The new policy will be effective with June earnings paid on June 24 and June 30, 2009 for biweekly and monthly-paid employees, respectively.

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1 Date: May 11, 2009 To: From: Subject: MSO s and DBO s Don Larson, Controller New Cell Phone Policy The Office of the President has announced a new cell phone policy, which will be published shortly in Business and Finance Bulletin G-46, Guidelines for the Purchase and Use of Cellular Phones and Other Portable Electronic Resources. Under the new policy, the value of a University-provided cell phone, a cell phone-enabled personal digital assistant (PDA), or similar device provided to an employee will be treated as a taxable fringe benefit subject to withholding for payroll taxes. Employees with such equipment, however, will receive a monthly cash allowance reimbursing them for the tax on this fringe benefit. The new policy will be effective with June earnings paid on June 24 and June 30, 2009 for biweekly and monthly-paid employees, respectively. Background This change is being implemented in response to recent payroll audits conducted by the Internal Revenue Service (IRS) at UCLA and UCSD. As part of the settlement of the audits, the University was required by the IRS to come into compliance with the special substantiation rules governing the use of employer-provided cell phones and PDAs. These rules require detailed substantiation of each business call, including the name of the person called and the business purpose of the call. Any personal calls are taxable if not reimbursed by the employee. If the employer does not maintain these records on a current basis, the value of all calls made using the phone will be treated by the IRS as wages reportable on the employee s Form W-2. In response to the increasing number of cell phone audits being performed by the IRS, legislation was reintroduced earlier this year in both the U.S. House of Representatives (H.R. 690) and the Senate (S. 144) to modernize the substantiation rules applicable to employer-provided cell phones, BlackBerrys, Treos, and other similar devices. These rules, which have not been updated by Congress in 20 years, are extremely burdensome and outdated and to do not reflect the widespread business use of cell phone technology today. Although the bills have strong bipartisan support, it is not known when, or if, Congress will take action to pass these measures into law. Because compliance with the substantiation rules would not be practical, the University has decided to treat the provision of an employee cell phone or cell-phone enabled PDA as a taxable fringe benefit. If the law is eventually changed, the University will revert

2 back to its current policy, which permits incidental personal use of a UC-provided cell phone. New Imputed Income/Cash Allowance Policy The new policy involves an imputed income/cash allowance approach that will work as follows: The cost of an employee s cell phone plan, including the cost of the device itself, will be added to the employee's taxable earnings each month as imputed income subject to withholding. The employee will receive a taxable cash allowance each month to reimburse him or her for the tax on the imputed income. Because the allowance itself is taxable, it will be increased using the IRS gross-up formula to reimburse the employee for the taxes associated with the payment. For example, an employee with a $50 per month plan, including the cost of the handset, $600 in imputed income would be reported for the calendar year related to his or her University cell phone. This amount would be added to the employee s Form W-2 as additional wages subject to withholding for Federal and State income taxes and applicable FICA taxes. These taxes would be deducted from the employee s regular monthly earnings. The employee would receive a cash allowance of $35.60 a month or $ for the year as reimbursement for the withholding taxes on the imputed income and the taxes associated with the cash allowance itself. Departments will be responsible for funding the cost of the cash allowance so they should confirm that employees who currently have a phone or PDA still need this equipment for the performance of their job duties. Past access to a University-owned cell phone or an employee s job title should not be the determining factor by itself in making this assessment. Impact on Employees Because the University will retain ownership of the phones and PDAs, employees will generally be unaffected by the new policy: Employees will not experience any disruption in their current service levels or be required to take any action with respect to their phone carrier. Employees will be permitted to use their University cell phone or PDA for incidental personal calls as long as they do not exceed their plan minutes. Employee will not be required to comply with the detailed IRS substantiation rules with respect to any calls made within their plan minutes. 2

3 Employees may return their UC-provided phone or PDA if they no longer need this equipment for business purposes of if they simply do not want to retain the equipment. Imputed Income/Cash Allowance Form Departments must complete the Imputed Income/Cash Allowance Form ( Form ) for each employee furnished with a University cell phone or PDA with a cell phone capability. The Form is a web-based, fill-in form that will automatically calculate the amount of the cash allowance based on the information entered for the employee, taking into account any tax exemptions applicable to the individual. The Form will be used to create separate Distribution of Service (DOS) code transactions for the imputed income and the cash allowance. The two new DOS codes will be available for use in early May After completing the Form, the employee s EDB record should be updated in order to be effective for the June 2009 (BW/MO) payroll. The Form and Instructions are available at the following address: Exceptions to Imputed Income/Cash Allowance Policy In limited circumstances, an exception to the Imputed Income/Cash Allowance Policy may be granted. The two categories of exceptions, and possible examples of each, are as follows: 1. Policy exception due to capability of device, where NO IRS substantiation rules compliance is required a. Communications devices are PDA s that have data capability only (either cannot be used for voice communication or used only in emergency situations). b. Communication devices are push-to-talk type devices that can only be used for in-group communications and an incoming or outgoing cell phone calls cannot be made. 2. Policy exception due to use of device, where device has incoming and/or outgoing cell phone communication capabilities a. Communication devices are not regularly or permanently assigned to the same individual, limiting the practicality of appropriately imputing income to an employee. b. Communication devices that have voice capability are not regularly used for that purpose, but may, for instance, be used as a data transmission device for remote sensing equipment used in University research or operations. Exceptions identified in Category #1, above, are automatically granted, and do not require specific approval by the UCSD Controller s Office. Communication of the exception situation and identification of the devices covered must be made to the Controller s Office upon implementation of this policy and any change in circumstances. 3

4 Exceptions requested under Category #2, above, require the approval of the UCSD Controller s Office, and 1. Should be submitted by the Department Business Officer/MSO with the endorsement of the respective Vice Chancellor 2. The request should include the name(s) of the potential users, the employee PPS ID number, the employee address, and the cell phone number. 3. If the device is used for research only and not used for voice transmission or associated with an individual employee, the request for exception requires a description of the research and location of the device. In the limited number of instances where an exception to policy is granted under this category, employees provided with a cell phone or PDA must document the business and personal use of the device in accordance with the IRS substantiation rules. The employee must annotate the cell phone bill indicating the person called and the business purpose of each call. At the end of each billing period, this information will be submitted to the respective department business office for validation. Also, the prorated cost of any personal calls must be reimbursed by the user on a prorated basis. The personal reimbursement for any billing period is calculated by dividing the total minutes of personal calls by the total minutes of all calls for the billing period, multiplied by the total billed amount, including taxes and fees. If the reimbursement is made by personal check, it should be made payable to the Regents of the University of California. Excess Minutes Charges Departments must continue to review the monthly cell phone bills for excess minute charges and to confirm that employees have the appropriate number of minutes for business. Most of the University s cell phone carriers provide plans with pooled minutes (and rollover minutes) to absorb excess minutes due to temporary spikes in usage. If a plan does not include pooled minutes or if the pool can not absorb the excess minutes, the department must ask the employee to review the cell phone bill and note the person called and the business purpose for each call exceeding the plan minutes. Any minutes for personal calls must be timely reimbursed at the excess minute rate. If there will be an ongoing increase in the employee s business usage, the department should increase the number of minutes available under the plan and adjust the employee s imputed income/cash allowance, as appropriate. Reimbursement for Business Use of a Personal Cell Phone As provided under the current policy, employees who use their personal cell phones for business-related calls may be reimbursed for those calls, but only if they exceed their plan minutes. The reimbursement of business calls would be at the excess minute rate, up to the number of minutes exceeding the plan limit for the month. To be reimbursed, an employee must provide a copy of his or her cell phone bill identifying the business calls and noting the person called and the purpose of each call. No reimbursement of any business calls is permitted for a month in which the employee has not exceeded his or her plan minutes. In addition, reimbursements are not allowed based on a percentage of total 4

5 calls made or for the cost of an employee-owned cell phone plan. Employees should request such plans and equipment from their departments, which should be purchased using one of the University s preferred supplier agreements. Laptops, Home Computers, Data-Only PDAs, Internet Service, etc. University-provided laptops and computers, fax machines, printers, Internet connectivity, and other electronic resources provided for use by an employee at his or her home are not covered under the imputed income/cash allowance policy. In addition, data-only PDAs, push-to-talk devices, walkie-talkies, and pagers that do not have a cell phone capability are excluded from the policy. Employees receiving such equipment must complete and sign the usage agreement contained in G-46 confirming that the equipment will be used primarily for University business. Frequently Asked Questions (FAQs) Attached is a list of FAQs related to the implementation of the imputed income/cash allowance policy. 5