2016 GAPP CPP/FPC STUDY GROUP SECTION 9 OTHER DEDUCTIONS FROM PAY 1 Involuntary Deductions Those deductions which the employer or employee have no control over. Tax Levies (pg. 9-2) Child Support Withholding Orders (pg. 9-10) Creditor Garnishments (pg. 9-45) Bankruptcy Orders (pg. 9-49) Student Loan Collections (pg. 9-51) Federal Agency Debt Collections (pg. 9-52) 2 Tax Levies A tax levy can be issued for failure to pay federal, state or local income tax. When the employee has not paid federal taxes, the employer will receive form 668-W, Notice of Levy on Wages, Salary and Other Income from the IRS. (pg. 9-2) Employer must determine the amount of the employee s wages that are subject to the levy. 3 1
Federal Tax Levy Priority: Federal tax levies must be satisfied before all other garnishments, except for child support withholding orders in effect before the receipt of the federal tax levy. (pg. 9-2) 4 Federal Tax Levy - 668-W Consists of six (6) parts: Part 1 Employer s copy of levy. (pg. 9-2) Part 2 Employee s copy of levy. Part 3, 4, 5 Require employee to provide to employer regarding: Tax filing status, and Dependents that can be claimed as personal exemptions. Part 6 Retained by the IRS 5 Federal Tax Levy - 668-W Part 3 Statement of Exemption and Filing Status Employee completes this section Returns to Employer Employer Returns to the IRS Part 4 Retained by the Employer (pg. 9-2) 6 2
Federal Tax Levy - Amount to Deduct and Remit All amounts paid to the employee are subject to the levy unless specifically exempt under the Internal Revenue Code (IRC). Each employee is entitled to an amount exempt from the levy under the Internal Revenue Code. Not governed by the CCPA. IRS issues tables for figuring the exempt amount each year Publication 1494. 7 Federal Tax Levy Amount to Deduct and Remit If the employee does not submit Parts 3 and 4 of form 668-W: The exempt amount is determined as if the employee s filing status is married filing separately with one personal exemption. (pg. 9-3) Employers cannot rely on the employee s form W-4 currently on file with employer. Continue to use the table for the year in which the levy notice is received. (pg. 9-6) 8 Federal Tax Levy - Calculating Take Home Pay The amount of the employee s wages that is subject to the levy is the amount remaining after the exempt amount has been subtracted from the employee s take home pay. 9 3
Federal Tax Levy - Calculating Take Home Pay Gross Pay minus: Federal, State, Local Taxes Involuntary deductions already in place Voluntary deductions already in place Increases in preexisting deductions beyond the employee s control Deductions instituted after the levy is received and made a condition of employment (pg. 9-6) 10 Federal Tax Levy - Calculating Take Home Pay Example: $2,000.00 gross pay $ 600.00 taxes/deductions (both voluntary &involuntary) $ 1400.00 take home pay $ 398.08 exempt amount (taken from 2016 table) $1,001.92 subject to the levy 11 Federal Tax Levy Any payroll deductions initiated by the employee after the federal tax levy has been received by the employer must be deducted from the exempt amount when determining the employee s net pay, unless they are required as a condition of employment. Example: $ 398.08 exempt amount (taken from 2016 table) $ 20.00 voluntary increase in 401k amount $ 378.08 net pay 12 4
Federal Tax Levy Any change outside the employee s control is subtracted from the gross pay to arrive at the take home pay before the amount subject to the levy is determined (i.e. annual increase in health insurance premium) (pg. 9-6) 13 Federal Tax Levy - When to Stop Withholding Form 668-D, Release of Levy/Release of Property from Levy, is received. o Employers may not stop withholding when the payments match the total due on Form 668-W. o Withholding must continue because interest and possible penalties continue to accrue on the amount remaining. (pg. 9-8) 14 Federal Tax Levy - When to Stop Withholding Penalties: o Liable for full amount required to be withheld plus interest from the wage payment date. (pg. 9-9) o If an employer honors a notice of levy from the IRS and withholds, employers are not liable to the employee or anyone else for amounts withheld. o Any amount paid by the employer as a penalty will be credited against the taxes owed by the employee. 15 5
Federal Tax Levy Voluntary Deduction Agreement May be able to avoid the imposition of a federal tax level through: o Form 2159 Payroll Deduction Agreement o Employer signs if agrees to participate o Letter 3676 Payroll Deduction Installment Agreement Fax Letter o Facilitate the process of releasing and establishing a payroll deduction installment agreement simultaneously. o Verbal Agreement (pg. 9-9) 16 Child Support Withholding Orders Enforcement of child support is a joint federal/state responsibility. State standards are contained in Part D of Title IV of the Social Security Act. Title IV-D and the Consumer Credit Protection Act (CCPA) provide the legal framework. Priority Child support takes priority over all garnishments or attachments - except for Federal tax levies received by the employer before the child support withholding order is established. (pg. 9-13) 17 Child Support Deduction Amounts 50% of disposable earnings if employee is supporting another spouse and/or children. 60% of disposable earnings if employee is not supporting another spouse and/or children. 55% of disposable earnings if employee is supporting another spouse and/or children and at least 12 weeks late. 65% of disposable earnings if employee is not supporting another spouse and/or children and at least 12 weeks late. The total of the current support and the arrearages cannot exceed the applicable maximum amount. States can impose lower limits on the amount that may be withheld, but may not exceed CCPA imposed limits. (pg. 9-11) 18 6
Disposable Earnings Disposable earnings are determined by subtracting all deductions required by law from an employee s gross earnings (wages, commissions, bonuses, sick pay and periodic pension payments) (pg. 9-11) Deductions required by law include: Federal, State, Local Taxes Social Security and/or Medicare Tax State Unemployment or Disability Tax Payments Mandated payments for state employee retirement systems 19 Disposable Earnings Voluntary deductions are not subtracted from earnings to calculate disposable earnings. (pg. 9-11) Wages already subject to withholding for levies, bankruptcy orders, or wage garnishments are not considered deductions required by law. 20 Child Support Withholding Orders Uniform Order to Withhold In July 2014, the OCSE released a revised version of the Income Withholding Order, IWO. Standardized form must be used by state child support enforcement agency, a court or a private entity. If form issued by any individual or entity, must be accompanied by a copy of the underlying order. (pg. 9-13) 21 7
Child Support Withholding Orders Begin withholding no later than the 1 st pay period beginning after 14 working days. Continue to withhold until notified in writing by the court or agency involved. Payments must be remitted within seven (7) business days after withholding; some states may require payments to be made sooner. Payment is to be remitted to the State Disbursement Unit, except South Carolina. pgs. 9-13 9-14 22 Child Support Withholding Orders If an employer receives more than one child support withholding order state law governs how they must be handled. States can handle in several ways: Allocate the available wages evenly method Allocate by percentage of total wages method Allocate by first come first served method (pg. 9-23) 23 Child Support Withholding Orders Employers must withhold for independent contractors. Current support obligations must be paid before any past due amounts. Where more than one order had been received for an employee, generally current amounts due on each must be paid before any past due amounts. 24 8
Child Support Withholding Orders Penalties If employer fails to withhold the amount required by the withholding order, it is liable for the full amount not withheld and any fine set by state law. Employer doesn t have to alter its pay periods to comply with the law. 25 Administrative Fees Employers may charge the employee an administrative fee for processing the child support order each pay period. The maximum is set by state law, and the fee must be withheld from the employee s other wages, not the support payment. The total fee cannot exceed the maximum for child support withholding set by the.(pg. 9-15) 26 Child Support Withholding Orders from Other States Uniform Interstate Family Support Act (UIFSA) requires employers to accept withholding orders from other states so long as it appears regular on its face. Employers must follow the rules as stated on the order that specify: The duration and amount of periodic payments must be on the face of the support order. Where payments are to be sent. Whether Medical Support is included. Deduction of fees and costs for a support enforcement agency, court, or the custodial parent s attorney. Amount of arrears and interest on arrears. (pg. 9-21) 27 9
Child Support Withholding Orders from Other States Employers must follow the rules of the employee s work state when determining: Administrative Fees; Mandatory deductions for calculating disposable earnings; The maximum amount permitted to be withheld; When the order must be implemented and when the payments must be made; and Priorities for withholding and allocating income withheld for multiple orders (pg. 9-21) 28 Child Support Withholding Orders Lump Sum Payments Include severance, leave payouts, insurance settlements, retirement incentives, commissions, stock options, lottery winnings, awards, and payments resulting from verdicts. Some states require employers to report a bonus or lump sum payment before it is paid. States may use the IWO form or another form or process to notify an employer to withhold from the lump sum payment. 29 Child Support Withholding Orders Electronic Payments Federal law requires the states to develop automated data processing systems to receive receive amounts withheld for child support by electronic means. (pg. 9-22) OCSE has announced a new Employer Services Web application which allows employers to electronically report terminations (eterm). (pg. 9-15) 30 10
Medical Child Support Orders Office of Child Support Enforcement regulations require that each child support order must include a medical support obligation. Standardized National Medical Support Notice (NMSN). (pgs. 9-28-9-34) 31 Medical Child Support Orders Judgments or orders issued by a court or an administrative agency that recognize the right of the child to be covered under the same group health plan for which the noncustodial parent is eligible. Look at both parents for medical support. (pgs. 9-28-9-34) 32 Electronic Income Withholding Order (eiwo) Enable states to send income withholding orders electronically to employers. Enables employers to accept the electronic format and provide other information regarding the noncustodial parent. On October 1, 2015, all the states were required to adopt use of the eiwo and transmit child support withholding orders electronically at the employer s option. (pg. 9-24) 33 11
Creditor Garnishments An employee has a debt that remains unpaid, a wage garnishment is one legal means by which the person who is owed the money can get paid. Requires that the employee s employer withhold a portion of the employee s wages. The employer can be required to withhold a portion of the employee s wages for a garnishment only if the creditor first brings a court proceeding where the proof of the debt is offered and the employee has a chance to respond (pg. 9-45) 34 Creditor Garnishments Creditor garnishments are governed by a joint federal/state scheme. Federal Consumer Credit Protection Act (CCPA) (Title III) places restrictions on states in their regulation of creditor garnishments, both: On the amount that may be garnished; On the freedom to discharge an employee because the employee s wages have been garnished (pg. 9-43) 35 Creditor Garnishments CCPA states that the maximum amount of an employee s disposable earnings that may be garnished to repay the debt is the lesser of: 25% of the employee s disposable earnings for the week; or The amount by which the employee s disposable earnings for the week exceed 30 times the federal minimum hourly was then in effect (pg. 9-45) 36 12
Minimum Wage Watch out for changes to minimum wage when computing creditor garnishments. The amount subject to garnishment under the CCPA is keyed to the federal minimum hourly wage. ANY change in the minimum wage will change the amount that can be garnished. (pg. 9-47) 37 Bankruptcy Orders Governed by the Federal Bankruptcy Code. Employee can file for bankruptcy or be found bankrupt by court. The satisfaction of the employee s debt is administered by the Bankruptcy Trustee. When a bankruptcy order is received, the employer is to stop withholding on any other garnishments except for child support withholding orders. (pg. 9-49) 38 Bankruptcy Orders Orders issued under Chapter XIII of the Bankruptcy Act takes priority over any other claims against the employees wages including federal and state tax levies received before the bankruptcy order, except for child support. The reason is that the debts underlying those garnishments will be paid by the bankruptcy trustee out of the money withheld under the bankruptcy order. (pg. 9-49) 39 13
Student Loan Collections o Maximum amount subject to garnishment, the lesser of: o No more than 15% of disposable earnings or the excess of disposable earnings over 30 times the federal hourly minimum wage. o If collecting multiple student loans, the maximum that can be garnished in total is the CCPA limit of 25% in disposable earnings or the excess of 30 times the federal minimum hourly wage, whichever is less. 40 Student Loan Collections o Cannot discharge an employee for a garnishment to repay a student loan. o Employee must have 30 days notice before withholding begins and must be given a chance to work out a repayment schedule to avoid the garnishment. (pg. 9-51) 41 Student Loan Collections Employees who lose their jobs and become reemployed within 12 months after termination are to be given 12 months from the reemployment date before a student loan garnishment can be put into place If an employer does not comply and withhold on a lawful student loan order, it is liable for the amount not withheld, as well as punitive damages, court costs, and attorneys fees (pg. 9-51) 42 14
Student Loan Collections Penalties: If an employer fails to comply with a lawful student loan garnishment order, it s liable for the amount not withheld from wages, as well as punitive damages, court costs and attorney fees. Employers that unlawfully terminate employees because of a student loan garnishment may be ordered to reinstate the employee with back pay and to pay punitive damages and attorney fees. 43 Federal Agency Debt Collections Can only be applied to non tax debts. Governed by the CCPA as well as the Debt Collection Improvement Act of 1996. Maximum amount subject to garnishment is up to 15% of employee s disposable earnings or the amount by which the employee s disposable pay exceeds 30 times the federal minimum hourly wage in effect; whichever is less. Cannot discharge, discipline or discriminate due to a federal agency loan garnishment. Employee must be given time before deduction starts to allow employee to make repayment arrangements to avoid the garnishment. (pg. 9-52) 44 Federal Agency Debt Collections Penalties: If an employer fails to comply with a lawful federal agency loan garnishment order, it s liable for the amount not withheld from wages, as well as punitive damages, court costs and attorney fees. Employers that unlawfully terminate employees because of a student loan garnishment may be ordered to reinstate the employee with back pay and to pay punitive damages and attorney fees. 45 15
Federal Agency Debt Collections If the employee s pay is already subject to another type of withholding when the federal agency wage garnishment is received, or if a family support order is served on the employer at any time, the amount subject to the federal agency wage garnishment is the lesser of: The amount of the order up to 15% of the employee s disposable pay or the amount of the employee s disposable pay in the excess of 30 times the federal minimum wage in effect, or 25% of the employee s disposable pay minus the amounts withheld under the withholding orders with priority (pg. 9-52) 46 Wage Assignments Voluntary agreement by an employee (assignor) to have a portion of the employee s wages assigned to a third party (assignee). Not covered by the CCPA. Some states do not allow wage assignments of any kind. When more than one is presented, the one received first must be given priority if the full amount cannot be withheld for both. The assignment can be revoked at any time by the employee. (pg. 9-56) 47 Voluntary Deductions Union Dues Mandatory deductions required to a collective bargaining unit. Credit Union Deductions When a an employee borrows money from a credit union or place funds in a savings account, the employee may wish to have a portion of their wages deducted by the employer and paid over to the credit union. Savings Bonds No longer an option to purchase paper savings bonds through payroll deduction (1/1/11). Charitable Contributions Payroll deductions for local and national charity donations which are voluntary. (pgs. 9-59 9-60) 48 16