EY - US Employment Tax Year in Review (November 2013)

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The presentation covers:
- FICA on severance
- Fiscal cliff legislation – impacts for 2013 and beyond
- The additional Medicare tax began this year
- Reporting change in responsible party to the IRS
- 2010 HIRE Act – IRS notices and refund deadline
- Same-sex partner benefits in wake of Supreme Court ruling
- Affordable Care Act – what to know about 2014
- Unemployment insurance – new laws mean a new approach
- States go retro in 2013
- Pay card controversy – seven things employers should do

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EY - US Employment Tax Year in Review (November 2013)

  1. 1. Employment tax year in review 13 November 2013
  2. 2. Disclaimer ► This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ► The views expressed by the presenters are not necessarily those of Ernst & Young LLP. ► This presentation is © 2013 Ernst & Young LLP. All Rights Reserved. EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms, of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. Page 2 Employment tax year in review
  3. 3. Circular 230 disclaimer Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. ► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. ► Page 3 Employment tax year in review
  4. 4. Today’s moderator Gregory Carver Ernst & Young LLP Employment Tax Advisory Services Join today’s Twitter discussion: Page 4 Employment tax year in review #yearend
  5. 5. Today’s presenters Peter Berard Kenneth Hausser Debera Salam Deborah Spyker Ernst & Young LLP Employment Tax Advisory Services Ernst & Young LLP Employment Tax Advisory Services Ernst & Young LLP Employment Tax Advisory Services Ernst & Young LLP Employment Tax Advisory Services The information contained herein is a summary in nature. Viewers should consult their own professional advisors to address their individual circumstances and concerns. Page 5 Employment tax year in review
  6. 6. Today’s agenda ► ► ► ► ► ► ► ► ► ► FICA on severance Fiscal cliff legislation – impacts for 2013 and beyond The additional Medicare tax began this year Reporting change in responsible party to the IRS 2010 HIRE Act – IRS notices and refund deadline Same-sex partner benefits in wake of Supreme Court ruling Affordable Care Act – what to know about 2014 Unemployment insurance – new laws mean a new approach States go retro in 2013 Pay card controversy – seven things employers should do Join today’s Twitter discussion: Page 6 #yearend Employment tax year in review
  7. 7. FICA on severance? Supreme Court will decide Page 7 Employment tax year in review
  8. 8. The trail of challenges ► ► On 7 September 2012, the Sixth Circuit Court of Appeals affirmed the 2010 decision of the Michigan District Court that Quality Stores is entitled to a refund of the Social Security/Medicare tax that it collected and paid on severance payments (United States of America v. Quality Stores Inc., et al., No. 10-1563) In 2008, the Federal Circuit ruled in favor of the IRS in CSX, concluding that similar severance-type payments were subject to FICA (CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008)) ► ► ► CSX did not request a rehearing, and on 11 August 2008, the opinion was considered final The recent Quality Stores decision creates a split in the circuits The Supreme Court agreed to hear the case on 1 October 2013 and oral arguments are scheduled for 14 January 2014 Page 8 Employment tax year in review
  9. 9. Filing protective refund claims ► Employers are potentially eligible for a refund of FICA on severance pay pending the outcome of the Quality Stores decision: ► ► ► ► A protective claim must be filed within the statute of limitations The FICA tax must be withheld and paid to the IRS according to the current tax rules on all severance payments, using the protective claim process to request a refund after the fact There must be at least a reasonable basis (a position with disclosure) for filing the protective claim (e.g., a court decision, such as Quality Stores) The deadline for filing protective refund claims for severance payments made in 2010 is 15 April 2014 ► Page 9 Employers should consider also filing protective refund claims for any payments made in 2011, 2012 and 2013 Employment tax year in review
  10. 10. Keeping refund claims active ► The IRS began disallowing CSX-type and Quality claims outside of the 6th Circuit in 2010 ► ► This means that for certain taxpayers, the two-year period is expiring If taxpayers want to maintain their protective claims for refund without bringing suit in court, they can file Form 907, Agreement to Extend the Time to Bring Suit ► ► The IRS has been signing these agreements for CSX-types of refund disallowances while the Sixth Circuit’s Quality Stores opinion was pending ► Page 10 Under IRC §6532(a)(2), the two-year period to bring suit can be extended to a specified date if the IRS and the taxpayer agree in writing to the extension and Form 907 is used for this purpose Forms must be signed by IRS before expiration of the two-year period Employment tax year in review
  11. 11. Polling question We have taken these steps in response to the Quality Stores case: A. We filed protective FICA refund claims B. We have identified how we will perfect those claims C. We need more information D. Don’t know/does not apply (EY, faculty, alumni, other) Page 11 Employment tax year in review
  12. 12. Federal legislation affecting 2013 Page 12 Employment tax year in review
  13. 13. Federal income tax increase in 2013 ► The 2012 tax rates of 10%, 15%, 25%, 28%, 33% and 35% are maintained under the American Taxpayer Relief Act (ATRA), except: ► ► Federal income tax withholding rates for 2013: ► ► ► ► For wages in excess of $400,000 (individual filers), $425,000 (heads of households) and $450,000 (married filing jointly), the top rate increased to 39.6% effective with wages paid on and after 1 January 2013 Optional supplemental withholding remains 25% Mandatory rate for supplemental wages over $1m increased to 39.6% Backup tax remains at 28% (applies to nonemployee compensation) Note that employers were not required to implement these rates until 15 February 2013, resulting in potential underwithholding for some employees Page 13 Employment tax year in review
  14. 14. Social Security tax increase in 2013 ► The employee withholding rate of 4.2% returned to 6.2% in 2013 ► ► The 2013 wage base increased from $110,100 to $113,700 ► ► The employer rate has remained at 6.2% The 2013 maximum employee Social Security tax increases by $2,425.20 (2012 maximum of $4,624.20 vs. 2013 maximum of $7,049.40) Employers were required to implement the increase in withholding no later than 15 February 2013, and pay any adjustments to IRS by 31 March 2013 Page 14 Employment tax year in review
  15. 15. American Taxpayer Relief Act extenders Provision Description Expiration date Expense tax credit for employer child care assistance A credit of up to $150,000 for acquiring, constructing, refurbishing or expanding a child care facility 31 December 2013 Temporary Page 15 Employment tax year in review
  16. 16. American Taxpayer Relief Act extenders Provision Description Expiration date Undergraduate and graduatelevel education assistance Exclusion of up to $5,250 per year for education not related to the current job Permanent Adoption assistance Effective in 2012, exclude up to $12,170 per adoption and $12,970 for 2013 Additional $10,000 (as adjusted for inflation) per adoption made permanent Page 16 Employment tax year in review
  17. 17. American Taxpayer Relief Act extenders Provision Description Expiration date Work Opportunity Tax Credit (WOTC) Other than certain veteran groups Retroactive to 1 January 2012, and through 31 December 2013 Renew or reinstate the parity between parking and transit benefits: for 2012, $240 for mass transit and $240 for parking, increasing to $245 each for 2013 Retroactive to 1 January 2012, and through 31 December 2013 Temporary and retroactive Mass transit benefits Temporary and retroactive Page 17 Employment tax year in review
  18. 18. 2012 wage adjustments for transit benefits ► The retroactive increase in the 2012 monthly limit for mass transit/ van pool benefits from $125 to $240 could have resulted in the overstatement of 2012 taxable wages ► ► The IRS clarifies that an overstatement of taxable wages may be claimed only if the transit benefits were paid directly by employers or paid by employees with pretax and after-tax payroll deductions The 2013 rates are $245 for parking and $245 for transit Page 18 Employment tax year in review
  19. 19. 2012 wage adjustments for transit benefits ► Example 1: In 2012, employee elected to have $240 per month deducted from wages – $125 was deducted on a pretax basis and $115 was taken after tax Result: His wages were overstated by $115 each month ► Example 2: In 2012, employee elected to have $125 per month deducted from wages on a pretax basis, and he purchased additional transit benefits each month of $115 with his personal credit card Result: His taxable wages were not overstated in 2012, and he may not claim a federal income or FICA tax refund for the transit benefits purchased by personal credit card Page 19 Employment tax year in review
  20. 20. 2012 wage adjustments for transit benefits ► Through 31 January 2013, employers had three options for dealing with 2012 overstatement of taxable wages and the related FICA refunds: ► ► ► ► Special procedure Normal procedure Waiver of right to claim FICA refunds After 31 January 2013, employers have two options: ► ► Page 20 Normal procedure Waiver of right to claim FICA refunds Employment tax year in review
  21. 21. 2012 transit benefit overstatements – special procedure (available only through 31 January 2013) FICA refund employee consent letter Form W-2/W-2c and Federal Income Tax (FIT) Show reduction in FIT/FICA wages on Form W-2, boxes 1, 3 and 5 Show reduction in FICA taxes in boxes 4 and 6 when FICA refund paid to employee Form 941 Page 21 Not required Show 2012 total FICA wage adjustments on 2012 fourth-quarter return Show 2012 FICA tax adjustments (and claim for refund) on 2012 fourth-quarter return Employment tax year in review
  22. 22. State cautionary note on transit benefits ► State and local income tax jurisdictions may not couple with Internal Revenue Code (IRC) on transit benefits ► ► ► Page 22 It is important to know the state income tax rules on transit benefits before making adjustments to the 2012 Form W-2 in boxes 16 or 18 Example 1: For California income tax purposes and for 2012 and 2013, there is no monthly limit on the amount of transit benefits excluded from wages Example 2: For Massachusetts income tax purposes and for 2012 and 2013, only $125 per month is excluded from taxable wages Employment tax year in review
  23. 23. 2014 rates and limits Category 2014 limit Social Security wage base $117,000/year Employee pretax contributions to qualified retirement plan $ 17,500/year Qualified parking $ 250/month Commuter highway vehicle/transit pass $ 130/month Adoption assistance $ 13,190/adoption Health FSA employee pretax $ Page 23 2,500/year Employment tax year in review
  24. 24. New Medicare taxes began in 2013 Page 24 Employment tax year in review
  25. 25. Two new Medicare taxes apply Additional Medicare tax of 0.9% ► ► ► ► Applies to earned income (wages) Employers withhold on wages in excess of $200,000 There is no employer contribution This tax is in addition to the 1.45% Medicare tax employees already pay (and that employers match) Net investment income tax (NIIT) of 3.8% ► Applies to unearned income in these categories: ► ► ► Interest, dividends, rents and annuities not derived in the ordinary course of a trade or business Trade or business income from passive activities or from trading in financial instruments or commodities Net gains from the disposition of property not used in a trade or business Both the 0.9% additional Medicare tax and the NIIT apply to covered earnings in excess of $125,000 for married filing separately, $200,000 for single filers and $250,000 for joint filers Page 25 Employment tax year in review
  26. 26. Additional Medicare Tax considerations Additional Medicare tax employer reporting ► The additional Medicare tax is not separately reported on Form W-2 ► ► Most employers report this tax separately on pay stubs Form 941 includes separate line for the additional Medicare tax ► ► Liability for tax not withheld is reduced by amount of tax employees paid directly to the IRS ► Page 26 Failure to withhold subjects the employer to penalties After close of calendar year, employer may not adjust for 0.9% and is no longer liable for additional Medicare tax but may be liable for penalties for failure to withhold Employment tax year in review
  27. 27. Medicare tax employee considerations ► ► Employees are liable to pay to the IRS additional Medicare tax not withheld by employers and the NIIT of 3.8% on unearned income The difference in the two Medicare tax rates may highlight questions about those benefits included in wages and those that are not ► ► ► Additional Medicare tax of 0.9% applies to nonqualified deferred compensation based on the same FICA timing rules that apply to Social Security tax and the 1.45% Medicare tax Some investment-type income, such as restricted stock awards, are subject to the 0.9% additional Medicare tax at time of vesting, but income derived after vesting is excluded from wages/ordinary income, and subsequent capital gain income may be subject to the 3.8% NIIT These issues should be taken into account when reviewing the need for Form W-4 changes and/or estimated tax payment requirements Page 27 Employment tax year in review
  28. 28. Employer 2013 Medicare tax implementation considerations Gross-up and wage repayments Page 28 Inform employees of the new tax changes ► Remind employees that what you withhold could be too high or too low; Form W-4 can be revised accordingly Consider capturing the additional Medicare tax withheld in Form W-2, box 14 ► Also consider showing Medicare and additional Medicare tax (show “Med surcharge” withholding on the employee pay stub) ► Recordkeeping ► ► Employee communications Include the additional Medicare tax (and increase in top income tax rate) in gross-up calculations and consider the budgetary impact Consider revising wage repayment agreements to include the fact that the employer cannot refund withholding of the additional Medicare tax in subsequent calendar year ► Employment tax year in review
  29. 29. IRS requires responsible party information in 2014 Page 29 Employment tax year in review
  30. 30. IRS requires reporting of change in responsible party (as part of EIN application updates) ► ► ► In TD 9617 the IRS requires any person or entity assigned an Employer Identification Number (EIN) to provide updated responsible party information The IRS has now released revised Form 8822-B, Change of Address or Responsible Party—Business, for this purpose Beginning 1 January 2014, any person or entity with an EIN is required to file Form 8822-B, boxes 8a through 9b, to report any changes to the identity of their responsible party Page 30 Employment tax year in review
  31. 31. Who is a responsible party? Business Type Responsible party is the… Corporation Principal officer Partnership General partner Disregarded entity Owner (if the disregarded entity is owned by a corporation, enter corporation's name and EIN) Trust Grantor, owner, or trustor Page 31 Employment tax year in review
  32. 32. Remember when … Page 32 Employment tax year in review
  33. 33. We had employment tax stimulus? ► The HIRE Act of 2010 ► ► ► ► ► Provided employers with a exclusion from the 6.2% Social Security tax on wages paid to the long-term unemployed The credit applied only for tax year 2010 and was claimed on the secondthrough fourth-quarter Forms 941 The wages on which the credit was claimed were required to be reported on Form W-2, box 12, Code CC The deadline for claiming the credit is 15 April 2014 IRS is now sending Combined Annual Wage Reporting (CAWR) notices where Form 941 HIRE Act are wages are greater than wages reported on Form W-2, Code CC ► ► Page 33 If the error is not corrected by sending in Forms 941-X or Forms W-2c, IRS will charge back the 6.2% plus penalty and interest The corrections must be made by 15 April 2014 (sooner is better) Employment tax year in review
  34. 34. Same-sex partner benefits in wake of Windsor Page 34 Employment tax year in review
  35. 35. Court rules for equal tax treatment of samesex married couples ► ► Section 3 of the Defense of Marriage Act (DOMA), enacted on 21 September 1996, provides that, for purposes of interpreting federal laws, including the IRC, the term “spouse” means only a “person of the opposite sex who is a husband or wife” within a “legal union between one man and one woman” In United States v. Windsor, the US Supreme Court ruled that disregarding a same-sex spouse lawfully married under state law violates the Fifth Amendment rights of the same-sex spouse Page 35 Employment tax year in review
  36. 36. The Windsor decision has broad implications Page 36 Employment tax year in review
  37. 37. Key highlights of Treasury/IRS guidance ► In Revenue Ruling 2013-17, the IRS makes these relevant stipulations: Refunds apply for all open tax years Civil unions and similar do not meet marriage definition Page 37 Qualified retirement plans must comply in operation effective 16 September 2013 Place of celebration governs Employment tax year in review
  38. 38. Retroactive refunds are governed by statute of limitations ► Massachusetts recognizes samesex marriage ► ► IRS ► statute of limitations expires on 15 April 2014 District of Columbia recognizes same-sex domestic partners 1992 ► Section 1996 3 of DOMA is enacted Page 38 2004 ► 2009 2010 Numerous protective refund claims are filed in 2013 to keep statute open for 2009 Employment tax year in review Supreme Court overturns Section 3 of DOMA 2013
  39. 39. Fringe benefits currently in scope for retroactive refunds IRC Section Applicable fringe benefit(s) 106 Health and accident benefits including employee pretax contributions under a Section 125 plan, health savings accounts, health reimbursement arrangements and long-term care 117(d) Qualified scholarships 119 Meals and lodging for employer’s convenience 129 Dependent care assistance 132 No-additional-cost services and qualified employee discounts Page 39 Employment tax year in review
  40. 40. When does federal or state income tax apply to same-sex partner benefits? Page 40 Employment tax year in review
  41. 41. State payroll tax analysis ► Some states have taken a unique position on fringe benefits ► ► ► Example: Wisconsin says that if a health savings account (HSA) allows reimbursements to a same-sex spouse, all pre-tax contributions to an HSA are included in wages subject to income tax As of 1 November 2013, the states fall into three categories ► ► ► Page 41 All inclusive Follow federal Restricted Employment tax year in review
  42. 42. State payroll tax analysis Civil union Domestic partnerships Marriage All inclusive Page 42 Employment tax year in review
  43. 43. State payroll tax analysis Civil union Domestic partnerships Marriage Follow federal Page 43 Employment tax year in review
  44. 44. State payroll tax analysis Civil union Domestic partnerships Marriage Restricted Page 44 Employment tax year in review
  45. 45. Case in point – Colorado Civil unions recognized in 2013 ► ► ► ► Civil unions are recognized for tax year 2013 Civil union partners may not file state income tax returns as married, unless they are married for federal income tax purposes Same-sex marriages from other states qualify as married for state income tax purposes Same-sex partner benefits follows federal tax treatment (taxable to civil union partners) Determining the tax treatment of same-sex partner benefits will be complex and variable in civil union and domestic partnership states – Telephone conversation, Colorado Department of Revenue, 13 September 2013 Page 45 Employment tax year in review
  46. 46. More federal guidance is needed Page 46 Employment tax year in review
  47. 47. Same-sex partner rules should be coordinated across all affected business functions Evaluate, communicate and manage Counsel Vendors Benefits Teamwork Human resources IT Payroll and tax Page 47 Identify business process owners and stakeholders ► Evaluate US benefits and company policies ► Determine benefit eligibility and policy changes ► Coordinate with third-party service providers ► Implement human resources information system (HRIS) and other system changes ► Communicate with and educate employees ► Manage taxing requirements retroactively and prospectively ► Employment tax year in review
  48. 48. Recommended steps vernments need revenue. They are raising the tax burden and policing the tax base in a far tougher manner.Companies are responding to the shifting global landscape and dramatically changing their business models.This convergence is driving a significant increase in tax controversy which can lead to financial, resource and reputational need to be “audit ready” in this new era of global risk and uncertainty. A number of key steps can help you reduce the threats posed to your business. 1 6 Identify affected employee population 2 Communicate with and educate employees Review benefit and company policies Are you ready? 5 3 Make retroactive corrections to wages and taxes Modify benefit plans and policies as determined 4 Adjust 2013 wages and taxes Page 48 Employment tax year in review
  49. 49. Same-sex partners Communicate Evaluate Business owners Considerations in developing a work plan Human resources Family and medical leave, employee assistance programs (financial/tax planning, tax return preparation) Change in policies, availability of financial/tax planning or tax preparation assistance Payroll Health/medical, retirement, annuity, life/AD&D, QDROs, non-qualified deferred compensation Prior-year taxable wage data, current federal/state tax setup, Form W-4 and equivalent filings Benefit eligibility, spousal consent and beneficiary designation requirements, enrollment procedures and effective dates Prior-year adjustments (FICA refunds, Forms W-2c), federal and state tax effect of same-sex spousal benefits Manage ► Retirement and other benefit payments to employee’s spouse? ► How will data for prior-year taxable wage overstatements be gathered? ► ► Publish revised company policies Benefits Plan enrollment changes to be communicated to payroll for tax and reporting purposes? ► ► Policy evaluation ► Plan evaluation ► EY can assist you ► Employee communications ► Plan document revisions ► Employee assistance programs (retirement planning, estate planning, education funding, including FAFSA filing and 529 plan contributions) ► Employee communications ► Inbound/outbound expatriate policy evaluation for effect on international workforce ► Inbound/outbound expatriate program evaluation for effect on international workforce Systems/IT Benefits enrollment, HRIS, employee self-service portal, system interfaces, payroll tax configuration Collaborate with HR, benefits and payroll on employee communications Service providers Benefits enrollment administrator, retirement/HSA plan trustees, insurance providers, employment tax filing Collaborate with HR, benefits and payroll on employee communications ► ► What is the process for prior-year FICA refunds? Are there any new system requirements in implementing policy and plan amendments? Are service providers aware of plan and policy changes and requirements? ► What is the implementation schedule for payroll tax configuration changes? ► How will you monitor changes in state and international tax laws? ► What software updates are expected, and when will those be implemented? What interfaces, reports, etc. need to be tested? What is the time line for implementation? ► Can the employment tax filing provider meet prior-year adjustment requirements? ► Collaborate with service providers to determine ability to meet requirements and objectives ► Fill gaps left by service providers (e.g., Forms W-2c, FICA refunds) ► Tax configuration review and design ► Assist in design of system requirements ► Address federal, state and local tax and reporting requirements ► Review system configuration and output ► International tax requirements ► Coordinate interface functionality ► Assistance with prior-year FICA tax refunds and return preparation For the complete report and work plan tips, go to: http://response.ey.com/CSG3/?doma Page 49 Employment tax year in review
  50. 50. Polling question How prepared are you to incorporate the new same-sex partner requirements in your business processes? A. Federal and state payroll tax configurations are current B. Benefit plans are up to date C. Both “A” and “B” are complete D. Don’t know/does not apply (EY, faculty, alumni, other) Page 50 Employment tax year in review
  51. 51. Health insurance and the Affordable Care Act (ACA) Page 51 Employment tax year in review
  52. 52. Employer responsibility coverage excise tax in 2014 (delayed to 2015) Employers are not required by the ACA to offer health care coverage to employees ► However, large employers may be subject to an excise tax if at least one full-time employee receives a premium tax credit for Marketplace coverage and an employer: Fails to offer coverage to full-time employees and their dependents (IRC §4980H(a)) Page 52 or Offers coverage to full-time employees that does not meet the law’s affordability or minimum value standards (IRC §4980H(b)) Employment tax year in review
  53. 53. Calculation of coverage excise tax Tax for unaffordable coverage IRC §4980H(b) Tax for no coverage IRC §4980H(a) ► If a large employer does not offer coverage to its full-time employees and their dependents, employers face a tax of: ► $2,000 × the total number of full-time employees (FTEs) if at least one FTE is receiving a premium assistance tax credit ► If a large employer offers coverage to their FTEs and their dependents, but the coverage is unaffordable to certain employees or does not provide minimum value, employers face a tax of: ► The lesser of $3,000 × the number of FTEs receiving a premium assistance tax credit or $2,000 × the total number of FTEs Employers that do not offer coverage may subtract the first 30 workers when calculating their liability for taxes under IRC §4980H(a). Taxes under 4980H(b) are capped not to exceed an employer’s potential tax under §4980H(a). Page 53 Employment tax year in review
  54. 54. Critical elements to the coverage excise tax determination “Large employers” – those with 50 or more full-time equivalents must assess whether they will be subject to a coverage excise tax by addressing: Who is a full-time employee? (defined as 30 hours per week per month) ► Is the employee reasonably expected to work full-time or part-time? ► Is the employee a “variable hour” or “seasonal” employee? Determination of full-time status may be based on a look-back measurement period of up to 12 months Page 54 Is the employerprovided health care plan affordable? ► A plan is “affordable” if the employee’s cost for self-only coverage is less than 9.5% of the employee’s “household income” ► Does the employerprovided health care plan meet the minimum value requirement? IRS guidance provides employers with a safe harbor to test affordability based on W-2 wages ► Plan must have a 60% actuarial value Employment tax year in review What portion of the employee population is eligible for the premium tax credit (PTC)? ► Employee with household income between 100% and 400% of federal poverty level ► Employee who is not eligible for other minimum essential coverage (e.g., Medicaid, Medicare, other employersponsored coverage)
  55. 55. Health Marketplace notification Process overview Employer State Marketplace Yes Workflow stream Employee applies for PTC Page 55 Health Marketplace determines eligibility status Exchange notifies employer who is eligible for PTC Employment tax year in review Employer system determines validity of notice If so determined, begin appeals process
  56. 56. Health Marketplace notifications When might an employer receive Marketplace notices? The Marketplace must notify the employer if it determines that an employee is eligible for an advanced payment of the PTC or a cost-sharing subsidy. The notice may apply to employees in various circumstances: ► If employee is a full-time employee (average ≥ 30 hours per week per month) and the full-time employee’s household income is between 100% to 400% of the Federal Poverty Level (FPL) , then he or she would be eligible for a PTC if the employer: ► Fails to offer coverage – triggers §4980H(a) (5% allowance by member firm) ► Offers coverage but coverage not considered affordable; minimum equivalent coverage, minimum equivalent value tests – triggers §4980H(b) ► Employee is not a full-time employee and his or her income is between 100% to 400% of the FPL: ► This does not trigger any excise tax penalty ► Individual is incorrectly determined eligible for coverage by the Exchange: ► This could trigger an excise tax penalty that employer could appeal Employer excise tax penalties? IRC §4980H(a) ► IRC §4980H(b) $2,000 × the total number of full-time employees if at least one full-time employee is receiving a PTC ► The lesser of $3,000 × the number of full-time employees receiving a PTC or $2,000 × the total number of full-time employees Health Marketplace open enrollment began 1 October 2013 Page 56 Employment tax year in review
  57. 57. Unemployment insurance Page 57 Employment tax year in review
  58. 58. 2013 state unemployment insurance highlights FUTA credit reductions SUI tax Cost of debt Page 58 ► As of 12 November 2013, EY projects that 14 states and territories are at risk of FUTA credit reductions for 2013, slightly less than in 2012 ► For 2013, 23 states raised the SUI wage base, 11 increased SUI base tax rates, and 17 lowered them ► For 2013, 18 states are expected to pass interest costs to employers for loans/bonds Employment tax year in review
  59. 59. Unemployment insurance basics FUTA credit reduction FUTA Employers pay 6% on employee wages up to $7,000 in the year A maximum FUTA credit of 5.4% applies, for a net FUTA rate of 0.6% Page 59 Applies to all employers in those states not compliant with federal law or that have outstanding federal loan balances (under Title XII) for two consecutive years; additional FUTA payments are used to pay down state federal loan balance Applies to individual employers that don’t timely and fully pay their SUI Employment tax year in review
  60. 60. Unemployment insurance basics 2.7% add on Further reduction in FUTA credit if state has outstanding loan for three consecutive years and employer SUI rates don’t meet minimum federal level Benefit cost reduction (BCR) Applies in Virgin Islands in 2012 and 2013 Page 60 Employment tax year in review Further reduction in FUTA credit if state has outstanding loan balance for five consecutive years Triggers in Indiana and South Carolina in 2013 (most states trigger in 2014)
  61. 61. Federal UI loan balance life cycle ► ► FUTA credit reduction of 0.3% applies if loan balance from 10 Nov 2008 Interest was due 30 September (was waived under federal law) ► FUTA credit reduction of 0.9% applies if loan balance from 10 Nov 2008 ► Interest was due 30 September ► Additional FUTA credit reduction is triggered under the 2.7% add-on State receives federal loan to pay unemployment insurance benefits 2008 2009 2010 2011 2012 ► FUTA credit reduction of 1.5% applies if loan balance from 10 Nov 08 ► Interest is due 30 September ► Additional FUTA credit reduction is triggered under the 2.7% add-on ► ► Additional FUTA credit reduction is triggered under the BCR add-on 2013 Interest was due 30 September (was waived under federal law) ► ► Page 61 FUTA credit reduction of 0.6% applies if loan balance from 10 Nov 2008 ► FUTA credit reduction of 1.2% applies if loan balance from 10 Nov 2008 ► Interest was due 30 September Interest was due 30 September ► Additional FUTA credit reduction is triggered under the 2.7% add-on ► ► Additional FUTA credit reduction is triggered under the BCR add-on Employment tax year in review 2014
  62. 62. Federal unemployment insurance for 2013 States projected to have a FUTA credit reduction in 2013 Based on Ernst & Young LLP survey data, 12 November 2013 State Credit reduction rate Net FUTA rate and per employee maximum tax Arizona (loan balance repaid) 0.6% 1.2%/$84 Arkansas 0.9% 1.5%/$105 California 0.9% 1.5%/$105 Connecticut 0.9% 1.5%/$105 Delaware (law passed in 2013 to pay off loan with other state funds) 0.6% 1.2%/$84 Florida (loan balance repaid) 0.9% 0.6%/$42 Georgia (applied for but did not get a freeze at 2012 rate) 0.9% 1.5%/$105 Page 62 Employment tax year in review
  63. 63. FUTA credit reduction states for 2013 States projected to have a FUTA credit reductions in 2013 Based on Ernst & Young LLP survey data, 12 November 2013 State Credit reduction rate Net FUTA rate and per employee maximum tax Indiana (BCR triggers in 2013) 1.2% 1.8%/$126 Kentucky 0.9% 1.5%/$105 Missouri 0.9% 1.5%/$105 Nevada (loan balance repaid) 0.9% 0.6%/$42 New Jersey (loan balance repaid) 0.9% 0.6%/$42 New York 0.9% 1.5%/$105 North Carolina 0.9% 1.5%/$105 Ohio 0.9% 1.5%/$105 Page 63 Employment tax year in review
  64. 64. FUTA credit reduction states for 2013 States projected to have a FUTA credit reductions in 2013 Based on Ernst & Young LLP survey data, 12 November 2013 State Credit reduction rate Net FUTA rate and per employee maximum tax Rhode Island 0.9% 1.5%/$105 South Carolina (BCR triggers in 2013) 1.2% 0.6%/$42 (waiver approved) Vermont (loan balance repaid) 0.6% 0.6%/$42 Virgin Islands (2.7% add-on applies in 2013) 1.2% (net 2.1% with add-on) 1.5%/$147 (+ 2.7% add-on) Wisconsin 0.9% 1.5%/$105 Page 64 Employment tax year in review
  65. 65. Interest on federal loans Another component of rising employer cost ► ► ► ► ► ► The issue of interest debt on federal loans was delayed for two years when, under the American Recovery and Reinvestment Act of 2009, interest was waived for 2009 and 2010 It is likely the waiver of interest partially accounts for the heavy borrowing in 2009 and 2010, as interest-free Title XII loans would have been the most cost-effective way to obtain credit for failing UI trust funds Despite interest group pressure to extend the interest waiver for 2011 and beyond, Congress has not acted to extend the measure States that have not discharged their debt face the issue of paying interest assessments Interest payments cannot be paid from state unemployment trust funds Numerous states funded the 2011 and 2012 interest payment through general revenues, leaving the matter of future funding to 2013 Page 65 Employment tax year in review
  66. 66. States that pass interest expense to employers State Type of debt assessment Arkansas Title XII Colorado Bonds Connecticut Title XII Delaware (potential risk for 2014) Title XII Illinois Bonds Indiana (multiplier included in base rate) Title XII Kansas (paid by negative balance employers) Loan from state fund Kentucky (surcharge applies in 2014) Title XII Michigan Bonds Missouri Title XII Nevada (to apply in 2014) Bonds Page 66 Employment tax year in review
  67. 67. States that pass interest expense to employers State Type of debt assessment New Jersey Title XII New York Title XII Pennsylvania Title XII/Bonds Rhode Island (sunsets in 2015 if loan paid in full) Title XII South Carolina Title XII Virgin Islands (effective 2013) Title XII Wisconsin (bill proposes for state to partially fund in 2013) Title XII Page 67 Employment tax year in review
  68. 68. Case in point UI rates are sometimes incorrectly calculated The Minnesota Court of Appeals ruled that the Minnesota Department of Employment and Economic Development incorrectly set the state unemployment insurance (SUI) rate for a newly-formed employing unit at 8.3% rather than the new employer rate of 3.4%. At issue in the case was whether the department was correct in asserting that partial experience of the predecessor employer was required to be transferred to the successor employer because the entities were under substantially common management or control. (Continental Hydraulics Incorporation v. Department of Employment and Economic Development, No. A12–1654, 10 June 2013) Page 68 Employment tax year in review
  69. 69. Transfer of UI experience in partial acquisition (March 2013 – prior to acquisition) Snack Inc. Baker Inc. Cookies Chips (B. Sweet) Bread Co. Cakes Cookie Co. (J. Dough) Pie Co. In preparation for the sale on 1 April, Snack Inc. transfers B. Sweet to the cookie division and Baker Inc. creates Cookie Co. and transfers its employee, J. Dough, from Pie Co. to head the new company. Prior to the sale, there is common management between Snack Inc. and Cookie Co. Page 69 Employment tax year in review
  70. 70. Transfer or UI experience in partial acquisition (1 April 2013 – day of acquisition) Snack Inc. Baker Inc. Cookie Co. Bread Co. Chips Cakes (J. Dough and B. Sweet) Pie Co. On the day of the acquisition, there is no longer common management between Snack Inc. and Cookie Co. and, under Minnesota law, transfer of UI experience does not apply. Page 70 Employment tax year in review
  71. 71. UI integrity – Responding to UI claim notices ► Under the federal Trade Adjustment Assistance Extension Act of 2011, an employer’s account is required to be charged for unemployment insurance overpayments that are caused by: ► ► ► An employer’s (or an agent of the employer’s) pattern of failure to respond timely or adequately to a state’s request for information All states were required the adopt the provision by 22 October 2013 States may adopt a stricter standard than “pattern of failure”: ► ► Page 71 Under Iowa’s UI integrity provision, the charging provision applies the first time a UI benefit overpayment occurs and the employer did not adequately and timely respond to the state’s request for information Under New York’s UI integrity provision, an employer can be forgiven for the first such failure if good cause can be shown Employment tax year in review
  72. 72. States that have enacted the UI Integrity Act of 2011 (as of 31 October 2013) WA MT ME ND OR VT MN NH ID WI SD MA NY MI WY RI NV PA IA NE IL UT CA NJ OH IN DE WV CO VA KS MO CT DC MD KY NC TN AZ OK NM AR SC MS AK TX AL GA Legislation enacted LA HI FL Legislation pending Bill not yet introduced 22 October deadline for compliance will be missed Page 72 Employment tax year in review Applies after 1 to 2 offenses
  73. 73. Claims management isn’t just good business, it’s the law ► ► ► An employer’s individual UI rate is primarily influenced by the amount of benefits charged to its account Claims are the most significant variable over which employers have a measure of control The primary goal of claims management is the identification and elimination of fraudulent or erroneous benefit charges: ► ► Supporting the claims management program are processes that bring efficiencies to the hiring and firing practices of the business There are four key processes in an efficient claims management program Page 73 Employment tax year in review
  74. 74. Claims management Four key processes Educate and train Benchmark Benefit statement audit Claim review Page 74 Employment tax year in review
  75. 75. Polling question What steps have you taken to make sure you respond timely and fully to UI notices under the new laws? A. We are just now reviewing this issue B. We have discussed gaps and how they will be addressed with our claims management team C. We need more information D. Don’t know/does not apply (EY, faculty, alumni, other) Page 75 Employment tax year in review
  76. 76. State income tax withholding goes retro Page 76 Employment tax year in review
  77. 77. Record year for retroactivity in state income tax laws ► As of 3 July 2013, seven states have enacted income tax withholding changes that are retroactive to 1 January 2013 ► ► In contrast, just three states thus far have enacted tax rate cuts for 2014 and future years Retro changes include both income tax rate changes and changes in the income tax treatment of employee fringe benefits Page 77 Employment tax year in review
  78. 78. State income tax changes in 2013 ► Income tax changes effective 1 January 2013 ► Income tax rate changes in 2014 and future years ► Idaho Indiana 1 Kansas 2 Minnesota North Dakota Ohio Wisconsin ► Indiana (2015) Kansas (2014) Missouri (vetoed and sustained) North Carolina Oklahoma (2015) ► ► ► ► ► ► 1 ► ► ► ► Fringe benefits coupling 2 Standard Page 78 deduction Employment tax year in review
  79. 79. Minnesota and Indiana take fringe benefits in opposite direction Minnesota Indiana 1 January 2013 ► ► Page 79 Transit benefits in excess of $125 per month are taxable Adoption assistance and educational assistance of up to $5,250 is included in taxable wages 1 January 2012 ► Transit benefits in excess of $100 per month (and up to federal limit) is no longer taxable ► Educational assistance of up to $5,250 is no longer taxable Employment tax year in review
  80. 80. Three-step strategy for coping with income tax withholding changes 1 Monitor state 2 Track developments developments through the year against payroll system updates ► It is best to have more than one source for news (don’t just rely on your software or employment tax service provider) Page 80 ► Tracking should include effective date of state/local change, date update provided for payroll system and date the update was installed (payroll period ending date) communication template for state/local tax changes State or locality name ► Nature of the change ► Effective date of the change ► Payroll check date that change will first appear ► Employment tax year in review ► Link to the state/local Form W-4 where applicable ► ► Subscribe to an employment tax news service 3 Create employee Get corporate counsel approval of template where required by company policy
  81. 81. The pay card controversy Page 81 Employment tax year in review
  82. 82. It started with The New York Times, NBC and CBS ► NBC stated: ► ► ► ► ► Employees are forced to accept pay cards Fees eat up $30 per month of workers’ wages Employees don’t receive pay statements, thereby allowing employers to hide wage theft Employer kickbacks amount to a return of the “old-time company store” And then: ► ► New York Attorney General started investigating employer pay card policies Consumer Financial Protection Bureau issued a bulletin (12 September 2013) warning employers against using only payroll cards to pay workers ► Page 82 The agency said that by law workers must be able to choose how they receive their wages, and if they choose to be paid with payroll cards, they are entitled to protections such as disclosure of fees and free withdrawal of their pay each pay day Employment tax year in review
  83. 83. 7 leading employer pay card practices 1. Comply with the law 2. Offer options 3. Don’t be pushy 4. Carefully choose the card issuer 5. Provide information to employees 6. Be mindful of card terms and conditions 7. Make it easy for employees to change their payment method Read more about pay cards and on our blog, Payroll Perspectives from EY. Page 83 Employment tax year in review
  84. 84. Polling question Do you require RCH credits (recognized by the American Payroll Association)? A. Yes B. No In a few weeks, your certificate will be sent to the email address you provided when you registered for this webcast. Page 84 Employment tax year in review
  85. 85. Do you have a handle on year-end 2013? Page 85 Employment tax year in review
  86. 86. Questions Page 86 Employment tax year in review
  87. 87. One-minute recap Page 87 Employment tax year in review
  88. 88. Ernst & Young LLP employment tax contacts Mary Angelbeck mary.angelbeck@ey.com +1 215 448 5307 David Germain david.germain@ey.com +1 516 336 0123 Chris Peters christina.peters@ey.com +1 614 232 7112 Peter Berard peter.berard@ey.com +1 212 773 4084 Julie Gilroy julie.gilroy@ey.com +1 312 879 3413 Stephanie Pfister stephanie.pfister@ey.com +1 415 894 8519 Gregory Carver gregory.carver@ey.com +1 214 969 8377 Mary Gorman mary.gorman@ey.com +1 202 327 7644 Debby Salam debera.salam@ey.com +1 713 750 1591 Bryan J. De la Bruyere bryan.delabruyere@ey.com +1 404 817 4384 Ken Hausser kenneth.hausser@ey.com +1 732 516 4558 Debbie Spyker deborah.spyker@ey.com +1 720 931 4321 Jennie DeVincenzo jennie.devincenzo@ey.com +1 646 734 3517 Thomas Meyerer thomas.meyerer@ey.com +1 202 327 8380 Richard Ferrari richard.ferrari@ey.com +1 212 773 5714 Matthew Ort matthew.ort@ey.com +1 214 969 8209 Page 88 Employment tax year in review
  89. 89. EY puts inform into information Connect with us Follow us on Twitter @EYEmploymentTax Visit us on LinkedIn @Payroll Perspectives from EY Read our blog @payrollperspectivesblog.ey.com Page 89 Employment tax year in review

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