Author name: dshipps

Many employers facing economic challenges because of COVID-19 have considered several possibilities for reducing their contributions to employees’ 401(k) plans. Whether freezing safe harbor matching or nonelective contributions or deciding against making discretionary matching and/or profit-sharing contributions, the goal has been the same: reduce their employee benefits costs. What many employers have not focused on doing, however, is ensuring that employee contributions (elective deferrals and loan repayments) to their 401(k) plans continue to be deposited into the plans in a timely manner. The U.S. Department of Labor (DOL) requires that an employer remit employee contributions to a 401(k) plan “on the earliest date on which such amounts can reasonably be segregated from the employer’s general assets, but in no event later than the 15th business day of the month following the month in which the amounts were paid to or withheld by the employer.” In the case of a “small” plan, i.e., a plan with fewer than 100 participants, the DOL has established a safe harbor under which the remittance of employee contributions is deemed timely if made within seven business days following the pay date. In the case of a “large” plan, i.e., a plan with at least 100 participants, the 15th-business-day-of the-following-month rule isn’t a safe harbor for depositing deferrals but sets the maximum deadline. The DOL will look at all deposits made for the plan year and, absent unusual circumstances, will generally take the position that the quickest remittance is what is required for all remittances. The 15th-business-day outer limit is reserved for circumstances truly beyond the control of the employer. COVID-19 Guidance In light of COVID-19, on April 29 the DOL’s Employee Benefits Security Administration, in EBSA Disaster Relief Notice 2020-01, issued guidance intended to relax the timely remittance requirement for employers unable to satisfy the general rules described above: “The Department [DOL] recognizes that some employers and service providers may not be able to forward participant payments and withholdings to employee pension benefit plans within prescribed timeframes during the period beginning on March 1, 2020, and ending on the 60th day following the announced end of the National Emergency. In such instances, the Department will not—solely on the basis of a failure attributable to the COVID-19 outbreak—take enforcement action regarding a temporary delay in forwarding such payments or contributions to the plan. Employers and service providers must act reasonably, prudently, and in the interest of employees to comply as soon as administratively practicable under the circumstances.” (Emphasis added.) Pandemic-Related Delays The Notice requires that failing to remit employee contributions to the plan in a timely manner be “solely on the basis of a failure attributable to the COVID-19 outbreak.” Given this language, we recommend that an employer that cannot deposit or have its payroll provider deposit elective deferrals into the plan in a timely manner solely due to a COVID-19 issue to document the existence thereof and how the employee contributions were deposited into the plan as soon as possible after the COVID-19 issue was resolved. Potential examples of COVID-19 failures that, in and of themselves, might cause untimely deposits under the general rules include: Furloughing the employer’s payroll staff. Staffing shortages at the payroll provider. Late-Deposit Risks Any employer sponsoring a 401(k) plan should care deeply about ensuring the timely remittance of employee contributions: First, an untimely remittance must be reported on the plan’s annual IRS Form 5500 filing. Depending on the amount reported, a DOL or Internal Revenue Service audit of the plan could be triggered, as late remittances are higher audit risk items on the Form 5500. Second, an untimely remittance of employee contributions is deemed to be an interest-free loan from plan participants to the employer sponsoring the plan. Such a deemed loan constitutes a prohibited transaction under both the Internal Revenue Code and the federal pension law, the Employee Retirement Income Security Act (ERISA). Penalties under the Code amount to 15 percent of the earnings that the late employee contributions would have generated each year, compounded annually; this penalty increases to 100 percent of the foregone earnings if the IRS discovers the untimely remittance before the employer remits the employee contributions and required earnings to the plan. The ERISA penalty would be 20 percent of the foregone interest. Third, employees participating in the 401(k) plan tend not to look kindly upon untimely remittances of employee contributions (it’s their money!), especially if the employer is a “repeat offender.” Not only does this outlook increase audit risk, it creates employee relations issues that can be difficult to navigate.

On May 9, 2020, the U.S. Department of Labor published a program letter which answered a series of questions raised by states regarding the Federal Pandemci Unemployment Compensation (FPUC) program. The FPUC program, authorized by Section 2104 of the CARES Act, provides an additional $600 weekly payment to certain eligible individuals who are receiving other qualifying benefits. The responses are split into three categories: Issuing Payments, Overpayments and Recovery, and Financial Information and Reporting. Some of the answers provided by DOL in UIPL No. 15-20 include: Question: Is the state required to make FPUC payments weekly? Answer: The state must make FPUC payments on the same schedule as the state’s regular UC payments. If the state pays regular UC on a bi-weekly basis, it can maintain that same schedule for FPUC. Question: Is an individual who is working part-time, or has gone back to work part ­time, and is collecting partial UC benefits for a week eligible for FPUC? Answer: Yes. An individual working part-time who otherwise meets state eligibility requirements for the underlying benefit is eligible to receive the FPUC payment. Question: Does the additional FPUC payment affect how much a person could earn while working par- time before a deduction is made from the weekly underlying benefit payment? Answer: No. All earnings are deducted from the underlying UC benefit payment. If an individual’s earnings reduce the week’s underlying benefit payment to zero, the individual would not be eligible for FPUC for that week. Question: Are FPUC benefits subject to federal income tax withholding? Answer: Yes. Both the underlying benefit payment and the FPUC benefit payment are subject to federal income tax withholding. Individuals may elect to have federal withholding deducted from their FPUC payments separately from the withholding for the underlying benefit payments. Question: May the state suspend benefit offsets to provide relief to unemployed individuals? Answer: No. The state may not suspend benefit offsets. The Middle Class Tax Relief and Job Creation Act of 2012 changed the benefit offset provision from “may” to “shall” under both Section 3304(a)(4)(0), FUTA, and Section 303(g)(1), SSA, so federal UI law requires states to offset benefits. Question: How should states handle prosecutions of FPUC fraud overpayments? Answer: Individuals who fraudulently obtain FPUC benefits are subject to prosecution under 18 U.S.C. § 1001, among other federal criminal statutes. States must pursue FPUC fraud cases in the same manner as all other federal UC fraud cases. For referrals of fraud cases to the U.S. Department of Labor’s Office of Inspector General (OIG), states should follow the guidance provided in UIPL No. 29-05. “With all 50 states and two territories already providing this important benefit to eligible claimants, we hope today’s guidance assists these states and territories in continuing to faithfully execute this program during this challenging time,” said Assistant Secretary for Employment and Training John P. Pallasch in a news release. “The U.S. Department of Labor will continue to stand behind states as they administer this and other vital CARES Act programs, and today’s guidance is yet another example of our ongoing  commitment.”

Conducting a layoff is never easy—and conducting a layoff virtually adds new challenges for employers. While difficult for both the employer and employees effected, employers can improve this process by utilizing best practices. Effective remote layoffs can ease this difficult time for laid-off employees, while avoiding risk for the employer. What Are Layoffs?Layoffs are mass firings of employees, sparked by a need to cut expenses to save an organization in crisis—not typically due to employee performance. However, layoffs are permanent. Unlike furloughed employees, laid-off employees no longer have access to their employee benefits. However, they are typically entitled to unemployment assistance. Expansion of Remote Work—and Remote LayoffsA survey conducted by the Society of Human Resource Management and Oxford Economics found that 64% of HR professionals report having salaried professionals who are working remotely. Though remote work had been growing prior to the coronavirus disease (COVID-19) pandemic, more employees are working remotely than ever before.This same survey found that 32% of employers are planning on reducing their headcounts—through actions such as layoffs. Given current economic conditions, cost-saving measures such as layoffs are a reality for many employers. Unfortunately, in-person layoffs aren’t always feasible, and employers should prepare accordingly. Conducting a Remote LayoffWhen creating a process for remote layoffs, employers can consider including the following practices: • Set up a meeting—Ensure varying time zones are accounted for, as participants may be joining from various locations.• Include HR, and the employee’s manager—Including both HR and the employee’s manager can eliminate the need for multiple conversations.• Use video platforms if possible—Though the layoff won’t take place in person, using a video platform can allow for a face-to-face conversation. If video is not an option, consider a phone conference rather than an email.• Be detailed—Include critical information such as the termination date, and benefits and compensation information.• Create expectations—Be transparent about next steps for the affected employee—including the return of company-owned critical assets.• Prepare to answer questions—Support the laid-off employee by being prepared to answer clarifying questions that he or she may have. Prepare for Follow-up StepsWhen conducting layoffs—there are necessary steps to be completed. To ensure that loose ends are tied up, employers may consider the following: • Proactively involving IT—Before conducting remote layoffs, communicate with IT about removing the laid-off employee’s access to internal networks. As you won’t be able to collect equipment immediately, it will be necessary to conduct IT tasks remotely. Let IT know of any required actions in advance to ensure that tasks can be completed in a timely manner while avoiding missteps. • Creating specific follow-up actions—There may be follow-up actions that need to take place—don’t hesitate. Follow-up actions may need to be completed not only by the employer but by the employee being laid-off. Employers will want to plan for follow-up actions, including:o Mailing or shipping necessary materialso Providing necessary resources Employers should also ensure to provide the laid-off employee with guidance and resources to complete any required tasks. These may include: o Returning any proprietary documents or informationo Requiring signatures—completed via next-day delivery, or electronically Effective Remote LayoffsLaying off employees can be a necessary reality for many employers. More work functions, including the process of laying off an employee, are often beginning to take place remotely. Be using best practices, employers can minimize risk for the organization and ease the transition for affected employees. Laws and guidelines related to terminations may vary—when updating practices, employers should consult with local legal counsel. For additional remote workplace resources, contact Pinkerton Insurance Group.

The Small Business Administration (SBA) recently issued new guidance regarding the Payment Protection Program (PPP), established to offset the economic effects of the coronavirus pandemic. Small businesses can request loans from the PPP to help cover payroll costs. This new guidance from the SBA concerns employees who refuse to return to work after a business reopens. Background Small businesses can request loans from the PPP to be used as wages for employees, up to 2.5 times the average monthly payroll. Using the funds this way makes the loan entirely forgivable. The catch is that the business must rehire the same number of full-time employees that it used to calculate the PPP loan amount. The problem is that many employers don’t necessarily need all those staff members to return, especially if operations have been slowed. Furthermore, some employees may not even want to return—and not necessarily for coronavirus concerns. Some employees might be making more with unemployment benefits and don’t want to lose them by returning to work. What’s New The SBA understands some employees may not wish to return for a number of reasons, so it issued new guidance. As long as businesses “make a good faith” effort to rehire employees—and explain that they may lose their unemployment eligibility by not returning—the businesses would not face a penalty under that portion of the loan. Employers should carefully document any communication with employees in case they refuse to return to work and evidence is needed when requesting PPP loan forgiveness. Read the full text of the guidance below: Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer? Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of reemployment may forfeit eligibility for continued unemployment compensation. For more information, visit SBA.gov.

Many small businesses must rely on payroll-protection loans to keep workers on board during the coronavirus pandemic-and they need to carefully plan and track their spending if they intend to apply for loan forgiveness. Under the $2.2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act, Congress allocated $349 billion to the Paycheck Protection Program (PPP) to help small businesses keep workers on their payrolls. The fund was depleted in less than two weeks, so lawmakers added more than $300 billion (www.shrm.org/resourcesandtoo/llsegal-and-compliance/employment-law/pages/house• approves-small•business-coronavirus-relief.aspx). A covered small business may qualify for a loan of up to 2.5 times its average monthly payroll costs-up to a maximum of $10 million . The U.S. Small Business Administration (SBA), which is administering the program, will forgive loans if: The loan proceeds are used to cover payroll costs, as well as most mortgage interest, rent andutility costs over the eight-week period after the loan is made. Employee headcount and pay levels are maintained. The eight-week period begins on the date the lender makes the initial distribution to the business. Remember that the intent is to keep people on payroll and to support the ongoing operations of your business,” said Patrick Dennison, an attorney with Fisher Phillips in Pittsburgh . Employers should take a conservative approach while keeping the intent of the loan program in mind, he suggested. Here’s what employers need to know about loan forgiveness under the program. Payroll Costs “Small businesses and eligible nonprofit organizations, veterans organizations, and tribal businesses described in the Small Business Act. as well as individuals who are self-employed or are independent contractors, are eligible if they also meet program size standards,” according to the SBA. Most businesses are only eligible if they employ fewer than 500 employees. However, businesses that employ more than 500 workers may be eligible if they meet the SBA’s size standards (https://www.sba.gov/documenVsupport- table-size-standards) for their industry. “The SBA has been very clear on the uses of the PPP loans that are forgivable,” observed Jonathan Forgang, an attorney with Alston & Bird in Los Angeles. Borrowers are required to spend at least 75 percent of the loan proceeds on payroll costs. Employers need to monitor their expenditures during the first eight weeks after the PPP loan is originated, he noted, to ensure that no more than 25 percent of the loan proceeds are spent on nonpayroll costs such as rent, mortgage Interest and utilities payments. Payroll costs include: Salary, wages. commissions and tips- up to $100,000 annualized for each employee. Employee benefits, including paid leave, severance pay, insurance premiums and retirement benefit. State and local taxes assessed on pay. Payroll costs for sole proprietors and independent contractors include wages, commissions, income or net earnings from self­ employment (up to $100,000 annualized). Although payroll costs include paid sick leave, employers should note that paid-sick leave and paid-family leave payments made under the Families First Coronavirus Response Act (www.shrm.org/ResourcesAndTools/legal-and-compliance/employment-law/pages/ dol-issues­ guidance-on-coronavirus-paid-leave-mandate.aspx) (FFCRA) are excluded because reimbursement for those mandates will be provided through tax credits. Compensation is also excluded for any employee whose principal place of residence is outside the U.S. The SBA explained that payroll costs are calculated on a gross basis without considering federal taxes, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes that are required to be withheld from employees. “As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer,but payroll costs do not include the employer’s share of payroll tax,” the SBA said. The administration provided the following example: If an employee earned $4,000 a month in gross wages and $500 was withheld for federal taxes, then the total $4,000 would count as payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer’s federal payroll tax obligation for the $4,000 in wages is excluded from payroll costs under the statute. “The spirit and overarching intent of the bill is to either keep people working or bring them back to work,” said Stephanie O’Rourk. a partner advisory, assurance and tax firm CohnReznick in Atlanta. The SBA explained that the forgivable amount will be reduced if an employer: Decreases its full-time employee headcount. Cuts salaries and wages by more than 25 percent for any employee who made less than $100.000 (annualized) during all pay periods in 2019. Employers can choose to compare workforce reductions during the eight-week loan period with the average number of employees on staff from either: Feb. 15, 2019, to June 30, 2019. Jan. 1, 2020, to Feb. 29, 2020. So if a business employed 20 workers during the comparison period and only 10 workers during the loan period, the forgivable amount would be reduced by 50 percent. O’Rourk explained. “There is a cure period.” she noted. EMPLOYERS WHO MADE REDUCTIONS BETWEEN FEB. 15, 20 20 , AND APRIL 26 , 2020 , HAVE UNTIL JUNE 30, 2020 , TO RESTORE THEIR FULL-TIME EMPLOYMENT AND SALARY LEVELS TO QUALIFY. “An employer could theoretically hire back its employees for one day, June 30, in order to fall under this exception.” Forgang said. “However, Treasury Secretary Steven Mnuchin has had strong words for any employers attempting to take advantagao f the PPP loan program in a manner that goes against the intent of the law.” The U.S. Treasury Department is periodically updating its FAQ list (https://home.treasury.go/vsystem/files/136/Paycheck-Protection-Program­ Frequently-Asked-Questions .pdf) to answer more nuanced questions. Record-Keeping Employer s should diligently monitor their expenditures during the eight-week period after the loan Is funded to be sure that no more than 25 percent of the PPP loan proceeds are spent on nonpayroll costs such as rent. mortgage interest or utilities payments, Forgang said. Pete lsberg, vice president of government affairs at payroll and HR services firm ADP, suggested that employers open a separate account to be very clear about how the funds are used. Employers will ultimately have to submit a forgiveness request to the lender along with

Businesses that received Paycheck Protection Program (PPP) loans can exclude laid-off employees from loan forgiveness reduction calculations if the employees turn downa written offer to be rehired, according to new guidance from the U.S. Small Business Administration (SBA), which warned that employees who reject offers of reemploymentmay find themselves ineligible to continue receiving unemployment benefits. The guidance was included among three new questions the SBA added over the weekend to a PPP frequently asked questions (FAQ) file (https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf) it maintains in consultation with Treasury. The new guidance is included in FAQs 40–42. The first of the new questions asks if a borrower’s PPP forgiveness amount would be reduced if the borrower lays off an employee and then offersto rehire the employee, but the employee declines the offer. According the guidance, SBA and Treasury plan to issue a new rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the loan forgiveness reduction calculation spelled out in the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, which authorized Treasury to create the PPP through the SBA’s 7(a) lending system. The interim final rule will specify that a borrower may exclude an employee from loan forgiveness calculations if the borrower made a good-faith, written offer of rehire and also documented the employee’s rejection of that offer. The guidance does not specify what form that documentation should take. Some employees have been turning down offers to be rehired for the same jobs for a variety of reasons, one of them being that they are making more money in unemployment benefits than they do in pay at their jobs because the CARES Act temporarily provides an additional $600 per week to people who have been approved by their state for unemployment insurance. The new FAQ, however, warns that employees could be banned from receiving unemployment benefits if they turn down a reemployment offer. “Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation,” according to the guidance, which did not provide specifics on how that process might work. The other two questions added to the FAQs addressed (1) whether seasonal employers must make all the required certifications on the Borrower Application Form if they elect to use an alternative 12-week base period as allowed under the interim final rule issued April 27 (https://www.journalofaccountancy.com/news/2020/apr/how-tocalculate-ppp-loans-sba-coronavirus-relief.html.) and (2) whether not-for-profit hospitals exempt from taxation under Sec. 115 of the Internal Revenue Code qualify as “nonprofit organizations” under Section 1102 of the CARES Act. The PPP so far Congress established the PPP through the CARES Act, which was signed into law on March 27. The program is available to small businesses that were in operation on Feb.15 with 500 or fewer employees, including not-for-profits, veterans’ organizations, Tribal concerns, self-employed individuals, sole proprietorships, and independent contractors. Businesses with more than 500 employees in certain industries also can apply for loans, according to the SBA and Treasury. SBA lenders were flooded with PPP applications from businesses in need of resources to help their businesses as the coronavirus pandemic and the consequences from social-distancing requirements devastated the economy. By April 16, the SBA had stopped accepting applications for the PPP after exhausting the initial $349 billion in funding. Two weeks ago, Congress approved an additional $370 billion in funding for small businesses, with $310 billion in fresh funds provided for the PPP. The application window for the second round of PPP funding opened April 27.

A dependent care assistance program (DCAP) allows employees to pay for qualifying dependent care expenses, such as day care expenses, on a tax-free basis, up to certain limits. With many schools and day care facilities closing due to the COVID-19 outbreak, employees may want to change the amount of their DCAP contributions. Also, employees may be concerned about not being able to use all of their DCAP funds this year due to changing child care needs and availability.    Although the IRS has not issued any specific relief or guidance for DCAP benefits due to the COVID-19 outbreak, existing rules may help employees impacted by the outbreak. For example, under existing rules, DCAPs can be designed to: Allow employees to change their pre-tax elections when there is a change in employment status or if there is a change in cost or coverage of dependent care services. Include a grace period to allow employees to use any unused funds that remain at the end of the plan year for an additional 2 ½ months. For example, this would allow employees with DCAPs that operate on a calendar year basis to use their 2020 funds for eligible dependent care expenses incurred through March 15, 2021. Allow terminated employees to spend down their accounts rather than immediately forfeiting the unused amounts. DCAP – Key Legal Rules A DCAP is an employer-sponsored benefit plan that allows employees to pay for certain dependent care expenses on a tax-free basis, up to a specified limit. Most DCAPs are structured so that employees make contributions on a pre-tax basis through an Internal Revenue Code (Code) Section 125 cafeteria plan. Because of these tax advantages, DCAPs are subject to a number of legal restrictions. Impact of COVID-19 Outbreak The COVID-19 outbreak may impact employees’ DCAP benefits in a variety of ways. Many employees are experiencing changes with day care providers and schools and may need to adjust their pre-tax contribution amounts. Other employees may be concerned that they will forfeit unused amounts in the DCAP account because their child care expenses or employment status has changed. Employers with DCAPs should be familiar with legal restrictions that may impact employees during the COVID-19 outbreak. Employers may design their DCAPs to help minimize the impact of the COVID-19 outbreak on employees’ DCAP benefits. Mid-year Election Changes DCAPs that include pre-tax contributions must comply with the Code Section 125 restrictions on mid-year election changes. Under Section 125, participant elections must made before the first day of the plan year and must remain in effect until the beginning of the next plan year. This means that participants typically cannot make changes to their DCAP  elections during a plan year. Employers do not have to permit any exceptions to the election irrevocability rule. However, IRS regulations permit employers to design their DCAPs to allow employees to change their elections during the plan year, if certain conditions are met. DCAPs may be designed to allow employees to change their elections when the following events occur, provided that the employee’s requested change is consistent with the event: Event Description Change in Status Event A change in the employee’s number of dependents, a change in employment status of the employee or spouse, a change in the place of residence of the employee, spouse or dependent or the employee’s spouse or a dependent child ceasing to satisfy dependent eligibility requirements may allow an employee to change his or her election during a plan year. This may occur, for example, if an employee changes work schedules from full time to part time, which reduces the hours of child care needed and the amount of dependent care expenses. Changes in Cost or Coverage Changes in cost and coverage for dependent care services may allow an employee to change his or her election during the plan year. This may occur when a child care provider is no longer providing care (for example, a daycare closes or a summer camp cancels), when an employee switches from a paid provider to free care (for example, a relative or neighbor), when an employee no longer needs child care or when an employee needs additional child care due to a school closure. Family Medical Leave Act (FMLA) Leave Employees who take an FMLA leave are entitled to revoke an election of non-health benefits (such as DCAP benefits) to the same extent as employees taking a non-FMLA leave are permitted to revoke elections of non-health benefits. Forfeitures Any unused funds that remain in an employee’s DCAP account at the end of the plan year (or coverage period) must be forfeited. As an exception, the IRS allows employers to design their DCAP with an extended deadline, or grace period, of 2 ½  months after the end of a plan year to use DCAP funds. Thus, for a plan year ending Dec. 31, the employees would have until March 15 to spend the funds in their DCAP.  In addition, individuals whose employment is terminated forfeit any unused balances remaining in their DCAP accounts at the time of the termination. However, the IRS permits DCAPs to incorporate a spend-down provision for employees whose participation terminates during a coverage period. At the employer’s option, a DCAP may allow terminated participants to use unused amounts in their accounts for dependent care expenses incurred during the remainder of the plan year (or grace period immediately after that plan year, if applicable). Employer Considerations To assist employees impacted by the COVID-19 pandemic, employers with DCAPs should consider taking the following steps: Review their DCAP plan documents to confirm that they permit mid-year election changes for changes in employment status, changes in cost or coverage and FMLA leave. Depending on the specific facts involved, many of the changes that employees are experiencing in connection with the COVID-19 outbreak (for example, child’s daycare is closed) are exceptions that allow employees to change their DCAP elections. Implement a grace period that allows employees to use any unused funds that remain at the end of the