year, to allow employees to use up any leftover money in the first 2.5 months of the following plan year.  The IRS has clarified that even though a plan may have this grace period, OTC medicine costs cannot be reimbursed during this grace period, as the rule starts on January 1, 2011.

    If the plan’s grace period only allows employees to submit expenses in the first months of the following plan year that happened in 2010, then the OTC medicine still qualifies for reimbursement as long as it was purchased on 12/31/10 or before.

    Debit Cards
    Any plan that offers a debit card must have their cards reprogrammed by 1/15/11 so that the cards will not work for OTC medicines.

    DOL Offers Info for Expiring Cobra Subsidies

    Those who involuntarily lost their jobs from September 1, 2008 to May 31, 2010 are eligible (if they meet certain criteria) to pay a lower amount for COBRA coverage, only 35% of the full premium.  The employer will then be reimbursed by the federal government in the form of a payroll tax credit for the remaining 65%.   Individuals are eligible for this subsidy for a maximum period of 15 months.

    In response to those who have 15-month COBRA subsidies expiring or soon to be expired, the Department of Labor has recently issued a fact sheetand new FAQs addressing issues to be aware of when the subsidy period expires.  There has been no recent talk of Congress possibly extending the COBRA subsidy to anyone who involuntarily lost their job after May 31st.  The 15-month subsidy periods have started expiring back in May 2010 and the last group will expire in August of 2011.  After the COBRA subsidy expires, individuals will need to start paying the full COBRA premium instead of 35% for the remainder of the time they have their COBRA coverage.  The maximum period of COBRA in most cases is 18 months, so many will have a three month period that they will need to pay the full premium.

    The DOL’s fact sheet contains tips for those affected by the expiring subsidy, including a warning that plans are not required to send reminder notices that the subsidy period is ending.  Individuals are encouraged to contact their employer if they have questions about their subsidy end dates or full premium amounts.  The fact sheet also emphasizes the importance of paying the full COBRA premium for the remainder of months.  Otherwise, coverage could be cancelled due to nonpayment.

    The DOL also gives suggestions for other places to look for coverage, if the individual has already lost COBRA coverage because of their failure or inability to pay the full COBRA premium amount.

    If you have former employees on COBRA who are currently eligible for the subsidy, be sure to confirm the date each person’s subsidy expires, so that you are collecting the correct amount of full premium.

    Payroll Update: Health Costs Reported on 2011 W-2s

    The other day, I received an email with some propaganda-like information about the impending tax hikes coming in 2011 as a result of the tax cuts that are set to expire this December 31st.  At the end of the email was a rant about how you will be taxed on your health insurance costs next year because of the new W-2 reporting requirement.  I’m not sure how prevalent this belief is, but this is not true! The employee will not be taxed on the employer’s cost of health insurance, and the employee’s tax liability will not change.  As of right now, the only tax on health insurance will be on the high cost “Cadillac plans” starting in 2018.

    As a background, part of the PPACA healthcare reform laws is a new requirement for employers beginning in 2011.  Employers will need to calculate the total cost of providing health insurance for each individual employee, and report this number on the employee’s W-2.  Just because this number is reported on the W-2, it does not mean the employee will be taxed on this money.  The W-2 form contains boxes used for informational purposes.  The IRS has yet to issue specific guidance on where exactly this number needs to be reported, but we suspect it will either be Box 12 or 14, or perhaps the W-2 will be redesigned to accommodate this new number.  Regardless, this new reporting requirement will not increase taxes to the employee or employer.

    The IRS says the main purpose of this reporting requirement is to show employees the true cost of their health insurance costs, so they may be more informed consumers.  Other purposes are said to be served as well, including the government getting a better idea of exactly how many people are covered by employer-provided healthcare coverage, the loss of tax revenue as a result of this tax sheltered money, and the values of the high cost Cadillac plans that will begin to be taxed in 2018.

    Two Things To Start Preparing Now:

    1. Prepare Your Payroll System:  Check with your payroll service provider or internal IT staff to confirm that the health insurance cost can be tracked in your payroll software for W-2 reporting purposes.  In our case, we use “Company Contributions” that show informational numbers such as 401(k) match and the employer share of benefits.  Make sure that wherever the amount is stored in your payroll system that it does not affect the employee’s gross pay.  Also, make sure that your payroll system gives you the capability to report such non taxable money in a specific box on the W-2 Form.  If the IRS ends up using Box 12 or 14, you will also need the ability to apply a label or code (whichever is applicable).
    2. How To Calculate:  A total annual amount of both the employee plus employer costs needs to be calculated for each individual employee.  You can use the COBRA premium amount, minus the 2% administration fee, as the monthly base amount.  This amount will then need to be annualized for the number of months they were covered under the health plan.  Note that if the employee had a coverage change some time during the year, whether it was changing the number of people covered in the family, or changing plan choices, this will need to be taken into account.  Every single employee could have a different number, based on their activity.  So fire up your spreadsheets now!  Here are the types of group health plans that need to be included in the aggregate number:
      •   Medical plans
      •   Prescription Drug Plans
      •   Executive Physicals
      •   Onsite clinics providing more than “de minimus” care
      •   Medical Supplemental Policies
      •   Employee Assistance Programs

    If your dental or vision coverage is part of your group medical plan, these costs must be included too.  If they are stand-alone plans, meaning your employees can individually elect or decline coverage independent of their medical coverage, these do not need to be included.  Contributions to FSA’s, HSA’s, long term care, disability, and voluntary supplemental policies are also not included.

    Even though technically these health insurance costs don’t have to be reported until January of 2012, when W-2’s are issued for the year 2011, there may be a situation where you need to issue a W-2 to a terminating employee who leaves before the end of 2011.  Therefore, your company must be ready by February 1, 2011 to report these costs.  Now is the time to plan how your company will meet this requirement.

    Over the Counter Meds and FSAs in 2011

    One of the provisions of the Patient Protection and Affordable Care Act (PPACA) is the elimination of over-the-counter medicines as eligible expenses that can be paid for tax-free through a Flexible Spending Account (FSA), Health Reimbursement Account (HRA), or Health Savings Account (HSA).  The addition of over-the-counter medicine to the list of tax free medical items was added back in 2003.  So the rules are simply reverting to how they were eight years ago.

    Beginning January 1, 2011, FSA participants will need to be more careful in estimating their annual election amount.  With the “use it or lose it” rule, there may be a greater chance of “losing” instead of “using” the money since they won’t have the option to use up any FSA balance by going to the pharmacy and buying seven boxes of sinus medicine at the end of the year.

    There will be a couple of exceptions to the new OTC rules.

    1)      Insulin for diabetics that is currently purchased over-the-counter can still be purchased tax free with an FSA.

    2)      If you have a doctor’s prescription for a specific over-the-counter medicine, you can continue to use your FSA/HSA to purchase this medicine.  If your FSA provider offers you a debit card, you most likely will not be able to use your debit card to pay for this.  Instead, you will need to request reimbursement from your FSA provider.  Your FSA provider will ask you for a copy of the doctor’s prescription and a letter of medical necessity.

    So there are ways to still pay for OTC medicine with your FSA, but your doctor must agree that you need it for medical purposes.  HSA participants must also keep their doctor’s documentation on file, in case of a personal IRS audit.

    The IRS has yet to come out with the specific list of what will be excluded beginning next year, but the general rule is any over-the-counter medicines used to treat an ailment will no longer be an eligible item.  Examples would be medicines for allergies, sinus and colds, digestive ailments, and pain relievers.  Other medical supplies, such as bandages and thermometers, are still eligible expenses.

    Two other changes made by the PPACA affecting tax free accounts:

    HSA’s:  Beginning January 1, 2011, the tax penalty for HSA funds spent on non-approved medical expenses will increase from 10% to 20%.  So you’ll want to think twice before using your HSA money to buy that large screen TV.  This penalty is reported to the IRS at the time you file your income taxes.

    FSA’s:  Beginning January 1, 2013, employees can only elect up to $2500.00 per year.  While this limit may not affect those who usually don’t elect that much, it will affect those who put away higher amounts for orthodontia and other upcoming big ticket medical expenses.   Currently, there is no IRS imposed limit on the amount of money you can elect to contribute to an FSA.  The employer has the option to set their own limit for their employees, since the employer takes the risk of paying out the entire amount if the employee leaves mid-year, and is not able to recoup the rest of the money through payroll deductions.

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