Tim Goodman

On August 8, 2020, President Trump signed a Presidential Memorandum entitled “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” effective as of September 1, 2020 (the “Memorandum”). Late on Friday, August 28, 2020, in Notice 2020-65 (the “Notice”) the Secretary of Treasury provided the guidance that was directed by the Memorandum. As described in more detail below, the Memorandum and the Notice provide that employers may suspend withholding the employee portion of Social Security payroll taxes for eligible employees with respect to wages paid to them from September 1, 2020, to December 31, 2020, but that the deferred taxes generally must be paid over to the Internal Revenue Service ratably during the period January 1, 2021, to April 30, 2021. Employers are asking: Must employers stop withholding the employee portion of Social Security payroll taxes? Are there risks to employers if they do suspend the withholding of the employee portion of Social Security Taxes? The short answers are: No, employers are not required to suspend withholding (it is optional in the employer’s discretion). Yes, employers are at risk of owing additional amounts if they do suspend withholding; they are liable for any amounts not ultimately collected from the employee (for example, if an employee terminates employment before the amount is withheld from the employee the employer is liable). Based on this, and the complexity of adjusting payroll systems, we expect that many, if not most, employers will decide not to suspend withholding.This update provides more detail on the intent of the Memorandum, a few points to note surrounding the implementation of the Memorandum, and the options for responding to the Memorandum. The Presidential Memorandum On March 13, 2020, the President determined that the COVID-19 pandemic necessitated an emergency declaration under section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121-5207. The President signed the Memorandum pursuant to that emergency declaration and in response to the breakdown in negotiations between Democrats and Republicans over the next phase of COVID-19 stimulus legislation. In the Memorandum, the President instructed the Secretary of the Treasury to use the Secretary’s authority pursuant to 26 U.S.C. 7508A to defer the withholding, deposit, and payment of the employee’s 6.2% Social Security tax on wages (or the Railroad Retirement tax equivalent) paid during the period of September 1, 2020, through December 31, 2020, subject to the conditions that (a) the deferral shall only be available for any bi-weekly payroll period for employees whose gross wages payable during the period are less than $4,000 (or the equivalent threshold amount if employees are paid for different pay periods than bi-weekly periods), and (b) the amounts deferred shall be without penalties, interest, additional amount, or addition to the tax. In providing for deferral of this tax, the President has sought to increase the take-home pay of every eligible worker for the last four months of the calendar year by 6.2%. This, as the Presidential Memorandum states, “will put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most.” Notice 2020-65 provides that employers must pay the deferred taxes to the Internal Revenue Service between January 1, 2021 and April 30, 2021, otherwise interest, penalties, and additions to tax will begin to accrue on May 1, 2021 with respect to any unpaid taxes. The Notice provides that employers must withhold and pay the deferred taxes ratably during the four-month “payback” period. The Notice also provides that if necessary, the employer may make “other arrangements” to collect the deferred taxes from employees, such as if the employee has left employment. It is important to note that the four-month payback period equals the four-month deferral period. Thus, roughly speaking at least, and subject to the complications discussed below, an employee who had 6.2% more take-home pay during the deferral period would have their net pay go down by twice that amount during the period the deferred taxes must be paid. Points to Note Regarding the Presidential Memorandum and the Notice First, a deferral of a tax obligation is not the same as forgiveness of, or exemption from, a tax obligation. Eliminating the tax obligation entirely would require Congress to pass legislation that retroactively establishes a tax “holiday” beginning on September 1, 2020. While possible, Congress has not shown an appetite to enact a payroll tax holiday for employees during their previous rounds of negotiation regarding COVID-19 relief bills. Second, the Notice defers the employer’s obligations to pay the portion of the employee’s taxes that is covered under the Memorandum. Neither the Memorandum nor the Notice provides any relief for employers that are unable to recover the deferred taxes through increased withholdings in 2021. Accordingly, if an employee were to terminate employment during the deferral period, or during the payback period before the employer had the opportunity to recover the deferred tax obligation, the employer would still be required to pay the employee’s taxes. Third, neither the Memorandum nor the Notice explicitly requires an employer to take action to discontinue withholdings. Indeed, Treasury Secretary Mnuchin has been widely quoted in numerous press reports as stating that an employer’s decision whether to participate in the four-month deferral program is entirely voluntary. Presumably, absent more explicit guidance, employers will be free to continue withholdings as provided for in statutory law. The decision to alter withholdings comes, for many employers, with an investment in retooling existing payroll systems. An employer may decide that the costs associated with implementing such a change, to decrease withholdings for four months, then to increase withholdings when the payback period begins, then to decrease withholdings back to ordinary levels when the appropriate amount is recovered from the employee, outweigh any short-term benefits to employees offered by the deferred taxes. Possible Approaches for Companies in Light of the Presidential Memorandum Three possible approaches for employers to respond to the Memorandum and Notice present themselves: (1) continue to withhold, (2) adopt the tax deferral pursuant to the Notice, either for all eligible employees or for employees who consent to participate and (3) wait and see. The simplest approach is to continue to withhold. This avoids the need to modify payroll systems and avoids the risk of liability if an employee terminates employment prior to the corrective amount being deducted from employees. It also avoids employees asking why additional amounts are being deducted from their pay during the first four months of 2021. If an employer wishes to adopt the tax deferral, the employer will no longer withhold the 6.2% Social Security tax from eligible employees (or from participating employees if the employer adopts tax deferral only for employees who wish to participate). This will provide an employee with increased cash during the deferral period, but will require a greater withholding during the beginning of 2021 to cover the deferred tax obligation. As mentioned above, the employer will still be obligated to pay the deferred taxes even if they are unable to be recovered from the employee during the payback period. This approach would require adjusting the employer’s payroll systems at least twice. There are further complications to this adjustment if an employee is hired during this period or the employee’s compensation changes during this period (complications in assuring that the correct amount is deducted to replace the amount that would have been deducted). An additional complication is only employees with gross pay less than $4,000 during a bi-weekly payroll period are eligible for the tax deferral for that period. A third approach may be available, but goes against the reason for the tax deferral outlined in the Memorandum (allowing employees to retain more pay during the remainder of 2020). Under the third approach, an employer may decide to take a “wait and see” approach to the Notice. This would mean that the employer continues to withhold the 6.2% of wages from the employee, but it does not remit the payment to the Internal Revenue Service until the payback period. If Congress enacts a payroll tax holiday, the employer may return the money to the employees as appropriate; if no further government action is taken, the employer will remit the withheld wages to the IRS during the payback period. This approach will not provide any extra cash to employees, but it would prevent any adverse consequences to the employees when the deferred tax obligations come due. This approach would require some retooling of the employer’s tax infrastructure, but the employer will not have to alter any systems that are in place to withhold from employees. Under this approach there is no risk to employers that they will be unable to recover deferred tax obligations from employees during the payback period, although there is a cursory suggestion in the Notice that failure to deposit penalties could be imposed as a result of the fact that taxes were, in fact, withheld from employees. For Further Discussion Many employers are receiving questions from employees about the payroll tax deferral provided for in the Memorandum. If you would like assistance in answering these questions or in determining what approach to take in response to the Memorandum and Notice, please contact any one of us or any of the Dorsey attorneys with whom you work.  

The DOL and IRS have issued relief for employers, participants, and beneficiaries regarding a number of deadlines with respect to employee benefit plans.  This update reviews three recent pieces of guidance that provide relief. Background Section 518 of ERISA (as amended by section 3607 of the CARES Act) provides in the event of a Presidentially declared disaster or a public health emergency, the Secretary of Labor (DOL) may issue guidance suspending deadlines for affected plan administrators, participants, and beneficiaries for a period of up to one year.  In addition, section 7508A of the Internal Revenue Code provides in the event of a Presidentially declared disaster the Secretary of the Treasury may issue guidance suspending deadlines for affected plan administrators, participants, and beneficiaries for a period of up to one year.  In response to the coronavirus pandemic, the agencies have exercised this authority. DOL and IRS Final Regulations DOL and IRS final regulations (published in the federal register on May 4, 2020) suspend several employee benefit plan deadlines for the period from March 1, 2020 until 60 days after the announced end of the National Emergency (the “Outbreak Period”).  Much of the relief is for participants and beneficiaries.  The deadlines then commence (or resume) to run as of that date.  The affected plans and affected deadlines: Health plans – The HIPAA 30- or 60-day special enrollment period. Health plans – The COBRA 60-day election period. Health plans – The COBRA 45-day initial premium payment period. Health plans – The COBRA 30-day grace period for subsequent premiums. Health plans – The COBRA notification date for a qualifying event or disability determination. Health plans – External review:  The request for external review date by which a claimant is to file a request for an external review after receipt of an adverse determination. Health plans – External review:  The date within which a claimant may file information to perfect a request for external review upon a finding that the request was not complete. Health and retirement plans – ERISA claims. Health and retirement plans – ERISA claim appeals. The regulations contain examples that, when combined below, illustrate how COBRA premium payments work under the suspended deadlines.  The examples suppose a terminated participant (suppose terminated as of February 1, 2020) timely elects COBRA and makes the February COBRA premium payment.  Suppose the National Emergency ended April 30, 2020, in which case the suspension period would end June 29, 2020.  The participant is not required to make the COBRA premium payments for March, April, May, or June until July 29, 2020 (rather than the first day of each of these months).  Thus, the 30-day grace period for the payments for these months is July 29, 2020 (30 days after June 29, 2020).  The participant is entitled to coverage under the group health plan until the premium payments are due.  If by July 29, 2020 the participant has only paid two months of premium payments, these are applied to March and April 2020 and the participant is then not covered after April 2020. The regulations are available at: https://www.govinfo.gov/content/pkg/FR-2020-05-04/pdf/2020-09399.pdf. EBSA Disaster Relief Notice 2020-01 The DOL has issued EBSA Notice 2020-01 which provides relief from a number of deadlines. First, the notice provides relief for deadlines related to providing certain required notices or disclosures to participants and beneficiaries during the same Outbreak Period noted above if the employer has acted in good faith in working to provide the notices.  This relief does not mean that plan administrators are not required to provide the notices noted below, but rather that if they are unable to provide them due to the coronavirus.  This relief extends to the following ERISA disclosures: Annual funding notices required by ERISA section 101(f). Summary annual reports (SARs). Summary plan descriptions (SPDs) and summaries of material modifications (SMMs). QDRO notices. Periodic pension benefit statements required by ERISA section 105. General plan notices (such as plan fee disclosures). Qualified default investment alternative (QDIA) notices. Notices of adverse benefit determinations and appeals. Blackout notices. Note that the notice does not provide relief with respect to Form 5500 filings (IRS Notice 2020-23 provides some relief with respect to non-calendar year plans). Second, the notice indicates that the DOL will not take enforcement action in connection with a temporary delay in forwarding elective contributions and loan repayments to a retirement plan trustee during the Outbreak Period, if the failure is solely attributable to the coronavirus outbreak. Again, employers and plan administrators should work to forward the elective contributions and loan payments as soon as practicable. The notice ends with the DOL acknowledging that the coronavirus may cause problems with fiduciary compliance.  The DOL indicates it will focus on compliance assistance instead of enforcement during this time.  The notice is available at: https://www.dol.gov/sites/dolgov/files/ebsa/employers-and-advisers/plan-administration-and-compliance/disaster-relief/ebsa-disaster-relief-notice-2020-01.pdf. IRS Notice 2020-23 The IRS has issued Notice 2020-23 which also provides relief. Notice 2020-23 extended retirement plan deadlines due on April 1 through July 14 to July 15, 2020, including the following: Plan loan repayments due during the period April 1, 2020 to July 14, 2020. The 60-day window to roll over an eligible rollover distribution received from an eligible retirement plan, so that the participant will have until the later of (i) 60 days after receipt of the distribution or (ii) July 15, 2020 to complete the rollover. The April 15, 2020 deadline for a plan to distribute employee deferrals in excess of the Internal Revenue Code section 402(g) limit (plus associated earnings) for calendar year 2019. The 90-day deadline to elect a permissible withdrawal from an eligible automatic contribution arrangement (EACA) after the date of the employee’s first elective contri¬bution under the EACA. The deadline for restating a retirement plan by the close of its remedial amendment period. Non-calendar year plans may also be able to use the extension with respect to the following deadlines: The 2½-month period after the close of the plan year deadline to distribute excess contributions (ADP testing) and excess aggregate contributions (ACP testing), and related earnings on both, to avoid the 10% excise tax imposed on such excess amounts. The end of the following plan year deadline to correct ADP and ACP test failures by distributing excess contributions and excess aggregate contributions to highly compensated employees. The Form 5500 series and the Form 8955-SSA filing deadline. The notice is at 2020-18 IRB 742 (April 27, 2020), which is available at: https://www.irs.gov/pub/irs-irbs/irb20-18.pdf. Next Steps With all of these extensions, the best course for plan administrators is to continue to comply with the timing requirements for distributing notices and to provide relief to participants with respect to the deadlines if they miss one of the deadlines.  The relief does not require employers to issue a broad-based notice about the suspension of the deadlines or to change forms.  Employers will need to review processes (for example, if an employer in the past sent a participant who had not paid a COBRA premium on time a communication that COBRA would be discontinued for failure to pay premiums within the grace period, the employer needs to modify this practice during the Outbreak Period).  Hopefully, the DOL and IRS will provide additional guidance on implementing the relief. Please contact the attorney you work with at Dorsey with questions and for further assistance. For further updates on the impact of coronavirus (COVID-19), please visit Dorsey's Coronavirus Resource Center.