Section 9: Other Deductions From Pay

Section 9: Other Deductions From Pay Presented By: Cathy Bergstrom, CPP Retired Project Manager/ Business Analyst 336-253-2374 cbergstrom@triad.rr.com Revised: March 2016

Outline • Involuntary Deductions 9.1 • Tax Levies • Child Support Orders • Creditor Garnishments • Bankruptcy Orders • Student Loan Collections • Federal Agency Debt Collections • Wage & Hour Restrictions on Deductions • Voluntary Deductions 9.2 • Wage Assignments • Union Dues • Credit Union Deductions • U.S. Savings Bonds • Charitable Contributions

I. Involuntary Deductions • Deductions the employer is required by law to collect. • Tax levies • Child support • Garnishments • Bankruptcy • Gov’t obligations including student loans

I. Involuntary Deductions • Common Elements to consider • What wages are subject to involuntary deductions • How are “disposable earnings” defined for each order • Priority – How (and in what order) are multiple orders handled for an individual employee • What rules govern each order (Federal, State – which state?) • Timing of 1st deduction after order received and of payments of amounts withheld. • Penalties for non-compliance

Pop Quiz • If all of the following are received at the same time, which must the employer deduct first? • Student loan • Federal tax levy • Creditor garnishment • State tax levy • When calculating an IRS tax levy, the exempt amount is deducted from what amount? • Disposable earnings • Take-home pay • Gross pay • Federal income tax withheld

I. Involuntary Deductions Federal Tax Levy • Priority: Deduct before all other garnishment/orders except Child Support order in effect before the date of the levy. • All amounts paid are subject to levy unless specifically exempt under the IRC (see list p. 9-3) • Form 668-W (part 3&4) help establish the employee’s “exempt amount” . If no Form 668-W supplied, default is MFS with 1 exemption. • The exempt amount is subtracted from “Take Home Pay” to determine the levy deduction.

I. Involuntary Deductions Federal Tax Levy (continued) • “Take Home Pay” is defined as Gross pay • Minus federal, state and local taxes • Minus deductions in place before the levy is received • Minus deductions instituted after the levy if it is a condition of employment. • Deduction increases beyond the employee’s control will adjust the “Take Home Pay” (e.g.. Premium increase) • Does not include employee decision to change coverage or increase deferral % or any increase to a voluntary deduction. • Direct deposit is not a deduction for purposes of this calculation. • Withholding & remittance must begin with 1st payroll after Form 668-W received.

I. Involuntary Deductions Federal Tax Levy (continued) • Withholding continues until Form 668-D is received (or the employee terminates) • Don’t stop just because the amount on original order has been deducted • Do encourage the employee to contact the IRS to work out a Payroll Deduction Agreement • Penalties for failure to withhold & pay – Full amount due plus interest from payment date, applied to debt plus 50% penalty. State Tax Levy • Priority based on order of receipt. • Read the order carefully. Some states use Gross Pay (not disposable earnings) as the basis for calculation.

Pop Quiz • What law governs the maximum amount that can be deducted for spousal or child support? • Omnibus Budget Reconciliation Act of 1993 • Consumer Credit Protection Act • Family Support Act of 1988 • Child Support Enforcement Amendment of 1984 • Which order has the highest priority? • IRS levy received 3/12/10 • Garnishment received 1/30/10 • Child support order received 2/5/10 • Student load order received 12/15/09

I. Involuntary Deductions Child Support Orders • Since 1994, wage withholding is the primary way of collecting child support (unless parties agree to a different method). • Child support enforcement is a joint federal/state responsibility. Title IV of the Social Security Act and the Consumer Credit Protection Act (CCPA) provide the legal framework. • Maximum deduction is 60% if employee not supporting another person; otherwise the max is 50% • Maximum increases to 65% and 55% respectively if employee is at least 12 week in arrears. • States may provide for lower limits. • Employee’s work state determines what limits apply (not state where order originated).

I. Involuntary Deductions Child Support Orders (continued) • Disposable Earnings (DE) calculated by subtracting all legally required items from gross pay. • Tips (whether cash or credit card) are not wages subject to child support according to the OCSE. However, service charges collected by the employer and paid to employees are wages. • Typically voluntary deductions do not reduce DE. • Some states reduce DE by health insurance deductions. (Read orders carefully). • One-time payments may require child support deductions (particularly if employee is in arrears) • Generally subject to interpretation by states • Contact state enforcement office for direction as early as possible before a one-time payment. Most states now paticipate in OCSE web portal for reporting one-time payments.

I. Involuntary Deductions Child Support Orders (continued) • Deadlines. • Start deductions no later than 1st pay period beginning 14 work days following mailing of notice to employer. • Payments required within 7 business days of pay date. • Failure to withhold – employer liable for full amount not withheld plus any state imposed fines. • Priority • Child support takes precedence over any other order except for tax levies received before the child support order was established. • Child support “not dischargeable” in bankruptcy. • Multiple child support orders are governed by state law. If orders are from different states, the employee’s work state rule governs.

I. Involuntary Deductions Child Support Orders (continued) • Other Important Stuff • Employers may charge an admin fee (maximum amount may differ by state). • Employer may not discriminate against an employees due to a child support order. • Standard form (Income Withholding for Support) has made interpretation of support orders much easier. • States must develop electronic systems to manage cases and accept and disburse child support payments. All states (except SC) have accomplished this. Currently 15 states require most employers to remit payments electronically. • Electronic Withholding Order (e-IWO) system is now available and all states must implement by October 2015. Currently employers are not required to accept e-IWO’s.

Pop Quiz • Under federal law, what is the maximum amount of “disposable earnings” that can be garnished to repay a debt to a creditor? • 25 x federal minimum wage • 15% • 40 x federal minimum wage • 25% • Which item is not wages subject to garnishment? • Salary • Tips • Overtime • Service Charges

I. Involuntary Deductions Creditor Garnishments • Federal Requirements • Any debt that remains unpaid is a candidate for garnishment. • Deductions limited by CCPA to the lesser of 25% of Disposable Earnings (DE) or DE greater than 30 x federal minimum wage • DE = gross earnings minus deductions required by law (taxes and required contributions to state retirement plans. • Again, tips are not “wages subject to garnishment” under Federal rulings but service charges and any “tip credit” used to bring the wages up to FLSA requirements are. • No discharge for one garnishment • Federal employees not subject to creditor garnishments

I. Involuntary Deductions Creditor Garnishments • States may: • Further limit the amount subject to garnishment (or disallow creditor garnishments entirely. • Increase employees’ protection from termination or discipline because of garnishment. • Establish the priority of multiple creditor garnishments. • Establish time limits for remitting payments as well as penalties for non-compliance. • Determine allowed administrative fees (or disallow). • Establish procedures for “out of state” garnishments

I. Involuntary Deductions Bankruptcy Orders • Bankruptcy orders governed by the federal Bankruptcy Code • Notice to withhold comes from the Bankruptcy Trustee. • Continue to withhold existing garnishment orders until notified by the bankruptcy court or trustee otherwise. • Priority – Chapter XIII order takes priority over any other existing order except Child Support. • Limits – since Bankruptcy is “voluntary” for the employee the CCPA limits do not apply. • Employers cannot terminate an employee because of a bankruptcy proceeding. • Neither support nor retirement plan loans can be discharged through bankruptcy.

I. Involuntary Deductions Student Loans • Orders for the repayment of Student Loans have only a few differences from other garnishments: • Maximum of DE subject to withholding is lesser of 15% or excess over 30 x federal minimum wage for each loan. When more than one order received, aggregate deduction still must adhere to CCPA maximums. • 30 day notice before withholding required. • The law provides no guidance on priority when other garnishments exist. However, DOE has allowed Child Support to take precedence. • Grace period after reemployment – 12 months from reemployment if reemployed within 12 months of termination.

I. Involuntary Deductions Other Federal Agency Debts • Debt Collection Act of 1996 covers non-tax, non-student loan debts. • Law preempts state garnishment laws/restrictions • Limits are the same as for Student Loans. • Withholding must begin within a “reasonable period of time” which will be specified in the order. Payments of withheld amounts “promptly” after payday. • Priority – Unless otherwise provided by federal law, federal agency wage garnishments take priority over any other order served after the federal agency garnishment except family support orders.

I. Involuntary Deductions Federal Wage & Hour Law Restrictions • FLSA places additional restrictions on deductions when they bring wages below the minimum wage and OT pay guaranteed by the act. • Garnishment deductions are allowed. Such deductions (within the CCPA limits) paid to a third party are considered the same as payment to the employee. • Other deductions that are generally “allowed” , so long as the employer derives no profit or other benefit from making the deduction. Board, lodging and other facilities Loan principal (but not interest or fees) Recovery of salary advances and overpayments Deductions for federal, state and local taxes Required union dues (allowed by fed/state labor relations law)

I. Involuntary Deductions Federal Wage & Hour Law Restrictions (continued) • Deductions that are generally “not allowed” unless minimum wage and OT threshold is met: Good & services connected with employment (including cost/maintenance of uniforms, Penalty docking for missed work time, i.e. docking beyond the actual time missed. Cash shortages and bad checks. An exception exists if the employee is convicted (or pleads guilty) to stealing Cost of employer insurance bonds

II. Voluntary Deductions Deductions that an Employee Must Agree To • Generally, an Employer is not obligated to agree to voluntary deductions. • Employers should always have an authorization signed by the employee for any voluntary deduction. • Employee can change/stop a voluntary deduction at will. • Wage Assignments: Often used by an employee to avoid a garnishment. • Garnishment limits (CCPA) do not apply • Some states regulate (or even disallow) wage assignments. • Regulations often disallow assignment of “future” wages • Since requirements vary so widely, always check state law.

II. Voluntary Deductions Deductions that an Employee Must Agree To • Examples of other “voluntary deductions”: • Union Dues (not required by CBA) • Credit Union Deductions • U.S. Savings Bonds • Employer may be “issuing agent” or turn deductions over to a third party. • Issuing agent must track deductions and reconcile to bonds purchased returning any remaining funds when an employee terminates or cancels the program. • Issuing agents are entitled to an administrative fee based on the number of bonds issued.

II. Voluntary Deductions Deductions that an Employee Must Agree To • Examples of other “voluntary deductions” (continued): • Charitable Contributions • New in 2007 – Taxpayers must substantiate all charitable contributions in order to take as an itemized deduction. • Employers need to provide evidence of deduction by listing on pay stubs, on Form W-2 or by a separate statement. • A pledge card/document prepared by or at the direction of the charitable organization showing the name of the donee organization is also required. • For donations of $250 or more (for a single deduction), the documentation must contain a statement certifying that the donee organization does not provide goods or services in exchange for the donation.

Section 9: Other Deductions From Pay