Pennsylvania Labor and Employment Blog : Pennsylvania Labor and Employment Lawyer & Attorney : McNees Wallace & Nurick Law Firm : Human Resources, Workplace and Business Law : Harrisburg, Lancaster, Allentown, Lehigh

The Internal Revenue Service ("IRS") recently released a revised Form 941, the Employer's Quarterly Federal Tax Return, and related instructions to guide eligible employers in claiming the payroll tax exemption offered under the Hiring Incentives to Restore Employment ("HIRE") Act (H.R. 2847). The HIRE Act offers a tax exemption from having to pay the employer's 6.2% share of social security tax on the wages paid to a qualified employee from March 19, 2010, through December 31, 2010. In order to receive this tax benefit for qualified new hires, employers must claim the exemption on their quarterly federal tax returns, beginning with the second quarter of 2010. The exemption applies to wages paid to qualified employees from March 19, 2010, through December 31, 2010.

President Barack Obama signed the HIRE Act into law on March 18, 2010. As detailed in our blog post, HIRE Act Provides Employers with Tax Incentives for Hiring and Retaining Qualified Employees, the HIRE Act amended the Internal Revenue Code to provide tax incentives for employers to hire unemployed workers. Specifically, the HIRE Act created two new tax benefits for eligible employers: the aforementioned payroll tax exemption for certain new hires, and a tax credit for retaining the qualified new hires. The IRS previously released a sample affidavit form, which employers' qualified hires must complete as part of the qualification process for the tax exemption. The newly-released Form 941 will allow qualifying employers to claim the HIRE Act tax exemption on their Quarterly Tax Returns. Employers must claim the retention tax credit on their 2011 tax returns.

For additional information on the tax benefits offered under the HIRE Act, and related qualifications, visit the IRS's website to read their Frequently Asked Questions regarding the HIRE Act tax benefits, or contact one of the attorneys in McNees Wallace and Nurick LLC's Labor and Employment Practice Group. 

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In recognition of the importance and sacrifices associated with military service, many employers provide a supplemental payment for their employees called to active military service which covers the difference between their military pay and their regular compensation. Pay differentials are provided for varying lengths of time.

Revenue Ruling 2009-11 provides that a differential wage payment made by employers to their employees that leave their job to go on active military duty is not subject to FICA or FUTA taxes. However, the pay differential is subject to income tax withholding under new Code section 3401(h). The IRS ruling provides that employers may use the aggregate procedure or optional flat rate withholding to calculate the amount of income taxes required to be withheld on these payments, and that these payments must be reported on Form W-2.

Section 3401(h) was added to the Code by section 105(a) of the Heroes Earnings Assistance and Relief Tax Act of 2008.  New subsection 3401(h) provides that, for purposes of income tax withholding, any differential wage payment is to be treated as a payment of wages by the employer to the employee. Section 3401(h) applies to differential wage payments paid after December 31, 2008. The enactment of section 3401(h) modifies the holding in Revenue Ruling 69-136 that differential wage payments are not subject to income tax withholding. The term “differential wage payment” means any payment which (A) is made by an employer to an individual with respect to any period during which the individual is performing service in the uniformed services (as defined in chapter 43 of title 38, United States Code) while on active duty for a period of more than 30 days, and (B) represents all or a portion of the wages the individual would have received from the employer if the individual were performing service for the employer.

We have previously summarized the provisions of HEART in our post Making Sure Your "HEART" Is In The Right Place When It Comes To Soldier-Employee's Benefits

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On March 31, 2009, the IRS issued a notice relating to premium assistance for COBRA continuation coverage under the American Recovery and Reinvestment Act of 2009 (ARRA). Notice 2009-27 contains many helpful clarifications on the following topics:

• INVOLUNTARY TERMINATION
• ASSISTANCE ELIGIBLE INDIVIDUAL
• CALCULATION OF PREMIUM REDUCTION
• COVERAGE ELIGIBLE FOR PREMIUM REDUCTION
• RECAPTURE OF PREMIUM ASSISTANCE
• PAYMENTS TO INSURERS UNDER FEDERAL COBRA
• COMPARABLE STATE CONTINUATION COVERAGE

The Q&A section answers many nagging questions particularly on "involuntary termination" eligibility including the following as meeting the definition:

• An involuntary termination means any severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services (this leaves in question where employees accepting a "voluntary layoff" may qualify).
• Any temporary layoff with recall rights qualifies as a termination, but a reduction in hours does not qualify. However, an employee’s voluntary termination in response to an employer-imposed reduction in hours may be an involuntary termination if the reduction in hours is a material negative change in the employment relationship for the employee.
• Any termination elected by the employee in return for a severance package.
• Any employee-initiated termination from employment constitutes an involuntary termination from employment for purposes of the premium reduction if the termination from employment constitutes a termination for good reason due to employer action that causes a material negative change in the employment relationship for the employee.

Employers should be complying with the Notice requirement of the ARRA before April 18, 2009.

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On February 26, 2009, the Internal Revenue Service released detailed information that will help employers claim credit for the COBRA medical premiums they pay for their former employees.

Under the new law, eligible former employees, enrolled in their employer’s health plan at the time they lost their jobs, are required to pay only 35 percent of the cost of COBRA coverage.  Employers must treat the 35 percent payment by eligible former employees as full payment, but the employers are entitled to a credit for the other 65 percent of the COBRA cost on their payroll tax return.

• Employers must maintain supporting documentation for the credit claimed. This includes:
• Documentation of receipt of the employee’s 35 percent share of the premium.
• In the case of insured plans: A copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier.
• Declaration of the former employee’s involuntary termination.

The informational Release is IR-2009-15, includes an amended Form 941 and the Instructions,  together with a Q&A for Employers.  The Q&A makes the following notes on implementing and claiming the subsidy:

• The Employer may provide the subsidy (65%) and take the take the credit on its employment tax return only after it has received the 35% premium payment from then intdividual.
• The law became effective on the date of enactment, Feb. 17, 2009. However, under a transition rule, the regular premium amount may continue to be paid for up to two months after enactment (e.g., for March and April), and the subsidy can be provided retroactively.
• An employer can reduce its tax deposits or claim the credit on its quarterly return.
• An assistance-eligible individual can be any COBRA qualified beneficiary associated with the related covered employee, such as a dependent child of an employee, who is covered immediately prior to the qualifying event. The qualifying event for purposes of eligibility for the subsidy is involuntary termination of the covered employee’s employment that occurs during the period beginning Sept. 1, 2008, and ending Dec. 31, 2009. The individual must also be eligible for COBRA coverage, or similar state coverage, during this period.
• Model notices implementing the law will be issued shortly apparently by the Department of Labor.
   

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