- Why Proliant
Below is a client letter you can use to help summarize for your clients (both individuals and small business owners) the key provisions in the SECURE 2.0 Act.
In late December while most practitioners and their clients were busy with other things, Congress was passing a giant omnibus budget bill. Buried within it was the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (SECURE 2.0), which contains many retirement (and some other) changes that practitioners and their clients need to be aware of. It provides new incentives for employers to offer retirement plans to their employees and for the employees to participate and improve their retirement security. SECURE 2.0 helps employees and their beneficiaries, owner-employees, small businesses, and retirees, and eases costs, administrative burdens, and penalties for inadvertent mistakes. It will also require most plans to be amended to comply with some of its provisions. The 2023 omnibus bill containing the following key provisions was signed into law by the President on December 29, 2022.
Provisions Benefiting Individuals
Tax-free rollovers from 529 accounts to Roth IRAs. After 2023, the Act permits beneficiaries of 529 college savings accounts to make up to $35,000 of direct trustee-to-trustee rollovers from a 529 account to their Roth IRA without tax or penalty. The 529 account must have been open for more than 15 years, and the rollover is limited to the amount contributed to the 529 account (and its earnings) more than five years earlier. Rollovers are subject to the Roth IRA annual contribution limits, but are not limited based on the taxpayer's AGI.
Age increased for required distributions. Under the Act, the age used to determine required distribution beginning dates for IRA owners, retired employer plan members, and active-employee 5%-owners increases, in two stages, from the current age of 72 to age 73 for those who turn age 72 after 2022, and to age 75 for those who attain age 74 in 2032.
Bigger catch-up contributions permitted. Starting in 2025, the Act increases the current elective deferral catch-up contribution limit for older employees from $7,500 for 2023 ($3,500 for SIMPLE plans) to the greater of $10,000 ($5,000 for SIMPLE plans), or 50% more than the regular catch-up amount in 2024 (2025 for SIMPLE plans) for individuals who attain ages 60-63. The dollar amounts are inflation-indexed after 2025.
More penalty-free withdrawals permitted. The Act adds an exception after 2023 to the 10% pre age-59½ penalty tax for one distribution per year of up to $1,000 used for emergency expenses to meet unforeseeable or immediate financial needs relating to personal or family emergencies. The taxpayer has the option to repay the distribution within three years. No other emergency distributions are permissible during the three-year period unless repayment occurs.
Similarly, plans may permit participants that self-certify having experienced domestic abuse to withdraw the lesser of $10,000, indexed for inflation, or 50% of their account free from the 10% tax on early distributions. The participant has the opportunity to repay the withdrawn money from the retirement plan over three years and get a refund of income taxes on money that is repaid. Also, the additional 10% early distribution tax no longer applies to distributions to terminally ill individuals.
Beginning December 29, 2025, retirement plans may make penalty-free distributions of up to $2,500 per year for payment of premiums for high quality coverage under certain long term care insurance contracts.
Also, retroactive for disasters after January 25, 2021, penalty free distributions of up to $22,000 may be made from employer retirement plans or IRAs for affected individuals. Regular tax on the distributions is taken into account as gross income over three years. Distributions can be repaid to a tax preferred retirement account. Additionally, amounts distributed prior to the disaster to purchase a home can be contributed, and an employer may provide for a larger amount to be borrowed from a plan by affected individuals and for additional time for repayment of plan loans owed by affected individuals.
The Act also contains an emergency savings provision that allows employers to offer non-highly compensated employees emergency savings accounts linked to individual account plans that automatically opt employees into these accounts at no more than 3% of their salary, capped at a maximum of $2,500. Employees can withdraw up to $1,000 once per year for personal or family emergencies without certain tax consequences.
Reduced penalty tax on failure to take RMDs. For tax years beginning after December 29, 2022, the Act reduces the penalty for failure to take required minimum distributions from qualified retirement plans, including IRAs, or deferred compensation plans under Code Sec. 457(b) from the current 50% to 25% of the amount by which the distribution falls short of the required amount. It reduces the penalty to 10% if the failure to take the RMD is corrected in a timely manner.
Favorable surviving spouse election. For plan years after 2023, the surviving sole spousal designated beneficiary of an employee who dies before RMDs have begun under an employer qualified retirement plan may elect to be treated as if the surviving spouse were the employee for purposes of the required minimum distribution rules. If the election is made distributions need not begin until the employee would have had to start them.
This provision allows a designated spousal beneficiary to receive a similar distribution period for lifetime distributions under an employer plan as is permitted if the surviving spouse rolled the amount into an IRA.
IRS will prescribe the time and manner of the election, which once made may not be revoked without IRS' consent.
Employer match for student loan payments. To assist employees who may not be able to save for retirement because they are overwhelmed with student debt, and are missing out on available matching contributions for retirement plans, SECURE allows them to receive matching contributions by reason of their student loan repayments. For plan years after 2023, it allows employers to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA for "qualified student loan payments."
More qualified for ABLE programs. States may establish tax-exempt ABLE programs to assist persons with disabilities. Under current law, an individual must become disabled or blind before age 26 to be eligible to establish an ABLE account. The Act raises the age threshold from 26 to 46. The change is effective for tax years beginning after 2025.
Tax-exempt disability retirement payouts for first responders. The Act allows law enforcement officers, fire fighters, paramedics, and emergency medical technicians to exclude from gross income certain service-related disability pension or annuity payments (from a 401(a), 403(a), governmental 457(b), or 403(b) plan) after they reach retirement age. The exclusion applies to amounts received for post-2026 tax years.
Telehealth exemption for HDHPs. To facilitate the use of telehealth during the COVID pandemic, the CARES Act provided that coverage for telehealth and other remote care services would be disregarded coverage, which could be provided before a High Deductible Health Plan minimum deductible was satisfied without causing a loss of Health Savings Account eligibility for plan years beginning before 2022. The Act amends the IRC to provide that the exception for telehealth and other remote care services applies to plan years beginning after 2022 and before 2025.
Return of excess contributions. The Act specifies that earnings attributable to excess IRA contributions that are returned by the taxpayer's tax return due date (including extensions) are exempt from the 10% early withdrawal tax. The taxpayer must not claim a deduction for the distributed excess contribution. This applies to any determination of, or affecting, liability for taxes, interest, or penalties made on or after December 29, 2022.
Time limit on excess contribution excise tax. The Act provides that the statute of limitations for the assessment of excise taxes on excess contributions to tax-favored accounts and accumulations on qualified retirement plans begins to run on the filing of the taxpayer's income tax return for the year of the violation and runs for three years (six years in the case of excess contributions). The starting point no longer depends on the plan's filing an excise tax return.
Small Business Provisions
Bigger tax credit for start-up retirement plans. The SECURE Act improves the small employer pension plan start-up cost credit in three ways for tax years starting after 2022.
First, it makes the credit equal to the full amount of creditable plan start-up costs for employers with 50 or fewer employees (up to an annual cap). Previously only 50% of costs were allowed (which still applies to employers with 51 to 100 employees).
The Act also retroactively fixed a technical glitch that prevented employers who joined multi-employer plans in existence for more than three years from claiming the start-up cost credit. Employers that joined a pre-existing multi-employer plan in 2000 or 2001 should contact us about filing amended returns claiming the credit.
Perhaps the biggest change is that certain employer contributions for a plan's first five years now may qualify for the credit. The credit is increased by a percentage of employer contributions, up to a per-employee cap of $1,000: it is 100% in the plan's first and second tax years, 75% in the third year, 50% in the fourth, and 25% in the fifth. For employers with between 51 and 100 employees, the contribution portion of the credit is reduced by 2% times the number of employees above 50.
In addition, no employer contribution credit is allowed for contributions for employees who make more than $100,000 (adjusted for inflation after 2023). The credit for employer contributions also is not available for elective deferrals or contributions to a defined benefit pension plan.
New credit for military spouses. The Act adds a new tax credit for employers with no more than 100 employees earning at least $5,000 for the preceding year for each military spouse who starts participating in an eligible employer defined contribution plan. Highly compensated employees are excluded from consideration. The annual credit amount for the year the spouse begins participating in the plan and each of the next two tax years is (1) $200 for each plan-participating military spouse, plus (2) up to $300 of related employer plan contributions. This new credit is available for tax years beginning after December 29, 2022.
Retroactive first-year deferrals for sole proprietors. To correct the situation where a sole proprietor can't make an elective deferral for the first year to a plan created after the close of the year, the Act provides, for plan years beginning after 2022 for a sole proprietor who is the only employee of an unincorporated trade or business, that any elective deferral made by the proprietor's original tax return due date ending after or with the end of the plan's first plan year, will be treated as made before the end of that first plan year.
Key Retirement Plan Provisions
Automatic salary deferral enrollment. For plan years beginning after 2024, the Act provides that a plan that permits salary deferrals generally will not be treated as a qualified cash or deferred arrangement or annuity contract unless it includes an automatic contribution arrangement (EACA) that satisfies these requirements:
Exceptions: Automatic enrollment is not required for SIMPLE 401(k) plans, plans established before December 29, 2022, governmental or church plans, plans maintained by an employer in existence for less than three years or with fewer than 11 employees.
New "starter 401(k) plans. The Act establishes two new kinds of retirement plan designs for plan years beginning after 2023, which smaller employers may be inclined to offer to employees due to their eased costs and administrative burdens:
Improved coverage for part-timers. The Act modifies the rules that apply to long-term part-time employees under a 401(k) or 403(b) plan subject to ERISA to reduce the service requirement for those employees from three years to two consecutive years, for employees who have worked for the employer at least 500 hours per year and have met the minimum age 21 requirement by the end of the two-year period. This change is effective for plan years beginning after 2024.
More plan self-correction permitted. The Act expands the use of self-correction under the IRS Employee Plans Compliance Resolution System (EPCRS) in a number of ways. It generally allows qualified plans under Code Sec. 401, Code Sec. 403, as well as SEPs and SIMPLE IRAs under Code Sec. 408 to self-correct certain inadvertent failures (defined expansively, but not including egregious or abusive violations), including participant-loan-related errors, without advance permission, unless the error is identified by IRS before any corrective actions are taken, or the self-correction is not completed within a reasonable time after the failure is identified.
The Act also directs the IRS to allow custodians to use EPCRS to address various IRA failures, including failures to make required minimum distributions and attempted rollovers by nonspouse beneficiaries from inherited IRAs. These provisions are effective as of December 29, 2022, and EPCRS must be revised for these changes within two years.
Eased notice requirements for unenrolled participants. For plan years after 2022, the Act exempts defined contribution plans from intermittent notification requirements for participants who elect not to participate, and who have already received a summary plan description and any other notices related to initial eligibility. However, unenrolled participants must still receive: an annual reminder notice of their eligibility to participate with any applicable deadlines; and certain other documents they request.
Extended plan amendment period. The deadline for plan amendments made under the Act or any related IRS or DOL regulation is the end of the first plan year beginning on or after January 1, 2025 (2027 for governmental and collectively bargained plans). In the interim, a plan that operates as if a retroactive amendment were already in effect generally will not be treated as violating the anti-cutback rules. The Act also conforms certain plan amendment deadlines under the SECURE Act, the CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 to these new dates.
Catch up contributions of highly compensated. For tax years beginning after 2023, catch-up contributions under Code Sec. 401(k), Code Sec. 403(b), or Code Sec. 457(b) plans are subject to mandatory Roth tax treatment, for those made by participants whose wages for the preceding calendar year exceed $145,000, as annually indexed for inflation. This rule does not apply to simplified employee pensions under Code Sec. 408(k), or to SIMPLE IRAs under Code Sec. 408(p).
Even plans that do not provide a designated Roth contribution feature will now be forced to include and account for designated Roth contributions to the extent that they have employees with income that exceeds the annual limitation.
Matching or nonelective Roth contribution option. Before the Act, employers were not permitted to make matching or nonelective contributions on a Roth basis. For contributions made after December 29, 2022, however, a Code Sec. 401(a) qualified plan, a Code Sec. 403(b) plan, or a governmental Code Sec. 457(b) plan may permit a participant to designate some or all employer matching contributions and nonelective contributions as designated Roth contributions. This applies only to the extent that a participant is fully vested in these contributions.
Contribution changes for SIMPLE plans. Employers with SIMPLE plans currently must either make contributions for employees of 2% of compensation or match employee elective deferral contributions up to 3%. For tax years beginning after 2023, the Act permits an employer to make additional contributions to each employee of the plan in a uniform manner, of up to the lesser of up to 10% of compensation or $5,000 (indexed).
The Act also increases the SIMPLE annual deferral limit and the catch-up contribution at age 50 by 10%, compared to the limit that would otherwise apply in the first year. This change is effective (tax years after 2023) for employers with no more than 25 employees. Employers with 26 to 100 employees could provide for higher deferral limits, but only if they either provide a 4% match or a 3% employer contribution. Similar changes to the contribution limits also apply to SIMPLE 401(k) plans.
Changes for Conservation Easements
Restriction for pass-throughs. The Act disallows a charitable deduction for an otherwise-qualified conservation easement contribution made by a partnership, S corporation, or other pass-through entity, if the amount contributed exceeds 2.5 times the sum of each partner/member's basis in the contributing entity. Exceptions apply where the contribution meets (1) a three-year holding period test, (2) substantially all of the contributing entity is owned by members of a family, or (3) the contribution relates to a certified historic structure (for which there is a new reporting requirement).
Correcting easement deeds. The Act allows taxpayers to correct easement deed language for extinguishment clauses and boundary line adjustments, substituting safe-harbor language to be issued by the IRS but not for easements involving tax shelters, contributions to which the above pass-through disallowance applies, docketed Tax Court cases, or where penalties have been finalized. The provision applies to contributions made after December 29, 2022.
We know that this amount of information is overwhelming, but there is much here that may affect you or your business, and induce or require you to change your retirement plan or how you handle your account and distributions. It's a lot to consider.
Be assured that we can help you with all of this. Please don't hesitate to call us for more information and our assistance.
This latest State Roundup provides legislative and regulatory updates for various topics of interest to payroll professionals that go into effect in 2023.
See our other State Roundups on specific topics:
Wage and Hour
California. Effective January 1, 2023, unless otherwise stated.
District of Columbia.
The IRS has released the 2023 final version of its Publication 15-B (The Employer's Tax Guide to Fringe Benefits).
The "What's New" section of the publication includes information on the 2023 business mileage rate under the "cents-per-mile rule", the monthly exclusion for qualified parking and commuter transportation benefits , and the contribution limit on a health flexible spending arrangement (FSA).
There is a table on page 6 of the publication that summarizes the differences in the treatment of various fringe benefits for federal income tax withholding (FITW), Social Security and Medicare (FICA), and federal unemployment tax (FUTA) purposes. For example, payments from an employer's adoption assistance plan that meet certain requirements are not subject to FITW. However, the payments are subject to FICA and FUTA tax.
Qualified parking exclusion and commuter transportation benefit. The monthly exclusion for qualified parking is $300, and the monthly exclusion for commuter highway vehicle transportation and transit passes is $300 in 2023.
Contribution limits for health flexible spending arrangements (FSAs). A cafeteria plan may not allow employees to request salary reduction contributions to health FSAs greater than $3,050 in 2023.
Employers must generally determine the value of noncash fringe benefits no later than January 31 of the next year. Before January 31, employers may reasonably estimate the value of the fringe benefits for purposes of withholding and depositing on time. Employers may be subject to a penalty if they underestimate the value of the fringe benefits and deposit less than the amount that they would have had to deposit if the applicable taxes had been withheld. If employers overestimate the value of the fringe benefit and over deposit, they may either claim a refund or have the overpayment applied to their next Form 941.
IRS Publication 15-B supplements IRS Publication 15, (Circular E) (Employer's Tax Guide), and IRS Publication 15-A (Employer's Supplemental Tax Guide).
The Department of Homeland Security (DHS) proposes to adjust certain fees charged by U.S. Citizenship and Immigration Services (USCIS) including establishing distinct fees for petitions of nonimmigrant workers [88 FR 402, U.S. Citizenship and Immigration Services Fee Schedule and Changes to Certain Other Immigration Benefit Request Requirements, 01/04/2023].
The USCIS notes that 95% of its funding is from customers in the form of filing fees, and not through Congressional appropriations through taxpayers. The last fee adjustment occurred in 2016.
Proposed fee rule. The rules have been proposed after a comprehensive review revealed that the current fee schedule does not meet the agency's full cost of operations. The proposed rule increases some fees but will maintain the fee waiver for low-income and vulnerable populations as well as create new fee exemptions for certain humanitarian programs.
The proposed rules establish separate fees for Form I-129 (Petition for a Nonimmigrant Worker), by nonimmigrant classification. These fees can be found on Table 1: Comparison of Current and Proposed Fees of the proposed rules in the section labeled "Employment-Based." For example, the USCIS proposes to increase the H-1B Pre-Registration Fee from $10 to $215. The proposed rules would also seek to limit the number of named beneficiaries on certain petitions for nonimmigrant workers.
The proposed rules would change the premium processing timeframe from 15 calendar days to 15 business days and institute lower fees for certain forms filed online.
Finally, the proposed rule would create a new Asylum Program Fee surcharge of $600 to be paid by employers who file either Form I-129 or Form I-140 (Immigrant Petition for Alien Workers) to cover some of the costs associated with asylum processing, which does not currently include a fee.
The USCIS has released a Proposed Fee Rule Frequently Asked Questions for further information.
Comment period. Written comments must be submitted on this proposed rule on or before March 6, 2023. Comments may be submitted at https://www.regulations.gov/docket/USCIS-2021-0010.
On December 14, 2022, the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) signed a Memorandum of Understanding (MOU) for employment tax referrals related to worker misclassification.
Consequences of misclassification. Worker classification remains a top concern for both the DOL and the IRS. From a labor standpoint, improper classification of a worker as an independent contractor will lead to the loss of protections under the Fair Labor Standards Act (FLSA) such as minimum wage and overtime requirements. In terms of employment tax compliance, in the case of a misclassified worker, the employer will not have remitted the required federal withholding tax as well as pay Social Security and Medicare taxes.
Note: Other worker classification issues may arise for unemployment, workers' compensation, state wage and hour compliance, and state withholding tax.
Memorandum of Understanding. Under the MOU, the DOL and the IRS agree to collaborate and share information to aid employment tax compliance. While the DOL and the IRS use different factors to determine a worker's status, the DOL's Wage and Hour Division (WHD) agrees to refer worker classification cases to the IRS's Small Business/Self Employed Specialty Employment Tax (SB/SE) that meet certain criteria.
Observation: The MOU does not contain a provision that requires the IRS to refer worker misclassification cases to the WHD.
The DOL will refer cases to the IRS when:
Priority of referral. The IRS will give priority to referrals of businesses that cannot claim Section 530 relief.
Other terms of the MOU. In addition to referring cases, the DOL will share training materials related to worker classification with the IRS. The IRS will provide annual reports to the DOL regarding the results of the referrals. Also, upon the DOL's request, the IRS will provide any new or revised employment tax training materials. Further, the agencies may coordinate outreach activities including joint press releases and other education efforts.
Expiration date. The MOU remains in effect until December 31, 2028, unless terminated earlier.
By Jeff Carlson
The House of Representatives on January 10 approved a measure that would rescind almost all the $80 billion provided by Congress for the IRS to step up tax enforcement.
The Family and Small Business Taxpayer Protection Act (H.R. 23) was approved 221-210 along a party line vote and would cancel $45.6 billion for stepped-up tax enforcement and $25.3 billion for agency operations support, which covers administration activities, IT development and telecommunications. The measure leaves some funds for the IRS to use: $3.2 billion for the improvement of taxpayer services and $4.8 billion for technology development aimed at improving customer service phone lines.
“The IRS does not need a raise. It needs a reckoning,” said incoming Ways and Means Chairman Jason Smith, Republican Representative of Missouri. “House Republicans are ready to provide oversight and accountability and that starts today.”
The measure is destined to die in the Senate however, as Democrats loudly denounced the legislation. The Biden administration issued a Statement of Policy affirming that the president would veto the measure, calling it a “reckless bill. Senate Majority Leader Charles Schumer, Democratic senator of New York, said that “this is a giveaway to the multimillionaires and big corporations, and Democrats won’t let it happen.”
The $80 billion in funds was part of the Inflation Reduction Act (PL 117-169) passed in 2022 and was meant for the IRS to hire 87,000 IRS employees and modernize the agency’s antiquated technology systems.
In its analysis of the Inflation Reduction Act, the nonpartisan Congressional Budget Office (CBO) found last year that the $80 billion included under the law would result in a net gain of $124 billion in revenue over the next decade. In a report published January 9, the CBO said that the House GOP bill to defund the agency would increase the deficit by more than $114.3 billion over the coming decade if enacted.
Miguel Chi-dzul, the owner of a Portland restaurant, had previously been a victim of wage theft several years by an employer. The U.S. Department of Labor (DOL) investigated and found that the employer had changed time records in an attempt to hide the fact that employees weren't paid for all hours worked, and proper overtime. At the conclusion of that investigation, the DOL's Wage and Hour Division (WHD) was able to pay Chi-dzul $831 in back overtime wages to the current restaurant owner.
History repeated itself, and a recent WHD investigation found that Chi-dzul denied 31 workers at his Casa Maya Taqueria & Cantina a total of $94,177 in tips and back wages.
The WHD found that Chi-dzul changed pay records, including deleting overtime hours, to hide the fact that he failed to pay workers proper overtime. He also retained a portion of tips customers left for workers for himself. The DOL successfully recovered $188,354 in back wages and damages for the workers, and assessed $11,292 in civil penalties due to the willful nature of the violations.
The DOL release notes that it issued a final rule, "Tip Regulations under the Fair Labor Standards Act," parts of which became effective April 30, 2021. Under that rule, an employer cannot keep employees' tips under any circumstances, and managers and supervisors may not keep tips received by employees, including through tip pools. This prohibition against employers keeping tips applies even if tipped workers are paid hourly at rates equal to or above the full federal minimum wage.
WHD District Director Carrie Aguilar commented that: "Miguel Chi-dzul suffered wage theft as a restaurant worker, yet - when in a position to do right by his own workers - he chose to inflict worse financial suffering on people who trusted him as their employer and then attempted to cover it up. This case serves as another unfortunate reminder that wage theft is a common and serious concern for restaurant industry workers, many of whom are vulnerable and afraid to complain."
Aguilar added that: "Restaurant workers are often among the lowest wage earners in our nation, and they depend on every dollar they earn for hours worked and on tips received for good service to their customers. This intensifies the economic impact of Chi-dzul's theft on his employees, each of whom has a legal right to be paid all of their hard-earned wages" [Wage and Hour Division, Release No. 23-24-SAN, 1/9/2023].
The Office of Information and Regulatory Affairs (OIRA) has released the Fall 2022 Regulatory Agenda. Regulatory agendas are submitted by each federal agency to provide insight on how the agency will tackle various issues. There are over 20 items submitted by the Department of the Treasury, Department of Labor, and the Department of Homeland Security of interest to payroll professionals.
Department of the Treasury
Nonqualified Deferred Compensation Plans. Further Guidance on the Application of Section 409A to Nonqualified Deferred Compensation Plans: RIN 1545-BF50. The IRS expects to release proposed regulations in October 2023. Proposed regulations would be in regard to the measurement of income inclusion and calculation of applicable taxes of nonqualified deferred compensation plans (NQDC) under Code Sec. 409A. This would be the second set of proposed regulations on this topic. Application of Section 409A to Nonqualified Deferred Compensation Plans: 1545-BL25. The IRS will release a second set of proposed regulations that contain certain clarifications and modifications to the final regulations and the proposed income inclusion regulations under Code Sec. 409A in October 2023.
Deferred Compensation Plans of State and Local Governments and Tax-Exempt Entities: RIN 1545-BH72. On June 22, 2016, the IRS released proposed reliance regulations which applies to deferred compensation plans under Code Sec. 457 as established and maintained by State or local governments or other tax-exempt organizations that provide rules for determining when amounts deferred under these plans are includible in income, the amounts that are includible in income, and the types of plans that are not subject to these rules. Included in the 2016 proposed regulations are detailed definitions of a bona fide severance pay plan (Prop Reg § 1.457-11(d)). The IRS anticipates releasing a second set of proposed regulations that would provide guidance relating to the definitions of a bona fide severance pay plan under Code Sec. 457(e)(11) and substantial risk of forfeiture under Code Sec. 457(f)(1)(B) in October 2023.
Guidance on Rules Applicable to IRAs Under Sections 408 and 408A: RIN 1545-BL98. The IRS anticipates releasing a Notice of Proposed Rulemaking (NPRM) in November 2023 that will provide guidance and update current regulations under Code Sec. 408 and Code Sec. 408A. The regulations will address: (1) the requirements for traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, and deemed IRAs established under qualified employer plans; (2) the treatment of contributions to, and distributions from, an IRA; (3) deductibility rules for IRAs under Code Sec. 219; and (4) taxes on excess contribution to an IRA under Code Sec. 4973.
Requirements for Employee Stock Ownership Plans: RIN 1545-BM32. The IRS expects to release proposed regulations in June 2023 that would prescribe rules for employee stock ownership plans as well as update existing regulations relating to ESOPs.
Section 72(t) 10 Percent Additional Tax Regulations: RIN 1545-BM96. The IRS plans to release proposed regulations under Code Sec. 72(t) regarding the application of the 10% additional tax to that portion of a distribution includible in gross income and received by a taxpayer before attaining the age of 59 1/2 from a qualified retirement plan. These proposed regulations would affect any individual who receives an early distribution from a qualified retirement plan.
Rules Relating to Employer-Provided Meals and Employer-Operated Eating Facilities: RIN 1545-BO29. In November 2023, the IRS expects to release proposed regulations that clarify the income tax treatment of certain employer-provided meals, including meals provided in employer-operated eating facilities.
Definition of Last Known Address: RIN 1545-BO29. The IRS intends to propose regulations in November 2023 that change how the IRS updates the last known address of business taxpayers. The revised regulation would prohibit the IRS from updating a business taxpayer’s last known address without clear and concise notification of the change of address from the business taxpayer.
SECURE Act Modifications to Certain Rules Governing 401(k) Plans and 401(m) Plans: RIN 1545-BP81. The IRS will propose regulations to implement provisions of the SECURE Act including requirements that long-term part-time employees be eligible for 401(k) plans. The IRS plans to release the regulations in December 2023.
Additional Rules Regarding Information Reporting of Minimum Essential Coverage: RIN 1545-BN23. The IRS expects final regulations to be issued November 2023 to address additional rules under Code Sec. 6055 relating to information reporting of minimum essential coverage. The regulations the requirements under Code Sec. 6724 for establishing reasonable cause for a failure to report an individual’s taxpayer identification number (TIN) and the use of truncated TINs.
Electronically Filed Returns: 1545-BN36. In July 2021, the IRS released proposed regulations that seeks to decrease the electronic filing requirement threshold for several different types of tax returns that include withholding tax returns and certain information returns pursuant to provisions in the Taxpayer First Act (TFA). Under the proposed regulations, the reduction would be as follows: 100 or more returns for tax filing year 2022 and 10 or more for the tax filing year beginning January 1, 2023. The proposed rules have moved out of the White House subcommittee, however, the final rules have not yet been released.
Withholding on Certain Retirement Plan Distributions Under Section 3405(a) and (b): RIN 1545-BN52. The IRS released proposed reliance regulations in May 2019 income tax withholding for certain periodic and non-periodic payments, other than eligible rollover distributions. The proposed regulations clarify Notice 87-7, 1987-1 CB 420 in regards to distributions to (1) a payee who provides the payor with a military or diplomatic post office address, and (2) a payee who provides the payor with a U.S. address, but requests the payment to be delivered to a person or financial institution outside the U.S. The proposed regs treat a military or diplomatic post office address as an address located in the U.S. Also under the proposed regs, a payor must withhold income tax from any designated distribution (without regard to where the payment is sent or any attempt to elect out of withholding) if a payee has a residence address located outside the U.S. Thus, withholding would be required even if a payee with a foreign residence address asks for the payment to be deposited with a financial institution located in the U.S. The IRS expects to release final regulations in November 2023.
De Minimis Error Exception to Penalties for Failure to File Correct Information Returns or Furnish Correct Payee Statements: RIN 1545-BN59. Section 202 of the PATH Act amended Code Sec. 6721 and Code Sec. 6722 to establish a safe harbor from penalties for failure to file correct information returns (Code Sec. 6721) and failure to furnish correct payee statements (Code Sec. 6722) for certain de minimis errors. Under the safe harbor, an error on an information return or payee statement is not required to be corrected, and no penalty is imposed, if the error relates to an incorrect dollar amount and the error differs from the correct amount by no more than $100 ($25 in the case of an error with respect to an amount of tax withheld). The safe harbor does not apply in the case of an intentional error, or if a payor fails to file an information return or furnish a payee statement even if the payee statement or information return would total $100 or less (or $25 or less with respect to any amount of tax withheld). In October 2018, the IRS released proposed regulations implementing the provision and provided: (1) a definition for "tax withheld"; (2) guidance on intentional disregard of information reporting requirements; (3) information on an election for a corrected statement; (4) what is reasonable cause; and (5) record retention requirements. The final regulations are anticipated to be released in March 2023.
Recapture of COVID-19 tax credits. Recapture of Excess FFCRA and CARES Credits: RIN 1545-BP88.In July 2020, the IRS released proposed reliance regulations to reconcile advance payments of refundable employment tax credits available for the COVID-19 pandemic and recapture the benefit of these credits when necessary as provided under the FFCRA and CARES. Recapture of Excess Credits Under the ARP Act: RIN 1545-BQ08. In September 2021, the IRS released proposed regulations related to the credits as provided under the American Rescue Plan Act of 2021 (ARP). The IRS has created Form 7200 (Advance Payment of Employer Credits Due To COVID-19) that permitted employers to request an advance of COVID-19 credits for paid sick, paid family, and employee retention. Employers were required to reconcile any advance payments claimed on Form 7200 with the total credits claimed and total taxes due on their employment tax returns. The proposed regulations provide that any refund of these credits paid to a taxpayer that exceeds the amount the taxpayer is allowed is an erroneous refund for which the IRS must seek repayment. Final regulations are expected to be released soon.
Paycheck Protection Program rules. A number of rules regarding the Paycheck Protection Program (RIN 1505-AC67; RIN 1505-AC69; RIN 1505-AC70; RIN 1505-AC71; RIN 1505-AC74; and RIN 1505-AC75) that are in the Interim Final Rule state will be finalized in November 2023.
Department of Labor
Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees: RIN 1235-AA39. The DOL conducted a series of listening sessions with workers, employers, and other workplace stakeholders in 2022 to discuss potential revisions to the FLSA regulations for the bona fide executive, administrative, and professional (EAP) exemption from overtime requirements. Currently, FLSA regulations exempt EAP workers from overtime if the worker meets certain job duties tests and is paid on a salary basis of not less than $684 per week as well as highly compensated employees (HCEs) who earn at least $107,432 annually and perform at least one duty of an EAP worker. The salary threshold was last increased, effective January 1, 2020. During the final rulemaking, the DOL declined to include a provision that would have adjusted the standard salary threshold as well as the highly compensated employee (HCE) total compensation level periodically for inflation. The DOL anticipates releasing proposed rules in May 2023 that update the standard salary level and the HCE level.
Employee or Independent Contractor Classification Under the Fair Labor Standards Act: RIN 1235-AA43. On October 13, 2022, the DOL released proposed regulations that would rescind current worker classification rules under the FLSA (the final 2021 rule). The final 2021 rule emphasized the use of two core factors for the determination of worker status, as opposed to long-standing court interpretations that favored a multi-factor approach. The proposed regulations would revert to the multi-factor approach as well as include any other relevant factors. The rule has been met with opposition. Opponents argue that the multi-factor approach does not provide clarity, making determinations difficult. Those that support the proposed rule argue the rule protects workers. The DOL projects this final rule to be released in May 2023.
Updating the Davis-Bacon and Related Acts Regulations: RIN 1235-AA40. The Davis-Bacon Act and Related Act requires contractors and subcontractors to pay their laborers and mechanics employed under the contract no less than the locally prevailing wages and fringe benefits for corresponding work on similar projects in the area. The DOL released proposed rules on March 18, 2022, that are designed to speed up prevailing wage updates, make the current more efficient, and ensure prevailing wage rates keep up with actual wages.. A provision of the rule would require periodic updates to prevailing wage rates.
Adverse Effect Wage Rate Methodology for the Temporary Employment of H-2A Nonimmigrants in Non-Range Occupations in the United States: RIN 1205-AC05. On December 1, 2021, the DOL released proposed rules that seek to revise the methodology by which it determines the Adverse Effect Wage Rates (AEWRs) for non-range agricultural occupations as it relates to H-2A visa workers. AEWRs are the minimum hourly wage rates the DOR has determined must be paid by H-2A workers and workers in corresponding employment, so that the wages of workers in the United States similarly employed will not be adversely affected. The DOL anticipates the final rule to be issued in January 2023.
Improving Protections For Workers in Temporary Agricultural Employment in the United States: RIN 1205-AC12. The DOL projects releasing proposed regulations in June 2023 regarding H-2A agricultural worker protection.
Strengthening Wage Protections for the Temporary and Permanent Employment of Certain Aliens in the United States: RIN 1205-AC00. The DOL anticipates releasing proposed rules in September 2023 to establish a new wage methodology for setting prevailing wage levels for the H-1B/H-1B1/E-3 and PERM programs consistent with the requirements of the Immigration and Nationality Act. Under the Trump administration, the DOL issued a final rule on January 14, 2021, however, that final rule was subject to multiple delayed implementation dates, under the Biden Administration, until a court required the rule be ended, restoring the current wage methodology . The H-1B visa program allows U.S. employers to temporarily employ foreign workers in highly-skilled occupations. Similar to the H-1B visa classification, the H-1B1 and E-3 nonimmigrant visa classifications also allow U.S. employers to temporarily employ foreign workers in specialty occupations, except that these classifications specifically apply to the nationals of certain countries (Chile and Singapore for H-1B1 and E-1 for Australia). Opponents of the Trump-era rule argued that the methodology for setting prevailing wage levels was flawed.
Temporary Employment of H-2B Foreign Workers in the United States: RIN 1205-AB93. The United States Department of Labor’s (DOL) Employment and Training Administration and Wage and Hour Division, and the United States Department of Homeland Security (DHS), U.S. Citizenship and Immigration Services, are jointly proposing to update the H-2B visa program regulations, including prevailing wage rate provisions. Specifically, the proposed regulations would update the process by which employers obtain temporary certification from DOL for use in petitioning DHS to employ an H-2B worker. The proposed rules would also establish standards and procedures for employers seeking to hire foreign temporary non-agricultural workers for certain itinerant job opportunities, including entertainers, tree planting, and utility vegetation management. The DOL anticipates the proposed rules to be released in August 2023.
Department of Homeland Security
Exercise of Time-Limited Authority to Increase the Numerical Limitation for FY 2023 for the H-2B Temporary Non Agricultural Worker Program and Portability Flexibility for H-2B Workers Seeking To Change: RIN 1615-AC82. A temporary final rule was released on December 15, 2022 that provided an additional 64,716 additional H-2B temporary nonagricultural worker visas for fiscal year (FY) 2023. The annual visa limit is set at 66,000. The comment period for this rule closes February 13, 2023.
Modernization and Reform of the H-2 Programs: RIN 1615-AC76. The DHS anticipates releasing proposed rules in September 2023 to enhance protections for workers and better ensure the integrity of the H-2A and H-2B programs. In addition, the proposed rule seeks to improve H-2 program efficiencies and remove certain barriers to program access. The proposed rule would not revise the temporary labor certification process.
Optional Alternative to the Physical Examination Associated With Employment Eligibility Verification (Form I-9): RIN 1653-AA86. The DHS released a proposed rule on August 18, 2022, that would provide alternative methods to examine employees' identity and employment authorization documents for Form I-9 (Employment Eligibility Verification). Form I-9 is a required form that employers must complete for each individual hired for employment in the United States. The form is used to verify the identity and employment authorization of the individual. During the COVID-19 pandemic and the increased use of remote workers, the DHS offered flexible I-9 policies. The proposed rule does not create alternatives but would formalize the extension of flexibilities. Further, the proposed rule would make changes to Form I-9 and instructions to allow employers to indicate the use of alternative procedures (when they become authorized). The DHS anticipates the final rule to be released in May 2023.
The U.S. Court of Appeals for the Sixth Circuit has ruled that a racehorse training operation failed to pay workers properly.
The facts. Steve Asmussen is a professional racehorse trainer, and he and his wife own KDE Equine (KDE). KDE is one of the horse racing operations in the country, and operates at four locations in three states (Texas, New York, and Kentucky).
KDE employs hotwalkers (who are responsible for walking and bathing horses after a training session to cool them down) and grooms, who generally take care of the horses and perform such tasks as brushing and saddling the horses, and cleaning their stalls.
Typically, hotwalkers work every day of the week from 5:00 a.m. to 10:30 a.m., although they may work additional hours in the afternoons every other day. The hotwalkers work approximately 44.25 hours per week.
Grooms work every day from 5:00 a.m. to 11:00 a.m. and return to work every afternoon from 3:00 p.m. to approximately 4:30 p.m. They also can earn extra pay on race day if one of their horses is racing. It is undisputed that grooms typically work between 48.5 and 52.5 hours per week.
The Department of Labor (DOL) filed a lawsuit against KDE in federal district court seeking an injunction and damages for KDE's alleged violations of various provisions of the Fair Labor Standards Act (FLSA). The amended complaint asserts that KDE failed to pay minimum wages and proper overtime and failed to keep adequate and accurate employment records. The DOL moved for partial summary judgment on the minimum wage and overtime claims and requested that the court find that KDE acted willfully. KDE responded with a motion for summary judgment on all counts. The district court granted in part and denied in part KDE's motion for summary judgment.
The law. FLSA requires employers to pay employees overtime when they work more than 40 hours in a week. . "Regular rate" is generally defined by the total weekly pay divided by the weekly hours.
The FLSA also requires employers to "make, keep, and preserve" payroll records for a period of time.
The FLSA established a two-year statute of limitations for ordinary violations. However, when the violation is willful, the statute of limitations increases to three years. For willful violations, an employer can be liable to the affected employees in the amount of their unpaid minimum wages or overtime compensation plus an equal amount as liquidated damages. 29 U.S.C. § 216(b). To show that an employer acted willfully, the DOL must prove that the employer "knew or showed reckless disregard for the matter of whether its conduct was prohibited by the statute." Prior case law determined that an employer has acted with reckless disregard where the employer "had actual notice of the requirements of the FLSA by virtue of earlier violations, his agreement to pay unpaid overtime wages, and his assurance of future compliance with the FLSA."
The ruling. The appellate court affirmed the lower court's grant of summary judgment to the DOL on the overtime claims. The court disagreed with all three theories put forth by KDE: (1) its payment scheme provided a premium for a fixed number of overtime hours under 29 C.F.R. § 778.309; (2) its employees worked "Fluctuating Work Weeks" (FWW) which is an acceptable method for calculating overtime pay when employees work varying hours from week to week but are paid fixed base salaries; and (3) the final salary plan for overtime included paying employees lump-sums for additional tasks performed outside of their normal duties (employees could earn $25.00 for unloading hay, $25.00 for transporting horses to the racetrack, and $100.00 for performing laundry tasks).
However, the court vacated the district court's grant of summary judgment on the willfulness issue in favor of KDE, finding it was inappropriate because genuine issues of material fact existed as to whether KDE willfully failed to pay its employees in compliance with the FLSA.
Year-end processing poses a number of challenges to payroll administrators, accountants, business owners, and employers of all types. Checkpoint Payroll has put together this series of articles aimed at guiding you through the trials of the year-end processing season.
Many companies offer some form of accrued time off for employees to take leave for illness, vacation, bereavement, or for other purposes. In addition, many states require some form of accruable paid leave to be paid by employers.
A couple scenarios regarding paid leave accrual arise during year-end:
Terminated employee leave pay out. When an employee either quits or is terminated, there is no requirement for a payout of accrued unused time off at the federal level. On the state level, however, there may be requirements for a payout of unused accrued time. Checkpoint Payroll Create-a-Chart Terminated Employee – Vacation Pay quickly summarizes these payout requirements by state for terminated employees. While Checkpoint Payroll Create-a-Chart – Vacation Pay State Laws address state payout requirements by state for general purposes.
Mandatory accrual calculations. States that have paid leave accrual provisions often require a certain accrual balance limitation per calendar year, e.g. one-hour of leave for every 30 hours worked, capped at 40 hours per year. Automated payroll programs generally provide some type of accrual balance tracking that either resets automatically or manually on a prescribed basis. To ensure your system is in compliance, use the Checkpoint Payroll Create-a-Charts Paid Sick Leave – Accrual and Paid Leave Other Than Paid Sick Leave – State.
Other states require that paid leave balances be paid out and accruals reset based on the employment contract in place at the time of the employee's hiring.
An Idaho stone quarry violated multiple provisions of the H-2B visa temporary worker program, as well as the Fair Labor Standards Act (FLSA). A U.S. District Court has ordered the quarry to pay $983,725 in back wages and liquidated damages for these violations.
H-2B visa violations. A Department of Labor Wage and Hour Division (WHD) investigation found that the owner of an Idaho quarry violated several requirements of the H-2B visa temporary worker program, including:
FLSA violations. The quarry owner was also found to have violated the FLSA by paying piece rates instead of the stated hourly wage on the job order of $12.79 per hour, neglecting to pay overtime premiums, and failing to keep proper employment records of hours worked. In the DOL's complaint, the DOL stated that its investigation discovered that the workers worked 80 to 94.5 hours per week and worked nearly every day of the month except three. Further, the piece rate at which the workers were paid was less than the stated $12.79 per hour on the job order (between $10 to $11 per hour).
The WHD reiterated several resources for employers seeking to use the H-2B visa program to fill jobs they are unable to find adequate domestic workers for on its website here [Department of Labor News Release, 22-2069-SAN, 11/29/2022].
Arkansas—2023 Unemployment Taxable Wage Base Reduction
The unemployment taxable wage base in Arkansas is reduced from $10,000 to $7,000 in 2023. The experienced employer tax rate range continues to be from 0.3% to 14.2%. The new employer tax rate remains at 2.9%. The 0.2% stabilization tax rate continues to be in effect in 2023 [Arkansas Unemployment Insurance Employer Newsletter, Fall 2022].
California—Federal Payroll Tax Relief for Storm Victims Updated for Additional Counties
The IRS has announced expanded payroll tax relief for victims of severe winter storms, flooding, and mudslides, beginning January 8, 2023. The following counties have been added to the list of areas that qualify for the relief: Alameda, Contra Costa, Fresno, Kings, Lake, Madera, Mono, San Benito, San Francisco, and Tulare. The tax relief postpones various tax filing and payment deadlines that occurred on or after January 8, 2023, and before May 15, 2023. Taxpayers will have until May 15, 2023 to file quarterly payroll tax returns that are normally due on January 31, 2023. Penalties on payroll and excise tax deposits due on or after January 8, 2023, and before January 23, 2023, will be abated as long as the tax deposits are made by November 22, 2023 [CA-2023-01, 01/10/2023 (Updated)].
California—Malibu Minimum Wage Rate Increases to $16.90 Per Hour on July 1
The City of Malibu has announced that its minimum wage rate will increase from $15.96 per hour to $16.90 per hour on July 1, 2023 for all employers. This increase is based on the 5.9% cost of living adjustment. The City notes that the minimum wage poster will be available prior to the July 1 effective date.
California—Federal Tax Relief Announced for Winter Storm Victims
The IRS has announced payroll tax relief for victims of severe winter storms, flooding, and mudslides, beginning January 8, 2023. Individuals and businesses in Colusa, El Dorado, Glenn, Humboldt, Los Angeles, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Bernardino, San Diego, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Ventura, Yolo and Yuba counties qualify for tax relief. The tax relief postpones various tax filing and payment deadlines that occurred on or after January 8, 2023, and before May 15, 2023. Taxpayers will have until May 15, 2023 to file quarterly payroll tax returns that are normally due on January 31, 2023. Penalties on payroll and excise tax deposits due on or after January 8, 2023, and before January 23, 2023, will be abated as long as the tax deposits are made by November 22, 2023 [CA-2023-01, 01/10/2023].
California—Payroll Tax Relief for Victims of Winter Storms
The California Employment Development Department (EDD) has announced that employers statewide directly affected by the January 2023 winter storms may request up to a 2-month extension of time from the EDD to file their state payroll reports and/or deposit payroll taxes without penalty or interest. A written request for extension must be received within two months from the original delinquent date of the payment or return [Emergency and Disaster Assistance for Employers, California EDD, 01/06/2023].
California—Court Grants Temporary Injunction Against FAST Recovery Act
The Superior Court of California, County of Sacramento has granted a temporary injunction against the California Department of Industrial Relations (DIR) from implementing the Fast Food Accountability and Standards Recovery (FAST) Act. California Governor Newsom signed the Act into law in early-September 2022, which establishes a Fast Food Council until January 1, 2029, comprised of fast food employees, worker advocates, franchisors, franchisees, and government officials within the DIR that would set industry-wide standards for wages, working hours, and other working conditions related to the health, and safety of fast food workers. Shortly thereafter, the National Restaurant Association and International Franchise Association aimed to get a measure on the state's 2024 ballot to reverse the FAST Act. The legislation was to take effect on January 1, 2023 [Save Local Restaurants v. Hagen, California Superior Court, Sacramento County, No. 34-2022-80004062, 12/30/2022].
Colorado—State's Secure Savings Program in Effect
Colorado's Secure Savings Program took effect on January 1, 2023. All eligible Colorado employers are required by law to facilitate Colorado SecureSavings if they don’t offer a retirement plan for their employees. The employer requirements are tiered by number of employees as follows: March 15, 2023 for employers with 50 or more employees, May 15, 2023 for employers with between 15 and 49 employees, and June 30, 2023 for employers with between five and 14 employees. Exemptions from this requirement are possible if certain conditions are met. Employers that already provide a qualified retirement plan need to certify their exemption when the program fully launches. Registration is required. The state will notify employers when they must register. Employers will need their unique Access Code (which will be sent in advance) and their Employer Identification Number to begin.
Colorado—Updated Labor Notice Explains New Employment Separation Requirements
In late December 2022, the Colorado Department of Labor and Employment (CDLE) updated its Interpretive Notice and Formal Opinion (INFO) #16 to note that beginning in 2023, employers are required to provide advance notice to the employee, within 10 days of their separation, that the employer will make the deduction, including a written accounting specifying: (1) the amount of money or the specific property that the employee failed to pay or return, (2) the replacement value of the property, (3) when the money or property was provided to the employee (to the extent known), and (4) when the employee should have returned the property or paid the money (to the extent known). An employer has 10 calendar days after an employee’s separation to determine that the money or property wasn’t returned, and to determine the value of that money or property — an exception to the general requirement to pay terminated employees their final wages immediately. Starting in 2023, the end of that 10-day window also is the employer’s deadline to provide notice to the employee. If the employer doesn’t provide this notice when it’s required (that is, in 2023 and after), it can’t make this kind of deduction.
Florida—Updated IRS Payroll Tax Relief for Hurricane Nicole Victims
The IRS has updated its payroll tax relief for victims of Hurricane Nicole to include the following areas in Florida: Alachua, Baker, Bradford, Broward, Calhoun, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Dixie, Franklin, Gadsden, Gilchrist, Glades, Gulf, Hamilton, Hardee, Hendry, Hernando, Highlands, Hillsborough, Holmes, Jackson, Jefferson, Lafayette, Lee, Leon, Levy, Liberty, Madison, Manatee, Marion, Miami-Dade, Okeechobee, Orange, Osceola, Pasco, Pinellas, Polk, Sarasota, Seminole, Sumter, Suwannee, Taylor, Union, Wakulla, and Washington Counties; the Miccosukee Tribe of Indians of Florida and the Seminole Tribe of Florida. Beginning November 7, 2022, affected taxpayers have until March 15, 2023 to file certain tax returns, including the quarterly payroll tax returns typically due on January 31, 2023. Also, penalties on payroll tax deposits due on or after November 7, 2022, and before November 22, 2022, are abated as long as the tax deposits were made by November 22, 2022.
Georgia—2023 Unemployment Tax Rate Information
A spokesperson for the Georgia Department of Labor has informed Checkpoint Payroll Update that unemployment tax rates for experienced employers range from 0.06% to 8.10% in 2023. The new employer rate is 2.7%. There is no administrative assessment rate for 2023. The unemployment taxable wage base is $9,500 this year.
Illinois—Unemployment Information for 2023 Released
The Illinois Department of Employment Security (IDES) has announced that 2023 unemployment tax rates for experienced employers will range from 0.850% to 8.650% (0.725% to 7.625% in 2022). New employers will pay 3.950% (3.525% in 2022). For 2023, there are no NAICS sectors whose average tax rate is above the standard entry rate. All of these rates include a 0.55% fund builder tax rate (0.525% in 2022). The taxable wage base will increase to be $13,271 in 2023 (up from $12,960 in 2022 [Illinois Department of Employment Security Historical Rate Chart, Rev. Jan. 2023].
Kentucky—New Legislation Revises and Establishes New PEO Registration Requirements
New legislation (Senate Bill 10), revises workers' compensation and unemployment laws as it pertains to professional employer organizations (PEOs). The deadline to register with the Department of Workers' Claims is changed from July 14, 2022 to July 15, 2024. PEOs are required to report and pay all unemployment insurance fund contributions using the state employer identification number and contribution rate of the client between January 6, 2023 and December 31, 2024. Beginning January 1, 2025, PEOs must report and pay all unemployment insurance fund contributions using the PEO's state employer identification number and contribution rate. After July 15, 2024, PEOs are prohibited from operating in the state unless they have registered with the Department of Workers' Claims [L. 2023, S10].
Kentucky—City of Henderson Occupational Tax Rate Increase
The City of Henderson has announced that for tax periods beginning January 1, 2023, the occupational tax rate has increased from 1.49% to 1.65% of gross compensation paid. Every employer (whether for profit or not for profit) who pays wages, salaries, commissions, tips, or other taxable compensation to an employee for work performed within the city limits of Henderson is required to withhold and remit to the City of Henderson the City payroll tax.
Maine—Updated Form W-4ME Reflects Withholding Exemption for Tribal Members
The Maine Revenue Services have issued a Maine Tax Alert notifying employers of the revised Form W-4ME (Maine Employee's Withholding Allowance Certificate), which has been updated to include a new checkbox for tribal members residing on tribal land. This checkbox allows tribal members to claim a withholding exemption on wages, salaries, or other compensation derived from or connected with sources on tribal land in Maine in concordance with recent legislation [Maine Tax Alert, Vol 33, Issue 1, 1/2023].
Massachusetts—Impact of Massachusetts Millionaires Tax on Withholding Tax Obligations
The Massachusetts Department of Revenue has announced that it does not intend to update the Income Tax Withdrawal Table (Circular M) to reflect the 4% surtax on income over $1 million. Employers should independently calculate the 4% surtax and add it to their withholding tax. To ease compliance with the new law, for withholding tax returns and payments due by or before January 31, 2024, the surtax will not be taken into account in determining whether an employer withheld sufficient tax to avoid penalties [Impact of Millionaires Tax on Withholding and Estimated Tax Obligations, Mass. Dept. of Rev., 01/10/2023].
Massachusetts—IRS 1099-K Reporting Delay Does Not Impact State Requirement
The Massachusetts Department of Revenue is informing taxpayers that the recent Internal Revenue Service (IRS) announcement of a delay in changes to the federal 1099-K reporting requirements for third party settlement organizations (TPSOs) does not impact the Massachusetts Form 1099-K requirement. TPSOs must report the gross amount paid in settlement to a payee with a Massachusetts address when the amount paid in a calendar year is $600 or greater, regardless of the number of transactions between the TPSO and the payee. A Form 1099-K, which can be either a Massachusetts Form M-1099-K or IRS Form 1099-K, must be provided to the payee by January 31 of the following year and must also be filed with the Department of Revenue by February 28 or March 31 if filing electronically [IRS Form 1099-K Reporting Delay, Mass. Dept. of Revenue, 01/09/2023].
New Jersey—Expanded Mini-WARN Act Begins in April
On January 10, 2023, New Jersey Governor Phil Murphy signed Assembly Bill 4768 that revises the effective date of the state's mini-Warn Act (the Millville Dallas Airmotive Plant Job Loss Notification Act). Under the state's mini-WARN Act, employers with 100 or more full-time employees who have been in operation for more than three years are required to provide notice to employees affected by a mass layoff, transfer of operations, termination of employment, or termination of operations. In April 2020, the state delayed implementation of the expanded mini-WARN Act due to the COVID-19 pandemic until 90 days after the state of emergency expired. The expanded legislation: (1) increases the number of days of advance notice of a mass layoff from 60 days to 90 days and required severance pay to be provided regardless if the required notice is provided; (2) requires employers who do not provide 90 days notice to provide an additional four weeks of pay; (3) redefines "mass layoff" to mean a reduction 50 or more full-time employees representing 1/3 or more of the workforce during any 30–day period; and (4) requires counting of part-time workers for coverage and notice purposes. The current legislation revises the effective date to 90 days of signing and decouples from the state of emergency, changing the effective date to April 10, 2023 [L. 2023, A4768].
New York—New Law Creates Penalties for Mandatory Overtime for Nurses
Assembly Bill 286, effective February 28, 2023, assesses an employer a civil penalty where an employer requires a nurse to work more than such nurse's regularly scheduled work hours and provides that the employee shall receive an additional 15% of the overtime payment from the employer for each violation [L. 2022, A286].
New York—Governor Hochul's 2023 State of the State Seeks Indexing Minimum Wage to Inflation
On January 10, 2022, New York Governor Kathy Hochul delivered the State of State address. Among the 147 initiatives of "Achieving the New York Dream" included a proposal to require the state's minimum wage rate, currently $15 per hour in New York City, Long Island and Westchester County and $14.20 per hour for the remaining areas of New York State, to be adjusted annually, indexed to inflation. Hochul noted in the speech that "If costs go up, so will wages. Like other states that have implemented this policy, we will put guardrails in place to make increases predictable for employers, and create flexibility in the event of a recession. But this important change will give the nearly 900,000 minimum-wage workers a lifeline." The 2023 State of the State book further notes that high inflation has led to higher prices to essentials like food and medical care. The proposed increases would include caps and an "off-ramp" in the event of certain economic conditions. Further, the book notes seventeen other states already index their state minimum wage for inflation.
New York—Unemployment Taxable Wage Base Increase Announced
New York has announced that the unemployment taxable wage base for 2023 is $12,300. Future increases are as follows: (1) $12,500 in 2024; (2) $12,800 in 2025; and (3) $13,000 in 2026. After 2026, the wage base is permanently adjusted on January 1 of each year to 16% of the state average annual wage, rounded up to the nearest $100. The state average annual wage is established no later than May 31 of each year. The average annual wage cannot be reduced from the prior-year level.
North Dakota—State of the State and Budget Proposes Flat Income Tax Rate
In his State of the State address and the 2023-2025 Executive Budget, North Dakota Governor Doug Burnum proposes the state adopt a flat income tax rate. The proposal would eliminate the income tax for three out of five taxpayers. Specifically, under the proposal, single filers with an adjusted gross income above $54,725 and married filers with an adjusted gross income above $95,600 would pay an income tax rate of 1.5%. Currently, most taxpayers are subject to income tax between 2.04% to 2.9%.
Oklahoma—Proposed Rules to Split State Withholding Form for Periodic and Nonperiodic Pension Payments
The Oklahoma State Tax Commission has released proposed rules that would split the withholding certificates for pension periodic and nonperiodic payments. Beginning with the 2023 tax year, for federal withholding purposes, the use of Forms W-4P (periodic payments) and W-4R (nonperiodic and eligible rollovers) is mandatory.The state's proposed rules mirror the use of similar forms on a state level, designating Form OK W-4-P for periodic payments and Form OK W-4-R for nonperiodic payments and eligible rollover distributions. Interested taxpayers must comment on the proposed rules by 4:30 p.m., February 7, 2023, at the following address: Oklahoma Tax Commission, Tax Policy and Research Division, Oklahoma City, Oklahoma 73194, Attention: Lisa Haws, or by email to firstname.lastname@example.org.
Pennsylvania—e-TIDES To Be Retired February 24
On its website blog, the Pennsylvania Department of Revenue announced that it will be retiring e-TIDES, its prior online filing system for business taxpayers, as of February 24, 2023. This means that taxpayers will no longer be able to use e-TIDES to file returns and make payments after this point. Instead, they will need to use myPATH to handle these tax obligations. Taxpayers have the option to migrate their prior account information from e-TIDES into myPATH. [PA Tax Talk: e-TIDES Is Being Shut Down February 24, 2023; Sign Up Now for myPATH Account, Pa. Dept. of Rev., 01/09/2023].
South Dakota—State of the State Notes Proposes a Reduction in Unemployment Tax
On January 10, 2023, Governor Kristi Noem delivered the State of the State address. Noem noted that the Department of Labor will be bringing legislation that would lower employer contribution rates in light of a flush unemployment trust fund. Noem estimates that the legislation could save South Dakota employers $18 million over the next two years.
Texas—2023 Unemployment Tax Information
The Texas Workforce Commission (TWC) has announced the 2023 unemployment insurance (UI) tax rates. Rates for experienced employers in 2023 range from 0.23% to 6.23%. These rates include a 0.10% employment and training assessment and a 0.13% replenishment tax rate. The new employer rate is set by statute at the higher of the NAICS industry average or 2.7%. The taxable wage base is $9,000. There is no Bond Obligation Assessment Rate or Interest Tax Rate in effect for 2023. The 2023 taxable wage base remains $9,000.
Utah—Penalty Waiver Regulation Amended
The Utah State Tax Commission has amended Utah Admin. R. §R861-1A-42 (Waiver of Penalty and Interest for Reasonable Cause Pursuant to Utah Code Ann. §59-1-401) effective December 13, 2022. Added to the circumstances that may constitute reasonable cause for a waiver of penalty is electronic submission of the return and payment that is not timely delivered to the tax commission through no fault of the taxpayer, where the electronic transmission error is clearly documented. Alternatively, where the taxpayer cannot document an electronic transmission error, the penalties may be waived if the taxpayer has an excellent history of compliance, proves that sufficient funds were in the bank as of the date of payment, and presents documentation showing that the return and payment was electronically submitted timely.
Virginia—Registration for Pilot Program for State-Run Retirement Plan
Legislation (House Bill 2174) directed the Virginia College Savings Plan (Virginia529) to establish a state-facilitated individual retirement account (IRA) savings program. Employers with 25 or more eligible employees, operating for more than two years, that do not offer a retirement plan are required to enroll in RetirePath Virginia. Enrollment is scheduled to begin on July 1, 2023. Vestwell has been designated as RetirePath Virginia's program administrator. Businesses interested in participating in the pilot program must upload their employee roster and payroll information, and submit payroll deductions for each pay period. Interested businesses must register before January 15, 2023.
Washington—2023 Unemployment Tax Information
The Washington Employment Security Department (ESD) has announced the 2023 unemployment tax information. The rates for experienced employers are to range from. 0.27% to 6.02% (.033% to 6.02% in 2022). The average tax rate will be 1.43% (1.36% in 2022). The delinquent rates for experienced employers range from 1.25% to 8.15% in 2023. Ranges include the experience tax rate, social tax rate, and employment administrative fund (EAF) tax. The flat rate social cost is 0.6% in 2023 (down from 0.75% in 2022). The social cost rate ranges from 0.24% to 0.72% for non delinquent employers depending on employer size. For delinquent employers, the social cost rate is 0.72%. The taxable wage base will increase from $62,500 to $67,600 [ESD, 2023 Tax Rates].
Washington—2023 Minimum Wage Posters Available
The Washington Department of Labor & Industries (DLI) has released the 2023 minimum wage poster in English and Spanish. The 2023 Minimum Wage in the state of Washington is $15.74 per hour. Workers who are 14 or 15 years old may be paid 85% of the adult minimum wage ($13.38 per hour). The state does not permit the use of a tip credit towards the minimum wage.
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