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Court Preliminarily Halts Overtime Rules With Last Minute Ruling

Dear ManagedPAY Clients and Associates,

Rules Will Not Take Effect On December 1; Future Thereafter Uncertain 11.22.16
In a dramatic last-minute development, a federal judge in Texas today blocked the U.S. Department of Labor’s (USDOL’s) overtime rule from taking effect on December 1, handing an eleventh-hour victory to employers across the country. Agreeing with arguments posed by concerned states and business groups, the judge issued a preliminary injunction preventing the rules from being implemented on a nationwide basis.

The fate of the overtime rules is now uncertain. The Trump administration will take over the USDOL in less than two months’ time, and the incoming administration has repeatedly indicated that it wants to eliminate unnecessary regulations hampering the business community. Unless an appeals court reverses course in the next several weeks and breathes new life into the rules, it is quite possible that the rules will be further delayed, completely overhauled, or altogether scrapped once President Trump takes office.

Background: Proposed Rules Would Have Brought Massive Changes And Upheaval
On May 18, 2016, the USDOL unveiled a package of revised regulations altering the compensation requirements relating to which employees may be treated as exempt from the federal Fair Labor Standards Act’s (FLSA’s) overtime and minimum-wage requirements under the so-called “white collar” exemptions. The two changes with the broadest impact: the minimum salary threshold you could pay in order to characterize an employee as non-exempt would increase from $455 to $913 per week, which annualizes to $47,476 (up from $23,660 per year); and this amount would be “updated” every three years (meaning that it will likely increase with each update) with the first update scheduled for January 1, 2020.

Once announced, the USDOL informed employers that the new rules would take effect on December 1, 2016. By this date, employers would have been forced to make sometimes difficult decisions on how to compensate the estimated 4.2 million workers who are currently classified as exempt under the so-called “white collar” exemptions but earn less than the new threshold.

Almost immediately, an outcry sprung from the business community, especially those advocating on behalf of small businesses. By doubling the existing salary threshold, the USDOL’s actions would likely reduce the proportion of exempt workers sharply while increasing the compensation of many who will remain exempt, rather than engaging in the fundamentally definitional process called for under the FLSA. As many pointed out, manipulating exemption requirements to “give employees a raise” has never been an authorized or legitimate pursuit.

Moreover, publishing what amounts to an automatic “update” to the minimum salary threshold is something that has never before happened in the more-than-75-year history of the FLSA exemptions. This departs from the prior USDOL practice of engaging in what should instead ultimately be a qualitative evaluation that would take into account a variety of non-numerical considerations.

Businesses And States Turn To Court For Relief
In response to these announced changes, a group of 21 states and several business associations filed lawsuits in the Eastern District of Texas seeking a court order that would block the rules from going into effect. The cases were all consolidated into one action, to be heard by District Court Judge Amos Mazzant (an Obama appointee).

The challengers argued that the USDOL did not properly carry out its responsibility under the FLSA to define these exemptions, failing to take into account the duties of white-collar workers as the best indicator for whether threshold increases were needed. The plaintiffs also argued that the automatic indexing mechanism which would ratchet up the salary levels every three years was improper because it would ignore current economic conditions or the effect on public and private resources.

Court Blocks Overtime Rules
On November 22, 2016, District Court Judge Mazzant agreed with the state challengers and blocked final implementation of the rule mere days before the December 1 effective date. In his ruling, he stated that it was improper for the USDOL to adopt a salary test that categorically excludes a substantial number of workers who meet the exemptions’ duties-related requirements. Although he acknowledged that Congress delegated definitional power to the agency with respect to these exemptions, he concluded that the USDOL overstepped its authority.

He concluded that the rule change equated to a de facto “salary-only test,” because it would have had the effect of causing some 4.2 million workers who are today classified as exempt to become non-exempt, despite the fact they would have exactly the same job duties on December 1. He said that Congress never authorized the USDOL to classify white collar workers based on salary alone, and the USDOL ignored Congress’s intent by attempting to raise the minimum salary as it did. “If Congress intended the salary requirement to supplant the duties test,” he said, “then Congress, and not the USDOL, should make that change.”

The judge recognized that, for 75 years, the salary levels that served as part of the USDOL’s overtime exemption test acted as a floor and not a ceiling. He said during last week’s oral argument the new rule’s proposed salary jump was “a much more drastic change.” During that argument, in fact, he pointed out that the proposed substantial increase in the salary threshold could lead to inconsistent treatment of workers who each fulfill white collar duties but are paid differently. A convenience store manager who clearly acts as an executive and who is paid a salary annualizing to only $47,000 a year, for example, would be treated differently than a similarly situated manager who is paid a salary equating to $47,500 a year.

He rejected the USDOL argument that the change was not “drastic.” At oral argument, counsel for the government characterized the jump as a simple “course correction” that was long overdue. She pointed out that the current salary level was below the poverty level for a family four, proving that it is inappropriate for white collar workers. But even if was considered to be a drastic increase, she said, it was within the USDOL’s authority to set such a level because the agency’s process in arriving at this figure was carried out by the book and should be afforded deference by the court. Judge Mazzant obviously disagreed.

How Does Trump’s Election Impact The Future Of The Rules?
President Elect Trump will be inaugurated on January 20, 2017 – less than two months from today. It is possible that Judge Mazzant might be swayed by USDOL arguments in the coming weeks, or that an appeals court could step in to reverse Judge Mazzant’s ruling before President Trump takes office. As the judge said in his opinion, it could be that this ruling “only delay[s] the regulation’s implementation.”

Assuming that the injunction survives the remainder of President Obama’s term, it is difficult to predict what President Elect Trump will do with the rules once in the White House. Perhaps President Elect Trump will direct his USDOL to commence a new rule making process, subject to notice and comment, with the goals of setting lower thresholds for the salary requirement and eliminating the three-year update, among other changes. How long and what form such a process would take, and what could or would be done in the meantime, are currently unpredictable.

At the same time, a series of measures have been introduced in Congress hoping to prevent or stall the rules changes. While one of the proposed legislative changes would scrap the increases altogether, another proposed change would delay implementation for a period of time to provide a longer period of preparation. Still another would push the date that the full increase would take effect to 2019, introducing more forgiving gradual increases on an annual basis for the next three years.

The fate of these measures is similarly uncertain at present. Even if any of these measures were fast-tracked, approved by Congress, and signed by President Obama before he leaves office, it is unclear whether they would ever take effect given the nature of the current litigation.

What Should Employers Do Now?
Some employers might find themselves in a difficult spot. If you have already made alterations to your compensation plans or to your employees’ exemption status, it might be unpopular to reverse course now. Although you may have the legal right to revert to the status quo depending on your circumstances, you might consider waiting until a final decision is reached in court, Congress, and the White House before doing anything further.

If you had been waiting until December 1 to implement the changes, you have the option of putting any alterations on ice and awaiting a final determination on the fate of the rules. If you do so, you might consider communicating to your workforce that the expected changes are going to be delayed given today’s court ruling, and let them know that you will continue to monitor the situation and make adjustments when and if appropriate.

We will track these developments on a daily basis, and provide updates through our Legal Alerts and blog posts. If you have any questions, please contact your Fisher Phillips attorney, or any member of our Wage & Hour Practice Group.

Important Information from the U.S Department of Labor’s Wage and Hour Division on their final Overtime Rule.

Familiarize yourself with the changes now before they go into effect on December 1, 2016. The following links are directly from the Department of Labor and provide in-depth information regarding the new Overtime rule. Visit Department of Labor for additional information.

Non-Enforcement Policy Questions and Answers
White House Fact Sheet: Overview and Summary of the Rule
Wage and Hour Division Overtime Fact Sheet
Questions and Answers
Comparison Table: Current Regulations, Proposed Rule, and Final Rule
Overtime Webinars from the Department of Labor’s Wage and Hour Division
Small Business Guide
Non-profits and the FLSA
Higher Education and the FLSA
State and Local Governments and FLSA
Private Employer Technical Guidance Document
Non-Profit Technical Guidance Document
Higher Education Technical Guidance Document
Non-Enforcement Policy Questions and Answers


2015 Affordable Care Act Information Return Filing Deadlines Extended

The IRS has recently announced that it is extending due dates for filing 2015 Affordable Care Act (ACA) information returns. To get informed and to read the entire announcement click here.

Issues Surrounding Final Paychecks

BizActions Article February 2015

When an employee leaves your company, the complicated issue of the final paycheck arises. And how your company handles the check depends on state and federal laws, which can make it difficult for businesses operating in more than one state to come up with a uniform nationwide policy.

State laws generally determine the timing of final paychecks based on whether the employee was fired, laid off, or quit. Depending on the state, deadlines for issuing the last check might be the employee’s last day of work, the following business day, three business days, or the next scheduled payday.

What your company includes in the final paycheck can depend on whether you pay the employee an hourly wage or a salary, as well as on your company’s written policies regarding:

  • Severance pay;
  • Expenses;
  • Vacation, sick and personal days;
  • Bonuses;
  • Commissions; and
  • Other pay and benefit arrangements.

It’s important to know the laws because your company could be assessed interest and penalties for non-compliance. In some cases, companies wind up paying legal fees if the employee resorts to legal action.

One complex area in writing final paychecks involves employees who owe money to your company for any number of reasons, including:

  • Payroll advances;
  • Tuition payments;
  • Employee loans;
  • Unreturned equipment such as a company cell phone or laptop computer;
  • Purchases through payroll deductions; and
  • Prepaid leave.

You might be tempted to withhold the amount an employee owes, figuring that’s the only way your company will collect the debt. That could be a mistake.

Withholding money for employee debts also falls under state laws – unless there is a conflict with federal law, which prohibits withholding if it reduces the final payment to below minimum wage. There is an exemption for withholding amounts for debts stemming from payroll advances.

For more information about withholding and the importance of being specific click here for the full article.


How to Make Benefits Administrations Easier for Employees to Understand

BizActions Article January 2015

If employers want their workers to participate in retirement and benefits programs, it is important to communicate with them in plain English. Many benefits packages and retirement plans come with complex wording, and employees may not understand all of the terms. In addition to this, English may be a second language to some employees, so terminology may seem even more confusing to them. If they do not understand the terms in such an overwhelming amount of information, they may just avoid participating. It is the responsibility of employers to educate workers at all levels about what these terms mean.

Comb through a benefits package to pinpoint words that are considered jargon. Think about what words or descriptions could be substituted to make it easier for someone who has not taken HR-related classes to understand. Next, think about the system used for communicating benefits. Use the following points to analyze the system and information.

Think about the Communication Approach

For some employers, communication starts and stops with handing workers thick booklets about benefits. It is likely that most workers will not even read the information until they have reasons to file claims. Since most workers do not read these booklets, they may not even know there are insurance plans that could help them in such situations.

Look for Undefined Terms that May Confuse Employees

Most managers and HR personnel know what open enrollment is. However, an employee may think this means enrollment is an option at any time. He or she may browse past the section outlining the open enrollment term, so these two words being repeated throughout the booklet may be misunderstood. Booklets should have glossaries, which define words and specific time frames associated with certain words. If the word “utilize” appears in the booklet, replace it with the more common word “use.” This is much easier for anyone to understand.

Organize the Information

Use bullet points to organize lists. For example, lists of exclusions, drugs or other types of data with multiple listings are much easier to read in list format. Use headers and bold print to highlight important dates or pieces of information. It is also helpful to have a Q & A section in the back that addresses common questions.

Best Practice Tips

Instead of handing employees a thick booklet packed with various types of information, it is better to offer multiple items. For example, make a special handbook for each type of insurance plan or retirement plan. Every booklet should have its own relevant glossary, and the information should be broken up into shorter paragraphs to make it easier to read. 

It is also helpful to post this information via social media. Creating an HR blog with concise and easy-to-understand information is a simpler way to communicate with employees. Allow workers to post comments and questions. It is important to match the form of communication with the right generation. While most Baby Boomers prefer face-to-face meetings and written material, Generation Y members prefer electronic communication. 

It is important for employers to communicate with workers about benefits throughout the year. Employers should proofread correspondence before it is sent out to eliminate any complex terms that HR managers may automatically use. When it comes to communicating with employees, the key to good communication is keeping the audience in mind at all times.

Hire the Right Person and Stay Out of Trouble Doing It

BizActions Article February 2015

Interviewing job candidates has never been easy. But now, a growing list of legal pitfalls is making a tough job even tougher.

Fortunately, there are techniques that can help you hire the right person and stay out of trouble while you’re doing it. Here are some of the most important:

  • Talk less, listen more. Most interviewers talk too much. They spend too much time discussing the job and the company and not enough time asking relevant questions. Your goal during an interview is to obtain as much meaningful information from the applicant as possible.
  • Examine resumes and applications carefully. While complete honesty on a job application may not be the norm today, you should question the obvious. An applicant with 10 year’s experience and 10 jobs may be a “job-hopper” at best and a problem employee at worst.
  • Stay on track. Ask only job-related questions that you need to make a lawful hiring decision. Interviews can easily turn into conversations about family, religion, or national origin. If you start going in this direction, stop and move the conversation onto a proper, legal topic.”
  • Prepare a written list of questions. To stay clear of discrimination laws, don’t ask different questions of male and female applicants. Create a list of questions for all candidates before interviews start. Make copies of those questions with space between them to take notes.
  • Consider compatibility. Will the candidate fit with the boss? A candidate who likes to work independently, for example, won’t work well with an micro-manager. Look for compatibility in the overall work environment. A person who thrives on competition among co-workers may not fit in a team-based culture that values partnership.
  • Interview some candidates more than once. This is especially important when hiring supervisors. Applicants for these jobs usually expect to be interviewed more than once. A second interview gives applicants and interviewers every opportunity to test compatibility.
  • Look behind the answers. Even after asking the right questions, some interviewers make wrong choices because they don’t listen carefully to the answers. Don’t fall into the trap of thinking you can overcome potential conflicts just because you like them or because their skills are a good match for the job.
  • As they say in court, “don’t lead the witness.” You shouldn’t give away too many details of what you’re looking for in a candidate. Otherwise, candidates tend to mold their answers to what you want to hear.
  • Don’t focus exclusively on hard skills. Some interviewers discuss only the candidate’s technical skills. Although these are important, they’re not always the best indicator of success on the job. The candidate must also be a good fit for the boss and the work environment. Two candidates can be equally qualified in technical skills, but vastly different in terms of personality and work-style preferences.
  • Avoid statements that imply a promise of permanent employment. An employer’s legal vulnerability in a wrongful discharge suit begins in the early stages of a relationship. Courts sometimes find a contractual relationship in statements about job security or advancement opportunities.
  • Make sure pre-employment tests measure only relevant skills. A 1971 Supreme Court decision, Griggs v. Duke Power, provided a major precedent in pre-employment testing. In that case, an applicant for a janitorial job was required to show a high school diploma. When the company did not hire him, the applicant sued. The Supreme Court ruled that a high school diploma was irrelevant to the position in question. The court also ruled that pre-employment testing must measure only skills directly related to performance on the job the candidate is seeking.

Never take pre-employment interviewing lightly. It is, perhaps, the most critical part of the employment process. The information you obtain from the candidates will become the most important factor in your decision.

 For more information and examples of questions not to ask, access the full article here

Job Interviews: Checklist to Prepare

BizActions Article December 2014

Interviewing job candidates is work enough. But the real work begins before you greet applicants Maria and Jacob with a friendly handshake.

Plan ahead. Several days before the scheduled interviews, set aside time to accomplish the following tasks:

Double-check job qualifications. Example: Perhaps you asked for candidates with college degrees. How much will you compromise on this requirement? Would you settle for someone who graduated from a 2-year community college program? Would you hire someone with no college education but excellent work experience?

Form questions you will ask of each candidate.Example: “Tell me about a recent accomplishment of yours of which you are especially proud”…”What contributions of yours have made for a better working environment at your present job?”

Note: The above questions are “open-ended,” and they encourage applicants to talk about themselves. Avoid “closed” questions, questions which can be answered with a simple “yes” or “no.” They stifle discussion.

Check references. Do statements on applications agree with real-life facts? Did Maria actually graduate from Harvard in 1989 with a masters in business administration?

Talk with past supervisors. What do they say about an applicant’s work history? If points raised in these reference checks need to be explored with candidates, write down your questions. Tape or clip them to the applications for easy reference during the interview.

Review application forms. Do any statements arouse your curiosity? Form questions for individual candidates. Again, write them down and attach to applications.

Note: Always follow up on gaps in an employment history. If something is amiss in an applicant’s work history, more often than not probing the candidate about these gaps exposes the closet of skeletons.

Inspect test results. When you test applicants for a measurable skill (for example: data entry accuracy, welding skill) administer the tests before the interview. Then, review results. If questions arise concerning test results, again jot down notes on a separate sheet of paper and attach to the application.

Do We Have To Pay For That?

BizActions Article December 2014

The time that employers must pay for isn’t always clear. To help make sense of the confusion, here are answers to some frequently asked questions about when companies have to pay employees based on Labor Department regulations.

Do We Have to Pay Employees On Call?

Yes, your company is required to pay employees if you require them to remain on your premises while they wait for an assignment (for example, firefighters waiting for an emergency call). If this is the case, they are considered to be working and must be paid, even if they are doing other things, such as playing cards.

No, you don’t have to pay employees if you allow them to go home and they are free to leave messages saying where they can be reached. In most cases like these, the employees are not considered to be working.

Yes, you must pay employees if you allow them to leave but restrict their activities, (such as requiring them to remain close to the workplace or not drink alcohol while on call).

Do We Have to Pay for Travel Time?No, you do not have to pay employees for the time they spend commuting back and forth from home.

Yes, you have to pay for travel time if you have maintenance employees who use their own cars every day to travel to your branch offices in neighboring cities. You pay for time between locations.

Do We Have to Pay for Meal Time and Rest Breaks?

Yes, you do have to pay if the employee continues working during lunch or rest breaks. For example, if your receptionist spends her lunchtime at her desk, answering the phone as usual and has not been relieved of her duties, you do have to pay her for the time. What if she works during lunch breaks against your instructions? It’s up to you to enforce the rules.

State laws regulate break periods, including the minimum time required for meals and rest breaks and whether the time must be paid. But even states that don’t require paid breaks do require employers to pay employees if job duties are performed while on long breaks, such as lunch or rest periods during long shifts.

Workers’ Compensation Settlements In Do We have to Pay for Sleep Time?Yes, you must pay for sleep time if employees sleep less than five hours or are on duty for less than 24 hours. They are considered to be working for those hours, even if they are allowed to sleep or engage in other personal activities during non-busy times.

No, you don’t have to pay if your employees work 24 hours or more and you have an agreement that their work hours will exclude bona fide regularly scheduled sleep periods for not more than eight hours – as long as you provide sleeping facilities and they can generally sleep uninterrupted. 

Workers Compensation Settlements In – Return to Work Programs Out – The Economic Reality!

Margaret Spence, CWC, RMPE May 19, 2009

Imagine if everyone shared your vision of getting ill or injured employees back to work? In today´s tough economy, it may be difficult to sell your company on the benefits of continuing to offer injured employees viable light duty jobs especially if you are considering a layoff.

A recent headline in the Lancaster Sunday News read “City Pays 1.2 Million to Cover Injuries in Change of Policy – Light Duty Programs for Those Hurt on the Job Out – Settlements In. According to the reporter, the new City administration made the decision to stop transferring injured employees to positions that were light; instead they were planning to offer all of them a settlement to leave the City. The City Administrator said “this approach will cost the city more now, but we will save money in the long term.” Article source:

So, Are Return to Work Programs Still Viable?

The answer is easy – in tough economic times businesses can not afford to overlook return to work programs because indemnity or lost wage payments are one of the key drivers of workers compensation cost. If you opt to keep the employee out of work, you risk paying for lost wages or indemnity benefits until the employee exhausts the state mandated benefits. Indemnity payments impact your experience modification and ultimately drive up the cost of your workers´ compensation premiums as well as, your cost of doing business.

The average company can not afford to take the position that the City of Lancaster, a self-insured organization, took because multiple settlements and lack of return to work programs will find your company uninsurable. Several years ago, when I first started my consulting practice, I received a frantic phone call from an insurance agent who advised me that his client received a Notice of Cancellation and that he had sixty days to find them new coverage. Apparently, the company had numerous accidents, large settlements and their idea of injury management was – injury, terminate, settle, a cycle that earned them the Notice of Cancellation.

This employer did not attempt to quantify the impact of allowing injured employees who could return to work, the option to stay at home, nor did they evaluate the long term cost of offering a settlement to every injured employee versus retaining the employee with some job accommodation. If this employer had asked two simple questions—what is the cost of leaving these employees at home? And what is the long term cost of settling these claims? —they might not have been so quick to say, “We have nothing available – let´s settle.”

The reality for this insured, his agent could not secure replacement coverage. The agent advised me that he contacted several underwriters to find out if they would be interested in issuing a quote for this client. After he relayed the fact that the company´s paid-in premium amount was $280,000 and the claims paid-out total was $850,000 the underwriters broke into hysterical laughter. No one was interested in providing workers´ compensation coverage for this company. The client faced the real issue of closing his business because he could not secure coverage. In today´s economic climate and as employers make decisions to terminate or layoff or refuse to offer light duty positions to injured employees, they must evaluate the long term cost of this adverse decision.

Workers Compensation is not forgiving and the system is built to punish employer´s long term for decisions they make now. Frankly, employers are not in a win-win situation when it comes to workplace injuries. If you leave the employee at home, the insurance carrier pays them to be there. This, in turn, affects the amount of money you pay for premiums. If you refuse to bring the employee back to work you may be in violation of the Americans with Disabilities Act – ADA. If you bring the employee back to work in a nonproductive light-duty position that has them counting paperclips, you are paying state and federal taxes as well as benefits for an employee who is not contributing anything to your bottom line. While settlements seem like the best immediate option for employers this does not eliminate their long term cost.

An argument could also be made that the cost associated with injured employees remaining off work does not stop when companies, like the City of Lancaster, make the decision to settle the worker compensation claim. The settlement actually transfers the cost of the injury to the general public, the next employer or the social security system in the form of disability payment, when the settlement money runs out.

What can you do to keep your organizations return to work program viable?

Quantify the cost – everyone especially today, understands dollars and cents – your only option is proving that the return to work program is financially beneficial to your company´s bottom-line. Imagine if everyone shared your return to work vision – the only way to share your vision – speak to your management team in financial terms. “It cost X to keep the employee at home, it cost Y to settle them out of the system, the long term impact on our profits is Z, the three year impact on our workers compensation cost is XYZ. Based on my evaluation I recommend that we implement a proactive return to work program instead” – This vision will sell even the most skeptic managers. Settlements may seem like the best option, return to work is the most cost effective solution.

Small Business Health Tax Credit

NAPEO has prepared a healthcare small business tax credit guide to understand the credits, including how much can be claimed, which small businesses are eligible to receive the credits, and how to calculate credits. Calculating the credit is complicated and this guide is a valuable tool developed to assist client with this complex issue. With phase one of the healthcare small business tax credits effective immediately, it is important that employers and their tax advisors understand its implications. Please feel free to reach out to a member of the ManagedPAY Benefits Team for assistance with the small business tax credit guide.

Small Business Health Tax Credit

Questions and Answers regarding the Small Business Health Tax Credit 

  1. How does my client determine if they are eligible for the Small Business Tax Credit?

    Answer: It is a lot more complicated than just counting noses. There is first a formula that a client must use to determine whether they qualify as a “small business.” This is done as follows:

    Step 1.

    Determine the total number of employees (not counting owners or family members): Full Time Employees _________ [40 + hours per week] + Full Time Equivalents for Part time Employees* _________ Total FTEs: _________ *Full Time Equivalent of Part-time Employees = Total Annual Hours of Part-time Employees 2080. Note: this does not include seasonal workers working less than 120 days during the tax year If Total FTE is less than 25, proceed to Step 2

    Step 2.

    Determine the total annual wages paid to employees (excluding wages paid to owners or family members): Total Annual Wages __________ Number of Employees (from Step 1) __________ = Average Wage __________ If the Average Wage is less than $50,000, proceed to Step 3

    Step 3.

    Determine if the client pays at least 50% of the health insurance premium of employees at the single (employee only) coverage rate. If yes, then the client is eligible.

  2. What is the amount of the credit?

    Answer: The credit varies based on the number of FTEs and Average Annual Wage and is less for a tax-exempt employer. The credit is based on the amount of premium that the company pays, not to include the amount paid by employees and also excludes any amounts paid for coverage on owners and their family members. According to the IRS, the credit is worth up to 35 percent of a small business’ premium costs for years 2010 through 2013 (25 percent for tax-exempt employers). On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers) for years 2014 and 2015. No further credits are expected at that time. The credit is 100% for small businesses with less than 10 employees. Also the credit is for payments made during the entire year and not just since enactment. Note: This credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 11 and 25 full-time workers.

  3. Can you give examples of this determination?

    Answer: The IRS has provided three examples: Example 1: Auto Repair Shop with 10 Employees Gets $24,500 Credit for 2010

    • Employees: 10
    • Wages: $250,000 total, or $25,000 per worker
    • Employee Health Care Costs: $70,000

    2010 Tax Credit: $24,500 (35% credit) 2014 Tax Credit: $35,000 (50% credit) Example 2: Restaurant with 40 Part-Time Employees Gets $28,000 Credit for 2010

    • Employees: 40 half-time employees (the equivalent of 20 full-time workers)
    • Wages: $500,000 total, or $25,000 per full-time equivalent worker
    • Employee Health Care Costs: $240,000

    2010 Tax Credit: $28,000 (35% credit with phase-out) (See Question 4) 2014 Tax Credit: $40,000 (50% credit with phase-out) Example 3: Foster Care Non-Profit with 9 Employees Gets $18,000 Credit for 2010

    • Employees: 9
    • Wages: $198,000 total, or $22,000 per worker
    • Employee Health Care Costs: $72,000

    2010 Tax Credit: $18,000 (25% credit) 2014 Tax Credit: $25,200 (35% credit)

  4. Is there a sliding scale or phase out that applies to the credit?

    Answer: Yes. The credit is reduced to the extent the number of FTEs is above ten and/or the average annual wage is above $25,000. The calculation is the sum total of the following reductions to the otherwise applicable credit (but not to reduce the credit below zero): If the number of FTEs exceeds 10, then multiply the credit times a fraction (that is the number of FTEs in excess of 15 over the number 15) If the average annual wage exceeds $25,000, then multiply the credit times a fraction (that is the amount of the average annual wage in excess of $25,000 over the number 25,000)

  5. Is there an example of how this sliding scale applies to the credit?

    Answer: The IRS has provided the following example: Example: For the 2010 tax year, a qualified employer has 12 FTEs and an average annual wage of $30,000. The employer pays $96,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer’s State and/or region) and otherwise meets the requirements for the credit. The credit is calculated as follows:

    1. Initial amount of credit determined before any reduction: (35% x $96,000) = $33,600
    2. Credit reduction for FTEs in excess of 10: ($33,600 x 2/15) = $4,480
    3. Credit reduction for the average annual wage in excess of $25,000: ($33,600 x $5,000/$25,000) = $6,720
    4. Total credit reduction: ($4,480 + $6,720) = $11,200
    5. Total 2010 tax credit: ($33,600 – $11,200) = $22,400

    This is also why the tax credit in the second example to question 3 equals $28,000 and not simply 35% of $240,000 (which would equal $84,000). The following would be the Phase-out for that above example:

    1. Initial amount of credit determined before any reduction: (35% of $240,000) = $84,000
    2. Credit reduction for FTEs in excess of 10: ($84,000 x 10/15) = $56,000
    3. Credit reduction for average wage in excess of $25,000 = none
    4. Total credit reduction: ($56,000)
    5. Total 2010 tax credit ($84,000 – $56,000) = $28,000
  6. Can a client of a PEO receive this credit?

    Answer: Yes. NAPEO believes (see NAPEO Advisory) that a colloquy on the Senate floor between Senator Nelson of Florida and Senators Baucus of Montana and Grassley of Iowa express the clear intent of those shepherding the legislation through the Congress that the credit should be available to clients of a PEO.

  7. What amount of premium is used in the calculation?

    Answer: An employer may only count the amount of premium paid by the employer. It may not count the portion paid by the employee. For example, if the employer pays 75% and the employee pays 25% of the premium, only the 75% is used in calculating premiums paid by the employer. An employer may not count the amount of premium paid by the employer for coverage on owners and their family members. CAVEAT: Premium paid under a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer. CAVEAT: There will be a cap on the amount of the employer’s premium payments cannot be greater than the amount that would have been paid for the average premium for the small group market in the state. So in the case above, not more than 75% of what the average premium would have been in the small group market. (That amount is to be determined by HHS and published by the IRS)

  8. Will all premiums in 2010 be counted, including those incurred before the passage of the Act?

    Answer: Yes

  9. Where can I go for further help on this?

    Answer: It is expected that the IRS will continue to develop information and guidance on this issue. Go to or directly to their health care tax credit page for information. In addition, look to the NAPEO web site and to NAPEO programming for additional information and educational programming throughout the year.

Social Security is Changing the Way Social Security Numbers are Issued

Were you aware that the first three digits of the Social Security Number (SSN) had a geographical significance? Since the inception of SSNs in 1936, the first three digits were determined by the state of the mailing address shown on the application for an SSN – but this is slated to change in 2011. In an effort to increase the number of SSNs available for use by the Social Security Administration (SSA) and in order to help reduce identity theft, SSA plans to change the methodology by which SSNs are issued. In June 2011, SSA will begin to issue SSNs randomly, regardless of the address on the application. As a result, SSA will have the ability to continue to issue SSNs in all areas of the country for many more years without having to make additional changes. Your computer systems or information technology staff may need to revise their programs to account for these changes.

What will change?

  • Anticipated implementation date of SSN Randomization is June 2011.
  • SSA will no longer issue SSNs based on geography.
  • SSA will issue SSNs with the number “8” in position 1.
  • SSA will issue SSNs with the number “7” in position 1 to the general population. These are currently reserved for people in the Railroad Retirement system and people applying for SSNs from outside the country.
  • Effective June 2011, SSA will no longer update the High Group List, which reflects the highest group number (positions 4-5) of SSNs issued within each geographical area number (positions 1- 3). SSA offers verification services (see below) that are more accurate than using the High Group List.

What will not change?

  • SSA will not issue SSNs beginning with the number “9”.
  • SSA will not issue SSNs beginning with the number “666” in positions 1 – 3.
  • SSA will not issue SSNs beginning with the number “000” in positions 1 – 3.
  • SSA will not issue SSNs with the number “00” in positions 4 – 5.
  • SSA will not issue SSNs with the number “0000” in positions 6 – 9.

For More Information:

In September 2010, SSA will conduct conference calls to provide more information and answer questions regarding this new process. Please e-mail to participate in one of these calls. More information is also available in our resource links below.


Information and Instructions to Verify Social Security Numbers Online

Social Security Number Allocations

Have questions about these links? E-mail us at

Current Economic Situation on the Unemployment System

Information for PEOs and their Clients on the Impact of the Current Economic Situation on the Unemployment System – What it means for all employers!

The current economic recession has impacted virtually all businesses.

Whether it is decreased consumer demand, restrictions in financing, shrinking workforces, or increased operational costs, these are indeed challenging times for everyone. Employers who have partnered with a PEO have many human resource related benefits that help in getting through economic downturns.

This is particularly true in the area of unemployment insurance. PEO professional management practices and administrative efficiencies allow clients to successfully minimize cost and exposure in both staff reductions and staff expansions. PEO benefits help to retain key staff and PEO administrative services can guide clients in effectively handling unemployment insurance (UI) issues.

However, no business (PEO or client) will escape some of the major impacts that the recent economic turmoil will mean for all businesses across the country – especially in the area of UI. Both PEOs and their clients must understand that the staggering costs of the recession will require contributions from all businesses for the unemployment system to recover.

Q: What factors impact UI costs?

A: Increased utilization of the system is the greatest cost driver. The current high employment, coupled with extended and expanded benefits, has imposed enormous burdens on every state system in the United States. Exact costs are determined by a number of factors relative to the type of system utilization they have (i.e. layoffs), new hires, and claims management. However, all employers share the cost of other employers who go out of business and no longer contribute to the system.

Q: How has the current recession impacted employers?

A: A major impact of the current economic recession has been increased unemployment. According to the U.S. Bureau of Labor Statistics, the unemployment rate has more than doubled from 2006 (4.1 percent) to the current rate (9.7 percent).

Q: How long will unemployment remain high?

A: Experts differ on how and when the economy will fully rebound from the most recent recession. However, historically the recovery in employment has usually trailed other elements with employers relying initially on productivity through reduced workforces.

Q: Where do unemployment funds come from?

A: The state-federal unemployment system is funded by employer contributions. An individual employer’s contribution is made of essentially two components – fixed cost contribution and experience rating charges (i.e. the more layoffs or undisputed claims an employer incurs, the more all employers must contribute to the system). Both fixed costs (those for operating the system) and increased use (additional benefits cost) increase during bad economic times.

Q: I have heard a lot about Congress expanding UI benefits. How does that impact overall costs?

A: The American Reinvestment and Recovery Act of 2009 (a.k.a. “The Stimulus Bill” or ARRA) contained provisions that incentivized the states to expand and/or extend UI benefits to additional workers thereby increasing the burden on the system, and consequently driving up the cost of UI for all employers. Additional Congressional action is anticipated to further add to the UI system costs.

Q: Do we know how much UI costs will increase for employers?

A: If we use past recessions as a guide, the employer costs associated with UI doubles during periods of high unemployment. Given the severity of the most recent cycle, this is not an unrealistic estimate and may in fact be low. In some cases, states not only increase the UI rates by the amount of wages which are subjected to UI taxes.

Q: I have a good record, why would my costs increase?

A: There are several reasons that all employers’ costs can be expected to increase. These all fall under a phenomenon called “socialization” where costs of the system are spread over all employers. Fixed cost increases – All employers share a portion of the fixed costs of the UI system which essentially means the costs of administering the program. Of course, in times of high unemployment there are increased administration costs (e.g. more claims to process, more workers to assist in work search). Statewide Unemployment Impact – All employers share some cost for the UI system regardless of their individual hiring experience. Borrowings – Additionally, if a state UI fund runs out of money, they must borrow from the federal government and the interest charged to the state borrowing money is assessed to the employers in the borrowing state. One method of recapitalizing the fund and paying off borrowing is for a state to raise the wage base and this affects all employers regardless of their experience. FUTA Credit Reduction – Where a state is unable to repay federal borrowings in a timely manner, the credit for state payments (SUTA credit) against the FUTA tax is reduced for employers in that state, adding cost to each employer in the state. Recapitalization of State Trust Funds – With the vast majority of state UI trust funds out of money, it will be necessary for states to adjust employer contributions to ensure the trust funds are recapitalized.

Q: How long will increased costs last?

A: Again, depending on a variety of factors, costs can be expected to remain high for five to 10 years. States whose funds are exhausted will have to borrow to fund unemployment costs, which means that employers will have to be assessed to cover the present costs, the funds necessary to pay the interest and principal on the borrowings, and the funds necessary to recapitalize the funds.

How does a PEO help clients with UI?

A: A PEO brings tremendous value to clients in the handling of UI. First, a PEO can provide expertise and guidance in handling personnel terminations and layoffs. The PEO can also assist the client in the administration of legitimate claims and in preventing illegitimate claims for workers that are not entitled to UI. A PEO can provide professional expertise in handling UI issues, dealing with the complexities of the UI system, managing claims and hearings, and, in some cases, providing assistance to employers in finding alternative employment opportunities.

Q: As a client of a PEO, is there anything I can do to help contain costs?

A: As an employer funded system, there is no way around the fact that rising unemployment rates are going to impact all employers. However, there are steps clients can take to help control costs to the greatest extent possible. Among those are: Documentation and record keeping. Following the established procedures will assist in avoiding unnecessary claims activity. The use of job descriptions and performance appraisals can help when making “for cause terminations.” Be on the lookout for fraud. According to UI experts, as much as 10 percent of all costs in the UI system are attributable to fraud. Good Hiring Practices. Proper pre-employment screening, training, and supervision assist in the retention of quality employees and reduces for-cause terminations.