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    Gross vs. Net Pay: What’s the Difference?

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  • Following the Fair Credit Reporting Act

    Updated on June 24, 2013

    When hiring for a position, do you perform a background check?  More than likely, you use consumer reports to check the background of a candidate.  Consumer reports can encompass many types of information such as criminal records, credit history, driving records, and employment history.  What happens when the results of a background check give you cause for concern?

    When you use a company to conduct background checks on your behalf, these companies are consumer reporting agencies.  When employers make hiring decisions based on consumer report information, there are steps you must follow in order to comply with the Fair Credit Reporting Act (FCRA).  The purpose of the FCRA is to protect the privacy of information found in consumer reports and to ensure that the information is as accurate as possible.

    Written Notice and Authorization
    When using consumer reports for an employment decision, you first must get the candidate’s authorization in writing, and notify them in writing that a consumer report will be used. If you use a consumer reporting agency, they should be able to provide a template that you can use. This notice and authorization can be electronic. For example, our company sends the candidate an email with a link to a website that contains the notice, and allows them to enter their information and authorize electronically. Paperless is a beautiful thing.

    Taking Adverse Action
    When a consumer reporting agency reports information to you that affects your decision to deny a job offer or promotion, there are two steps you need to take:

    Step 1:  You will need to send the candidate a “pre-adverse action disclosure” before making the official decision. This includes a summary of their rights under the FCRA and a copy of the consumer report. This gives the candidate a chance to make any corrections to the information if, in fact, it is wrong.

    Step 2:  If the candidate does not take steps to correct any inaccurate information after a period of time (usually five to seven days), you may proceed with the denial of the job or promotion, and will need to send the candidate an “adverse action notice.”  This notice can be oral, written, or electronic. The notice needs to include the name and contact information of the consumer reporting agency that provided the report, a statement that the reporting agency did not make the decision for adverse action, and a notice of the individual’s right to dispute the information in the credit report. Your consumer reporting agency can assist you with this process.

    Note that FCRA rules do not apply if the employer checked references directly without using a consumer reporting agency. For example, if an employer called a school directly and found out that a candidate did not have the degree they said they did, the employer can choose to deny the job without following FCRA procedure.

    For more details, the Federal Trade Commission has a good article on its website called Using Consumer Reports: What Employers Need To Know.

    Employer Credit Checks Under Fire

    In this time of high unemployment, the steps employers take to investigate candidates are being scrutinized more then ever. The Ban the Box law in Massachusetts prohibits employers from asking candidates about their criminal history on the initial written job application.  Pre-employment credit checks are also being scrutinized. As of now, Hawaii, Washington, and Oregon have laws prohibiting the employer from performing a credit check on candidates, with limited exceptions.  Many more states are also introducing similar legislation. The EEOC discourages employers from performing credit checks due to adverse impact on minorities and females, unless the candidate’s credit history is directly related to the particular job. The recession brings this issue to light, as many people looking for work may also have a tarnished credit history due to falling upon hard times. The EEOC held a public meeting last week to allow supporters from both sides of the issue to present their view. See the EEOC press release.

    Those against performing pre-employment credit checks say that the practice is harmful and unfair to workers. It negatively affects those with poor credit, and statistically, minorities and females tend to have lower credit ratings, which can make a discriminatory impact on hiring. It also poses a “catch 22” for those with poor credit who need a job to to improve their credit.

    Those in favor of performing credit checks say that most employers do not check credit history for every single position, the credit check is one of many tools to screen candidates, and helps to protect the company against fraud.

    As an employer, if you currently use credit history to make employment decisions, best practices are to first determine if it’s necessary to check credit for every position, and then document why it is necessary for those positions.

    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.

    Following the Fair Credit Reporting Act

    Updated on June 24, 2013

    When hiring for a position, do you perform a background check?  More than likely, you use consumer reports to check the background of a candidate.  Consumer reports can encompass many types of information such as criminal records, credit history, driving records, and employment history.  What happens when the results of a background check give you cause for concern?

    When you use a company to conduct background checks on your behalf, these companies are consumer reporting agencies.  When employers make hiring decisions based on consumer report information, there are steps you must follow in order to comply with the Fair Credit Reporting Act (FCRA).  The purpose of the FCRA is to protect the privacy of information found in consumer reports and to ensure that the information is as accurate as possible.

    Written Notice and Authorization
    When using consumer reports for an employment decision, you first must get the candidate’s authorization in writing, and notify them in writing that a consumer report will be used. If you use a consumer reporting agency, they should be able to provide a template that you can use. This notice and authorization can be electronic. For example, our company sends the candidate an email with a link to a website that contains the notice, and allows them to enter their information and authorize electronically. Paperless is a beautiful thing.

    Taking Adverse Action
    When a consumer reporting agency reports information to you that affects your decision to deny a job offer or promotion, there are two steps you need to take:

    Step 1:  You will need to send the candidate a “pre-adverse action disclosure” before making the official decision. This includes a summary of their rights under the FCRA and a copy of the consumer report. This gives the candidate a chance to make any corrections to the information if, in fact, it is wrong.

    Step 2:  If the candidate does not take steps to correct any inaccurate information after a period of time (usually five to seven days), you may proceed with the denial of the job or promotion, and will need to send the candidate an “adverse action notice.”  This notice can be oral, written, or electronic. The notice needs to include the name and contact information of the consumer reporting agency that provided the report, a statement that the reporting agency did not make the decision for adverse action, and a notice of the individual’s right to dispute the information in the credit report. Your consumer reporting agency can assist you with this process.

    Note that FCRA rules do not apply if the employer checked references directly without using a consumer reporting agency. For example, if an employer called a school directly and found out that a candidate did not have the degree they said they did, the employer can choose to deny the job without following FCRA procedure.

    For more details, the Federal Trade Commission has a good article on its website called Using Consumer Reports: What Employers Need To Know.

    Employer Credit Checks Under Fire

    In this time of high unemployment, the steps employers take to investigate candidates are being scrutinized more then ever. The Ban the Box law in Massachusetts prohibits employers from asking candidates about their criminal history on the initial written job application.  Pre-employment credit checks are also being scrutinized. As of now, Hawaii, Washington, and Oregon have laws prohibiting the employer from performing a credit check on candidates, with limited exceptions.  Many more states are also introducing similar legislation. The EEOC discourages employers from performing credit checks due to adverse impact on minorities and females, unless the candidate’s credit history is directly related to the particular job. The recession brings this issue to light, as many people looking for work may also have a tarnished credit history due to falling upon hard times. The EEOC held a public meeting last week to allow supporters from both sides of the issue to present their view. See the EEOC press release.

    Those against performing pre-employment credit checks say that the practice is harmful and unfair to workers. It negatively affects those with poor credit, and statistically, minorities and females tend to have lower credit ratings, which can make a discriminatory impact on hiring. It also poses a “catch 22” for those with poor credit who need a job to to improve their credit.

    Those in favor of performing credit checks say that most employers do not check credit history for every single position, the credit check is one of many tools to screen candidates, and helps to protect the company against fraud.

    As an employer, if you currently use credit history to make employment decisions, best practices are to first determine if it’s necessary to check credit for every position, and then document why it is necessary for those positions.

    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.

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