OVERPAYMENTS What You Dont Know Can Hurt You

OVERPAYMENTS: What You Don’t Know Can Hurt You Birmingham Payroll Conference 2016 Barbara Youngman, CPP 1

Barbara Youngman, CPP • Certified Payroll Professional since 1998 • • 26+ years Payroll experience APA, Immediate Past President 2009 Payroll Woman of the Year 2005 TX Payroll Professional of the Year Member of APA National Speakers Bureau and committees Dallas Chapter Member / Past President Texas Payroll Conference Past President 2

Agenda • Wage & Hour Compliance • Federal vs. State • Authorizations • Collection & Enforcement • Tax Implications • Gross vs. Net • Repayment in same Calendar Year • Repayment in subsequent Calendar Year 3

Federal – Deductions For the benefit of the employee FLSA does not require written approval Cannot take below minimum wage Cannot deduct from overtime 4

Federal - Overpayments • DOL Position • Same as a wage advance/loan • May take a “reasonable deduction” from future wages to recoup • Salaried Employees • “Free & clear” • Offer Letter Test • Reduce wage / reduce hours 5

What Do the States Say? Express, written authorization by the employee Voluntary STATE LAWS Do not take the employee below minimum wage Written notice prior to deduction 6

State Differences NOTICE • Written; full explanation • Specific period of time WAGES • Define: Wages, Bonus, Fringe • Percentage of net or gross WITHDRAW • Ability to repeal and revoke • Number of days allowed 7

State Requirements • Indiana (I. C. 22 -2 -6 -2; 22 -2 -6 -4) • 2 weeks’ notice required • Not permitted if in dispute • Kansas (Kan. Stat. Ann. § 44 -319) • July 1, 2013; H. B. 2022 • Signed agreement - if employer error and the recovery rate exceeds overpayment rate • Final wages - written notice and explanation 8

Maine • Me. Rev. Stat. tit. 26, § 635 • Does not apply to: fringe benefits, bonus, awards, commissions, expense reimbursements • Maximum deduction of 10% of net pay w/o written authorization • Voluntary termination: recoup in full • Violation of § 635 results in forfeiture of any claim • Does not apply – IF: • Overcompensation is less than 15% of correct net AND • The employer can PROVE (with evidence) that the employee “knowingly accepted” the compensation 9

Michigan • MI Guide to Overpayment Deductions • MI ST 408. 477 • Applies to wages OR fringe benefits • Deduction allowed without consent within 6 mths • Written explanation at least one pay period notice • Maximum of 15% of gross wages • After ALL other deductions • Cannot deduct: • “without the full, free and written consent of employees, obtained without intimidation or fear of discharge for refusal to permit the deduction. ” 10

North Carolina • NC GS 95 -25. 8 -10; 13 NCAC 12. 0305 • Prior to deduction • Signed written authorization • Amount or percentage of wages • Reason for deduction • Written notice of right to withdraw • Reasonable opportunity to withdraw 11

Washington • WAC 296 -126 -025; 028; 030 20 • “infrequent and advertent” DAYS • Max 5% of disposable earnings • 90 days to start deducting • Must provide notice to employee and documentation of error • Must allow 20 days for the employee to appeal 12

New York – 3 Year Extension • New York • May 2010 Opinion Letter – cannot deduct • Nov 6, 2012 – A. B. 10785, L. 2012 – can deduct • Nov 6, 2015 – Regulations Extended • Nov 6, 2018 – Regulations Expire • Due to errors or salary advances • Limitations on aggregate of all wage deductions 13

Authorization Required • Alaska • Arizona • Connecticut • Delaware • Hawaii • Idaho • Illinois • Iowa • Maryland • Nevada • New Hampshire • New Mexico • North Dakota • South Carolina • Texas • Virginia • Wyoming 14

What to Do? • Alabama • Arkansas • District of Columbia • Florida • Georgia • Louisiana • Massachusetts • Minnesota • Mississippi • Missouri • Montana • Nebraska • Pennsylvania • Rhode Island • South Dakota • Tennessee • West Virginia 15

Deductions not Overpayments? • California • Colorado • Kentucky • Ohio • Oklahoma • Oregon • Utah • Vermont 16

Voluntary and Authorized • What is “Voluntary”? • “A repayment is voluntary if it is made without fraud, misrepresentation, undue influence, duress or coercion. ” • (13 NCAC 12. 034 (b)) • What is “Authorized”? • Written • Condition of employment • Ability to withdraw 17

Types of Authorizations g n i h t y An oes G Blanket Specific Who? What? When? Where ? Why? 18

Steps To Recovery • Fact Gathering – Reason for overpayment – Employee Status – Timing (did it cross years? ) – State – Other deductions impacted? • Review state law • Review company policy 19

Collection q Partner with HR q Document a plan q Contact employee q Negotiate a Win-Win solution q Collect authorization forms q Start deducting 20

Good Faith Effort Have a policy • Communicate the policy Have a complaint mechanism • Communicate the process Comply in Good Faith • Reimburse for improper deductions 21

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Repay NET • Repayment made in current year • Employee repays net • Employer adjusts wages/voids payment • Taxes reconciled within the current qtr/year 23

Repay GROSS • Repayment in subsequent year • Employee repays gross • Current year wages NOT impacted • FICA taxes refunded* • FWT not refunded 24

Why Gross? • Per the IRS, the employee must reimburse the employer for: • Wages overpaid • Taxes improperly withheld and paid to the IRS 25

Tax Refunds* • Federal withholding • Not allowed via the employer • FICA refunds • Allowed via the employer OR the employees personal tax return *For overpayments in a subsequent calendar year. 26

“Claim of Right” Rule • Applied to the employee’s personal tax return • Repayment < $3000 – potential tax deduction • Repayment > $3000 –potential tax deduction or a credit e h t r e f e R ir e h t o t e employe or or s Tax Advi CPA!! 27

Repayments - Under Claim of Right • IRS Publication 17 – Your Federal Income Tax • Chapter 28 – Miscellaneous Deductions • “If you had to repay more than $3, 000 that you included in your income in an earlier year because at the time you thought you had an unrestricted right to it, you may be able to deduct the amount you repaid or take a credit against your tax. See Repayments in chapter 12 for more information. ” 28

How To Refund Employee FICA 1. Employer Refund* • Employee will repay gross • Employer will cut a refund check back to the employee, OR • Reduce gross repayment by FICA amount 2. IRS Refund • Employee will repay gross • Employee will file for refund on their personal income tax return *Authorization letters required 29

Tax Refund Authorizations q. Consent for the employer to file a claim of FICA taxes refund q. Written statement that the employee has not claimed AND will not claim a FICA tax refund 30

Statute of Limitations • The later of… • Three (3) years from when the return was filed • Two (2) years from the date the tax was paid Source: Treasury Regulations for Code Sec. 6511 31

Reconciliation 32

Same Calendar Year Same Quarter Subsequent Quarter Void in system No 941 adjustment File Form 941 -X No W-2 c 33

Prior Year TAX TYPE EMPLOYER ACTION Federal Withholding N/A FORM Form 1040 FICA (refund for EE) • Obtain authorization letter • Refund employee W-2 c (Box 3, 5, 4, 6) FICA (refund for ER) • File for refund (EE and ER portion) • File employee authorization letter 941 -X **No adjustment in payroll system** 34

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Gross Repayment with FICA Refund In 2015, the employee received $1000. In 2016, the employee repaid the gross wages overpaid. 1. Obtain tax refund authorization letter 2. Refund Social Security and Medicare taxes to employee ($76. 50) 3. File 941 -X to recover employer and employee Social Security and Medicare taxes ($153. 00) 4. File W-2 c 36

W-2 c: Gross Repay w/ FICA Refund 37

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Resources • APA Webinar (www. americanpayroll. org) • “How to Deal with Overpayments” • Bloomberg BNA Guide to Recovering Overpayments http: //www. bna. com/recovering-overpayments-16921/ 39

Sample Policies / Forms • Sample Safe-Harbor Policy • http: //www. delawareemploymentlawblog. com/2008/11/sample -safeharbor-policy-for-i. html • TX Specific Authorization • www. twc. state. tx. us/news/efte/appendix_sample_policies_ and_forms. html 40

Federal Resources • USDOL Opinion Letters • FLSA 2004 -19 NA (10/8/2004) • FLSA 2001 -7 (2/16/2001) • Letter Dated 3/20/1998 • DOL Field Operations Handbook • Sections 30 c 12 and 30 c 00 – 30 c 09 • DOL Fact Sheet #16 – Deductions for Uniforms and other Facilities http: //www. dol. gov/whd/regs/compliance/whdfs 16. pdf 41

Federal Resources Federal Deductions • 29 CFR 531. 57 • 29 CFR 778 (Overtime) Employment Taxes Special Rules • 26 U. S. C. Sec. 6413 42

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Thank you! How to Contact Me? Barbara Youngman, CPP Barbara. Youngman@equifax. com @payrollrocks Please remember to complete your evaluations! 44