Employer Articles and TipsYour responsibilities don't end with payroll outsourcing The IRS cautions employers who outsource some or all of their payroll responsibilities that they remain liable for all taxes, penalties, and interest due. In an article in the Spring SSA/IRS Reporter, entitled Outsourcing Payroll Duties Can be a Sound Business Practice, but Know Your Responsibilities as an Employer, the IRS offered tips to employers on how they can protect themselves. The IRS recommended that employers: (1) keep their company address on file with the Service, rather than the address of the payroll service provider; (2) require the payroll service provider to post a fiduciary bond in case it defaults; and (3) ask the service provider to enroll in and use the Electronic Federal Tax Payment System (EFTPS). [See RIA Payroll Guide Newsletter 03/17/2006 for complete details on the IRS guidance] Here are some
additional things that you can do to stay out of trouble: Know Your Responsibilities. Make sure you understand your contract with the service provider. Are you enrolled in a "deposit only" program? If so, you are responsible for the filing of your own tax returns. Who handles new hire reporting, W-2 filings, and year-end withholding reconciliations? Even if you use a payroll service provider, the IRS recommends that you reconcile your payroll after every processing to reduce errors. [See Payroll Guide Newsletter 03/31/2006] You shouldn't be receiving many deficiency notices from taxing authorities if you use a service provider. That's an indication that your service provider is not doing a good job. An employer should make sure that it receives copies of all tax notices. Employers should also be clear on whether they pay the penalty and interest on a deficiency notice or whether it is the responsibility of the service provider. Who Handles the Tax Filings in New Jurisdictions? Do you or the service provider file the paperwork if you begin business in a new state? Who files tax returns in jurisdictions where you have yet to receive a state identification number? Many payroll service providers will allow you to begin withholding taxes in the new jurisdiction (this is not available in some states and localities) before you provide proof of ID. They may put you on an "applied for" status. This means that they are handling the withholding taxes without an identification number. They may charge you a fee for not having provided an identification number. If the ID number is still only "applied for" when the quarter closes, your company may be responsible for filing the withholding or unemployment tax return in this jurisdiction, even though the provider deposited the taxes on your behalf. You should receive a report from the provider before the quarter closes detailing exactly which IDs are on file for your company, including any jurisdictions that are still in "applied for" status, so you can determine whether your company is responsible for filing any tax returns. Watch Out for Negative Wages. Do you have negative wages for an employee because you voided a check? Perhaps you have an employee who was terminated near the end of the first quarter, and you issued him a paycheck at the end of that quarter that should not have been issued. On the next payroll (in the second quarter), you void the paycheck. As a result, the only wages entered for the employee in the payroll system for the second quarter are negative. How does your payroll service provider handle this situation? How much time does the provider allow for adjustments after the quarter ended? Will your provider charge you a fee for amending a return to reflect negative wages? It is important to catch wage errors as soon as possible so they don't become a major issue at year-end. What payroll
practitioners should know about unclaimed property laws American Payroll Association Congress session (Orlando, FL), Anthony Andreoli, CPA, and Margaret Kelly reviewed the rules on unclaimed property at the recent APA Congress in Orlando, Florida. Unclaimed wages are a form of abandoned property that may become the property of the state. Employers with hourly workers or with a transient workforce are most likely to have unclaimed wages. All states have laws on unclaimed property. Many states modeled their law after the Uniform Unclaimed Property Act (1981). Most states consider wages abandoned after one year. Employers holding outstanding wages must file reports and turn over the abandoned wages to the appropriate state agency. Generally, reports must be filed annually and must state the employee's name and last known address, description and amount of the abandoned wages, date the wages became payable, and the date of the last transaction with the employee. Employers also must attempt to contact the employee and take steps to prevent the unclaimed wages from becoming abandoned. Penalties are provided for noncompliance. Employers should remit unclaimed property to the state of the last known address of the employee. If there is no address, the funds should be returned to the state in which the employer is incorporated. A common mistake made by employers is thinking that the check must be sent to the state of the corporate office, work location, or taxing jurisdiction of the employee. Employers are not allowed to deduct a fee to offset expenses incurred for abandoned property reporting. Employers should have an abandoned property auditor define the scope of the audit in writing. The auditor's access to employer records should be limited to information that pertains to the audit. Margaret Kelly cautioned employers to take audit notices seriously. Employers shouldn't use stall tactics, as that approach could get the auditor angry. Employers should assess their potential liability and determine how they will handle the audit. They should learn from their mistakes and come into compliance with all state abandoned property rules to which they are subject. Andreoli emphasized the importance of keeping good records. Otherwise, state auditors can estimate an employer's liability, and that assessment can be much larger than the amount based on good records. Andreoli also noted that appealing an assessment can be difficult, as the traditional administrative remedies that are available to protest a tax assessment are not available with an unclaimed property judgment, because such judgments are not considered a tax. There is no statute of limitations on an unclaimed property assessment. Most states offer voluntary disclosure initiatives under which penalties and interest can be reduced or abated. Employers who outsource their payroll may still be liable for abandoned property fees. Andreoli said that the contract will determine who is liable. He advised employers to ask the payroll processor's account representative how the processor handles unclaimed property before outsourcing their payroll. Andreoli recommended that employers document what the third party says. He also said that an employer cannot be relieved from abandoned property liability/reporting by issuing a check that contains a service charge, expiration date, or "void if not cashed" incentive for depositing the funds. Andreoli noted that while unclaimed wages are the primary concern for employers in this area, they must also consider other items that need to be included in an abandoned property report (e.g., commission checks that are still outstanding, dividends paid to shareholders, accounts payable to vendors, or gifts cards that they issued but that have not been redeemed). Embezzlement
by payroll service did not relieve employer from liability
Pediatric Affiliates, P.A., v. United States, DC NJ, Dkt. No. 05-3108 (MLC), 2/23/2006. A U.S. District Court has ruled that an employer was liable for past due payroll taxes even though it had relied on a payroll service that embezzled its funds. Facts. Pediatric Affiliates, P.A. ("Pediatric"), is a New Jersey professional corporation that provides pediatric medical services. Pediatric hired PAL Data to service Pediatric's payroll accounting needs. Pediatric did not know that Menachem Hirsch, the founder of PAL, embezzled the tax payments that Pediatric and other clients transferred to PAL. Hirsch would prepare and send to Pediatric a tax form that reflected Pediatric's actual tax liability. Pediatric then, would transfer money in the amount of its tax liability to Hirsch. Hirsch, however, would also prepare a tax form that reflected an understated tax liability. He sent the understated form and amount to the IRS, and invested the difference between the amount he received from Pediatric and the amount sent to the IRS in a personal hedge fund. The IRS sent Pediatric notices of its intent to levy on Pediatric's assets. The IRS sought taxes Pediatric owed from 1999 and the first quarter of 2000 due to Hirsch's underpayment. Pediatric requested a Collection Due Process Hearing ("CDPH") in August 2004. Pediatric asserted that it was not liable for past due payroll taxes, or the interest charges it was assessed, because Hirsch embezzled its tax payments. Following the hearing, the Appeals Office of the IRS determined that the levy notice was proper, and Pediatric was liable to pay the taxes owed and interest. Pediatric brought an action to the U.S. District Court, seeking a redetermination of the IRS collection action resulting from the CDPH due to reasonable cause. The law. IRC §6651(a) allows an employer to avoid penalties for noncompliance if it can show that its failure to file, pay, or deposit taxes was due to "reasonable cause" and not willful neglect. IRC §3504 provides that an agent is only jointly and severally liable for a company's payroll taxes if the agent actually had "control, receipt, custody, or disposal of, or pays the wages of an employee or group of employees." The form that a taxpayer must fill out to authorize an agent to make tax payments on its behalf contains an agreement that provides, "I understand that this agreement does not relieve me, as the taxpayer, of the responsibility to ensure that all tax returns are filed and that all deposits and payments are made" [Tax Form 8655, Reporting Agent Authorization ]. Ruling. The court ruled that Pediatric's reliance on Hirsch, and Hirsch's subsequent failure to properly perform the task assigned does not amount to reasonable cause. The court noted that Pediatric's situation is analogous to that of the plaintiff in Huffman, Carter & Hunt, Inc. v. United States, 317 F. 2d 816 (S.D. Ohio 2004). The plaintiff in Huffman relied on an outside payroll service. The service embezzled the plaintiff's funds, resulting in tax deficiencies and penalties. Similarly, Pediatric relied on Hirsch. Assuming, as the court did in Huffman, that Pediatric exercised prudence in selecting and monitoring Hirsch, Pediatric still bears the ultimate responsibility to ensure its taxes are properly paid. Reliance on Hirsch did not render Pediatric unable to fulfill its tax obligations. The court also noted that Hirsch was not a corporate officer or in a position of authority. He did not have final control over Pediatric's taxpaying duties. Hirsch was only an employee of an outside company who worked for Pediatric. He was an agent of Pediatric hired to "service Pediatric Affiliates' payroll tax needs." Hirsch is not jointly and severally liable because there is no assertion or indication that Hirsch had control, custody, or paid Pediatric's wages. The court said that Pediatric's reliance on Hirsch is understandable, and the subsequent misconduct "sad and unfortunate," but such reliance does not absolve Pediatric of its tax obligations. Proposed Rule
would clarify eligibility for unemployment compensation
The DOL and its predecessors have consistently interpreted provisions of federal UC law, contained in the SSA and the FUTA, to require that individuals must be A&A for work to be eligible for UC. Although this interpretation is long-standing, it has never been comprehensively addressed in a rule in the Code of Federal Regulations (CFR). As a result, there has been some confusion regarding the validity of the A&A requirement as well as its scope and application. Able and Available to Work Requirements. The proposed rule would establish the DOL's general interpretation of the A&A requirements. It would provide that a state may only pay UC to an individual who is unemployed due to a lack of suitable work for the week for which UC is claimed. To test whether the individual is unemployed due to a lack of suitable work for such week, the state must ensure that the individual is A&A. Whether an individual is able to work and available for work will be tested by determining whether that individual is offering services for which a labor market exists. This does not mean that job vacancies must exist, only that, at a minimum, the type of services the individual is able and available to perform is generally performed in the labor market. If the services offered by an individual are so restricted that there is no labor market for those services, then that individual is not able and available, and is not unemployed due to a lack of suitable work. While individuals are not expected to be available for all work to be eligible for UC, they may not impose restrictions that effectively remove them from the labor market. There is an example in the proposed rules of an individual who limits his or her availability only to evening hours. In this instance, the DOL says that the test of availability is whether there is a labor market for the individual's services taking into account the restriction. The DOL would also apply the above principles with respect to the "able to work" requirement. For example, a state may find that an individual with one or more disabilities is "able" to work if there are jobs in the individual's labor market that the individual can perform with reasonable accommodation. State Ramifications. Under the proposal rules, states would retain the authority to determine what constitutes the labor market for an individual under their UC laws. Generally, states look at local labor markets, but in some cases, due to telecommuting, it is possible for individuals to be legitimately attached to the labor force even though they will not relocate and their employment opportunities are outside the local area. As a result, the rule would permit states to consider such individuals to be available for work. The proposed rule would also clarify how the A&A requirement relates to the individual's initial separation from the labor market. The rule does not look to why the individual was separated from employment, except to the extent that the individual may not have been A&A for the week of the separation. There would not be a federal requirement that the initial separation be involuntary for an individual to be eligible for UC. State eligibility requirements concerning voluntarily leaving employment would be outside the scope of the rule. The rule would test whether an individual is able to work and available for work for the week for which UC is claimed. The DOL gives the example of an individual who left work to care for an ill child. Whether to disqualify this individual for voluntarily leaving employment is entirely left to state law. However, if the state does not disqualify the individual for voluntarily leaving employment, the individual must still be A&A to be eligible for UC. Under the proposed rule, an individual may be considered to be available for work if the individual limits his/her availability to "suitable work," as defined under a state's UC law, as long as such limitation does not constitute a withdrawal from the labor market. Generally, suitable work involves a determination of: (1) whether the work for which the individual is available is consistent with the individual's education and training, (2) whether the job is in the local labor market (usually measured by the distance or time of commute from the individual's home to the worksite), (3) whether there is suitable work based on analysis of the individual's previous work history (which may include factors such as occupation, pay and fringe benefits), and (4) how long the individual has been unemployed. Aliens. The A&A requirements in the proposed rule would also apply to aliens. The rule provides that to be considered available for work in the U.S. for a week the alien must be legally authorized to work in the U.S. during such week by the appropriate agency of the U.S. government (currently the United States Citizenship and Immigration Services). An alien not legally authorized to work is not available for work; thus, the regulations would require a state to deny an alien benefits for any week the alien was not legally authorized to work. The proposed rule does not address specific classes of aliens, nor does it specifically address what evidence is needed to prove that the alien is authorized to work, as the required evidence may change over time. Written comments on the proposed rule must be submitted on or before September 20, 2005. Comments may be submitted by one of several methods. See the July 22, 2005 Federal Register (Vol. 70, No. 140) for further information. Q&A from
American Payroll Association Congress in San Diego
Effective April 14, 2005, employers must only submit copies of Forms W-4, Employee's Withholding Allowance Certificate, to the IRS when directed to do so in a written notice or if directed to do so under published federal guidance. Previously, employers were required to submit all Forms W-4 filed by employees who (1) claimed more than 10 allowances or (2) claimed exemption from withholding while normally expected to earn more than $200 a week in wages. States have their own rules regarding when an employer must submit a questionable withholding allowance certificate but these rules may be affected by the new federal regulations. Here are some examples. California. In California (see RIA Payroll Guide ¶ 5603), employees complete Form DE-4, Employee's Withholding Allowance Certificate , rather than Federal Form W-4, if (1) they claim a different marital status, number of regular allowances, or different additional dollar amount to be withheld for California personal income tax withholding than they claim for federal income tax withholding purposes, or (2) they claim additional state allowances for estimated deductions. The Form DE-4 instructions note that an employer is required to send a copy of Form DE 4 to the state with the Quarterly Wage and Withholding Report (Form DE 6) if an employee claims more than 10 withholding allowances on Form DE-4 and Form W-4 is not reportable to the IRS. Thus, it appears that as a result of the new federal rules, more California employers are going to be submitting Form DE-4s to the state. Colorado. Colorado does not have a state equivalent of the federal form W-4. Colorado only requires employers to submit federal Form W-4 to the Department of Revenue if an employee has requested more than 10 withholding allowances, or an employee has claimed exempt withholding status for wages expected to exceed $200 per week (see RIA Payroll Guide ¶ 5703). Thus, it appears that as a result of the new federal rules, Colorado employers will be submitting some federal Form W-4s to the state even though the forms do not have to be submitted to the IRS. Illinois. Illinois (see RIA Payroll Guide ¶ 6503) has its own withholding allowance certificate form (Form IL-W-4). Federal Form W-4 is not acceptable. Form IL-W-4s must be submitted to the state for employees who claim 15 or more exemptions without claiming at least the same number of exemptions on their federal Form W-4, if the employer has not been notified to submit Form W-4 to the IRS. Thus, it appears that as a result of the new federal rules, more Illinois employers are going to be submitting Form IL-W-4s to the state. Maine. Maine has its own withholding allowance certificate (Form W-4ME). Employers who are required to submit Form W-4s to the IRS, along with a copy of any written statements received from employees in support of the claims made on the Form W-4, are also required to submit copies of the same along with a copy of Form W-4ME to Maine Revenue Services (see RIA Payroll Guide ¶ 7103). Thus, it appears that as a result of the new federal rules, Maine employers will be submitting less Form W-4MEs to the state than in the past. Montana. Montana does not have a state equivalent of the federal form W-4. The state requires employers to submit federal Form W-4 to the Department of Revenue at the same time and in the same manner as required by the IRS if an employee has requested more than 10 withholding allowances, or an exempt withholding status (see RIA Payroll Guide ¶ 7803). Thus, it appears that as a result of the new federal rules, Montana employers will be submitting less Form W-4MEs to the state than in the past. North Dakota. North Dakota does not have its own withholding allowance certificate form. Employers must submit a copy of federal Form W-4 to the North Dakota Commissioner if they are required to send a copy of Form W-4 to the IRS (see RIA Payroll Guide ¶ 8603). Thus, it appears that as a result of the new federal rules, North Dakota employers will be submitting less federal Form W-4s to the state than in the past. Wisconsin. In Wisconsin, every newly hired employee is required to file a completed federal Form W-4, or Wisconsin Form WT-4, Employee's Wisconsin Withholding Exemption Certificate/ New Hire Reporting, if claiming a different number of allowances for Wisconsin purposes than for federal purposes. Wisconsin law provides that when an employer is required to furnish a copy of an employee's exemption certificate to the IRS, a copy must also be furnished to the Wisconsin Department of Revenue (see RIA Payroll Guide ¶ 10,203). Thus, it appears that as a result of the new federal rules, Wisconsin employers will be submitting less federal Form W-4s to the state than in the past. (Note that Wisconsin also requires employers to submit a copy of Wisconsin Form WT-4 to the state for employees earning more than $200 per week who claim complete exemption from Wisconsin withholding. A federal W-4 cannot be used to claim complete exemption from Wisconsin withholding) It is expected that some states will revise their rules for submission of withholding allowance certificates as a result of the new federal rules. Q&A from
American Payroll Association Congress in San Diego
Immigration and Customs Enforcement Questions:
A. No. The electronic format will be helpful to the ICE in the event of an audit, but the rationale for making the audit has not changed, so there is no added risk by collecting and storing Forms I-9 electronically. Q. Immigration reform, including a formalized guest worker program, has been a hot topic in the press in the past year. Based on some of the current proposals, can you comment on how this could change today's work authorization processes, including Form I-9 and work authorization documents. A. In January 2004, President Bush talked of hooking up willing workers with willing employers, but the plan is still in process. ICE is working on it, but it is too soon to talk specifics. Border security is still the top priority of the Department of Homeland Security. The ICE has issued a new I-9 form (see Newsstand e-mail 6/20/05). Q. Am I allowed to photocopy the identity and work authorization documents a new worker presents with Form I-9 and keep those copies with the form itself. Do you recommend this? What if an employee objects? A. The law allows employers to photocopy the documents, although you do not have to. There is a debate as to whether an employer should do it. Some lawyers say you shouldn't, in order to limit your liability in the even of an audit. However, the ICE says there are more reasons to do it. In an audit, photocopies will provide evidence that you actually looked at the documents at the time of hire. You are also more likely to get an SSN right if you have a photocopy of the Social Security card. When an alien worker is arrested, the ICE asks what documents the worker showed at the time of hire. Showing a false document is a felony, so the worker is more likely to lie and say that he didn't show anything. Photocopies will put the truth to the lie. Q. How should I handle the preparation of Form I-9 for a new employee who is working alone in a satellite office? There is no one else there to review the employment eligibility documents. Could the new employee fax me copies of the documents? Could we have asked to see the documents at the in-person employment interview and have prepared a "tentative I-9" for this employee when he was a prospective employee? A. Only original documents may be used to determine one's employment eligibility, and the I-9 cannot be completed until the time of hire. The best solution to this problem is to have the employee go to a notary public, who can verify the documents for the employer. Social
Security Administration Questions:
A.
Whoever pays the sick pay should check the box. A. The SSA would have recognized the problem. Send the 100 Forms W-2 along with a W-3. Odds are that you sent the originals electronically, so the SSA would prefer that you send the remaining 100 electronically as well. However, paper can be used, as can W-2 Online, which allows filers to submit 20 Forms W-2 at a time. Five batches of 20 files could be submitted using W-2 Online. Q. What are some of the ways I can comply with the requirement to file Forms W-2c on magnetic media or electronically (which applies when 250 or more such forms correcting the previous year are filed during the calendar year)? A. File electronically. That's the easiest answer. Magnetic media is no longer accepted, and diskettes will soon be disallowed. Q. What
new developments are planned for Business Services Online for the
next filing season?
SES Bankruptcy
Costs Michigan's Unemployment Trust Fund $10 Million
Michigan's
unemployment insurance trust fund is out nearly $10 million due to
the bankruptcy of Simplified Employment Services (SES). One of the
nation's best-known professional employer organizations (PEO), SES
filed for bankruptcy in 2001. In 2004 and 2005, its two chief
executives pled guilty to conspiring to defraud the United States by
under-reporting and underpaying federal employment taxes to the IRS,
committing bank fraud and committing theft or embezzlement from an
employee benefit plan.
New Federal Law
Requires States to Crack Down on Employers Dodging Unemployment
Taxes
A new federal law
will require states to enact rules that would close loopholes that
now allow devious employers to dodge some of their unemployment
insurance taxes. Through a practice called SUTA (state unemployment
tax act) dumping, some employers have been able to lower their
unemployment taxes by shifting their payrolls to a new corporation
or by buying a different firm and using that company’s lower tax ”The federal legislation is intended to make the unemployment insurance (UI) tax system fair for all employers nationwide by mandating states pass legislation to close loopholes that may exist in their UI tax laws,” said David Plawecki, a deputy director with Michigan’s Department of Labor & Economic Growth. Plawecki said he expects Michigan’s Legislature to consider changes to the state’s UI law this fall. “Many forms of SUTA dumping are already illegal under Michigan law. These statute changes will close any loopholes so we can equally enforce laws to prevent SUTA dumping,” he explained. “Now, there are some gray areas, and some employers have adopted different schemes to avoid paying their fair share of unemployment taxes. With new legislation everyone would have clear rules to follow.” The state’s Unemployment Insurance Agency (UIA) believes only a small number of Michigan employers practice SUTA dumping. However, the agency estimates that it is losing between $62 and $95 million annually in state unemployment taxes because of the practice. “All employers are impacted because the ‘escaped responsibility for benefits paid’ ends up on the backs of all other Michigan employers. The loss of these tax dollars has already affected employers in the state,” Plawecki pointed out. “We were unable to grant employers a 10 percent credit on their state unemployment taxes because Michigan’s UI trust fund was short of the threshold level needed to trigger the tax credit by $70 to $80 million. If we had had SUTA dumping legislation in place two years ago, we would have been able to implement the tax credit this year.” UIA is already establishing a SUTA dumping team in its Tax Office. The team is starting to identify employers who are engaging in the practice and is trying to determine its impact and how to approach the problem. “If SUTA dumping is not addressed soon, it could become more commonplace,” Plawecki said. “Every employer should have a level playing field, where all employers are paying their fair share of unemployment taxes and replenishing the trust fund so money is there to pay unemployment benefits to their qualified and eligible unemployed workers.” The federal legislation received strong and rapid bi-partisan support in both the House and Senate and was signed into law by President Bush on August 9. Michigan was actively involved in supporting passage of the federal mandate to all states.
PEO Best Practices
1. Full Service
- The PEO should contractually establish and in fact assume
appropriate PEO employer responsibilities and liabilities,
including:
2. Written Business
Plan -
The PEO should maintain a written business plan that is updated at
least annually and communicated to all internal employees. The plan
should include: 3. Organizational Structure/Staffing - The PEO should maintain and document that it has adequate internal staff and/or outsourced capabilities, including qualifications and authority appropriate for delivering promised services to target markets in the areas of HR/legal compliance, WC risk assessment, safety and loss prevention, and WC claims management. If some of these requirements are outsourced, the PEO should be able to provide a copy of the service contracts and descriptions of the staff and qualifications of each service provider. Authority should be delegated with clear separation between responsibility for sales and responsibility for Client risk assessment, pricing and termination. 4. Basic Record Retention - The PEO should maintain the following current Client information, including additions and deletions: Client ID#, state, start date and termination date, brief general description of Client operations, number of employees, and payroll by class code. Records should include a list of terminated Clients for at least the past three years. Records should be readily available to the WC carrier. 5. Employee Handbook - Handbook should clearly define the employment relationship and set forth key workplace policies and procedures. The handbook should also discuss procedures for claims reporting, return-to-work, general safety rules and safety incentive programs, if any. Receipt of handbook by all worksite employees should be documented.
6. Controllable
Business Structure
- B. Client Service Contract:
A PEO should
execute with all Clients a written client service agreement (CSA)
that includes the following best practice provisions. If one or more
specific provisions are missing from the PEO’s existing CSA, the PEO
should incorporate these provisions into the CSA to be used for all
new Clients going forward and for existing Clients whenever
re-contracting is otherwise required. The PEO should also
immediately implement as appropriate the substantive requirements of
each of these best practices with all existing Clients regardless of
whether the CSA in effect for a given Client specifies the exact
best practice wording shown below. C. Client Risk Assessment:
PEOs deemed to be
following best practices are those that have established and
consistently follow a written risk assessment plan, as outlined
below: D. Loss Prevention Management:
Best practices
include having established and consistently implemented a sound,
written workers' compensation loss prevention management system
consisting of the following elements: E. Claims Management:
Best practices for
claims management mean that a PEO has a written claims management
plan, including the following elements:
Methods to ensure
PEO tax and regulatory compliance · PEO Quarterly submission of financial statements plus an annual audit by an independent CPA. · Annual independent verification of adequate financial reserves for any loss-sensitive insurance plans that are not fully-funded in advance.
·
Verification of adequate amounts of errors & omissions, fidelity and
liability insurance coverage.
PEO definitions “D” Ratio A factor used in Workers’ Compensation experience rating plans. It is the ratio of small losses (those under $2,000), plus the discounted value of large losses, as compared to the total losses which might be expected of an insured in a particular type of business. “First” Named Insured The first named insured appearing on a commercial policy. The latest forms permit the insurer to satisfy contractual duties by giving notice to the “first” named insured rather than requiring notice to all named insured’s. 401(k) Plan A cash deferred arrangement that allows employees to authorize their employer to place pretax dollars in a retirement plan that invests the money. Pretax contributions (including those matched by the employer) and any earnings on them are not subject to federal income tax (most state income taxes also) until they are withdrawn. ABC Test A set of criteria used by many states to determine the relationship of a worker to the organization for which services are performed. A worker meeting these criteria is considered an independent contractor under the state’s unemployment insurance law. Accelerated Deposit Rule Also known as the one-day rule, it requires employers that accumulate a tax liability of $100,000 or more during a deposit period to deposit the withheld taxes within one banking day of the day the liability was incurred. Accident A fortuitous event, unforeseen and unintended. Account The representation of assets, expenses, liabilities, and revenues in the general ledger, to which debit and credit entries are posted to record changes in the value of the account. Accountable Plan An employer’s business expense reimbursement plan that satisfies all IRS requirements regarding substantiation, business connection, and return of excess amounts in a reasonable period of time. Accounting Period The period covered by an income statement (e.g., month, year); also known as the business cycle. Accrual The recognition of assets, expenses, liabilities, or revenues after the cash value has been determined but before it has been transferred. Automated Clearing House (ACH) A Federal Reserve Bank or private financial institution acting on behalf of an association operating a facility that serves as a clearinghouse for direct deposit transactions. Entries are received and transmitted by the ACH under the rules of the association. Actuary A specialist in the mathematics of insurance who calculates rates, reserves, etc. (Americanism – In most other countries the individual is known as “mathematician.”) Accidental Death & Dismemberment (AD&D) A life insurance benefit usually included in group life insurance policies whereby the insured will be paid the principal or capital sum in the event of accidental death or dismemberment. The AD&D benefit is usually an additional death benefit equal to the policy’s face amount. Americans with Disabilities Act 1990 (ADA) Federal law that broadly prohibits discrimination against individuals with disabilities who can perform the essential functions of a job with or without reasonable accommodation. Age Discrimination in Employment Act of 1967 (ADEA) Federal law that prohibits employment discrimination on the basis of an individual’s age (40 or older). Adjuster An individual representing the insurance company and acting for the company in working on agreements as to the amount of a loss and the liability of the company in same. Adjusting Entry An entry made at the end of an accounting period to update or adjust an account before financial statements are prepared. Administrative Denotes regulations, interpretations, announcements, etc., issued by government agencies empowered to enforce laws, such as the Internal Revenue Service, the Department of Labor, the Social Security Administration, and the Equal Employment Opportunity Commission. Administrative Fee The fee applied to the client invoice representing the cost of the employee administrative services. Usually this appears as a percentage of gross payroll or, in some cases, as a fixed dollar amount per employee/month, or per check. The administrative fee is more narrowly defined as the cost of managing the client’s payroll, employee benefits, and the routine personnel services produced by the leasing firm. It does not include the other employee overhead costs, such as payroll taxes, liability insurance, workers’ compensation, or health insurance. Administrative fees are on the order of 2 to 6 percent of gross payroll or between $50 to $120 per month, per full-time employment unit. Factors that determine what the administrative fee will be for each client, depends on gross wages, the frequency of payroll, the complexity of payroll, employee turnover, number of employees participating in benefit plans, and other factors. [See Service Fee.] Administrative Law After Congress passes employment legislation, the administrative agency identified to oversee the law may write more specific regulations. These rules and regulations or policies and considered administrative law. Admitted Company An insurance company authorized and licensed to do business in a given state. Adoption Assistance Financial benefit provided by an employer to an employee to help with the child adoption process. Within certain limitations, it is excluded from federal income tax withholding, though not social security and Medicare taxes. Actual Deferral Percentage (ADP) The percentage of wages deferred by employees participating in a salary reduction plan (e.g., §401(k) plan). The IRS uses the ADP to determine whether the plan meets the agency’s nondiscrimination requirements. Adverse Selection The tendency of those who are in ill health to purchase and keep life and/or health insurance in greater proportion than the average risk. Adverse selection is detrimental to the insurer. Adverse Underwriting Decision Any decision involving individual underwriting insurance coverage resulting in termination of existing insurance, declination of an application, or writing the coverage only at higher rates. For property and casualty insurance, it also includes placing the coverage with a residual market mechanism or an unauthorized insurer. Advance Earned Income Credit (AEIC) Payments of earned income credit during the year to employees who expect to be eligible for the credit. Employers make the payments out of federal income, social security, and Medicare taxes withheld from the employees’ wages. Affiliated Service Group In the language of the tax code, this term refers to common ownership of the service bureau (the employee leasing firm) and the corporation, professional organization of business receiving employee leasing or temporary help services. Employees, as members of an affiliated service group, may be treated as employees of a simple employer for purposes of a qualified pension plan. After-tax Deduction A deduction from an employee’s pay that does not reduce the employee’s taxable wages. It is taken out only after all applicable taxes and other deductions have been withheld (e.g., union dues, garnishments, charitable contributions). Agency This term is applied to employment agencies and not to temporary help or employee leasing services. An employment agency assists in putting job seekers and employers together for a fee. Employment agencies are specifically regulated as an industry. Employee leasing and temporary help services are employers and as such come under the same employment regulations as any other employer. State regulations are beginning to appear for employee leasing. Agent The individual appointed by an insurance company to solicit, negotiate, effect or countersign insurance contracts on its behalf. Agent’s Authority (or Power) The authority and power granted to an agent by the agency contract. The agent is also clothed with additional power under the legal concept of apparent agency. [see Apparent Authority] Aggregate Limit Usually refers to liability insurance and indicates the amount of coverage that the insured has under the contract for a specific period of time, usually the contract period, no matter how many separate accidents may occur. Aggregate Stop Loss The excess insurance coverage which provides protection against the accumulation of claims exceeding a specified total loss. This is protection against abnormal frequency rather than one severe claim. [see Specific Stop Loss] Aggregation The process of considering separate plans together to see whether they satisfy requirements under ERISA and/or the Internal Revenue Code. Aggregation can be either permissive or mandatory. Alien A citizen of a country other than the U.S. or one of its territories or possessions. Alien Insurance Company (Insurer) An insurance company formed under laws of a country other than the United States. American Payroll Association (APA) An organization dedicated to helping and educating payroll administrators. Apparent Authority Authority of an agent that is created when the agent oversteps actual authority, and when in action by the insurer does nothing to counter the public impression that such authority exists. Applicant A person seeking employment. In some situations, the PEO recruits, screens and determines employment eligibility of worker applicants for the client. The PEO is not serving in the capacity of a personnel agency, since the applicant will become a shared employee if that person is qualified to be assigned at a client’s location. Apportionment The division of loss among insurance companies when two or more cover the same loss. Approved The condition which exists when the person or object to be insured meets the underwriting standards of the insurer. Arm’s Length Personnel Office Casually used to compare a PEO with what people think of as a corporate human resource/personnel office. In this case, the PEO is somewhat like a personnel office working at a distance with the shared employees assigned to the client. The PEO provides personnel activities to the client at “arm’s length.” Administrative Services Only Arrangement (ASO) A system under which an employer self-insures its welfare benefit plan, but contracts with a third-party administrator such as an insurance company that provides claims administration and related services. Assets Resources acquired by a business that are consumed by the business. Assignee The person to whom policy rights are assigned in whole or in part by the original policy owner. Assignment This term describes the assignment of temporary help workers to a client-customer or transfer of rights in a policy to other than the policy owner. Assumed Liability Liability which would not rest upon a person except that he has accepted responsibility by contract expressed or implied. This is also known as contractual liability. Assumption of Risk One of the common law defenses available to an individual. For instance, one person riding with another in an automobile has generally “assumed the risk” and, therefore, has no action against the driver of the vehicle should an accident occur. This is a common law concept and has been modified by recent case law and by statute in some jurisdictions. Assurance Same as “insurance.” Assured Same as “insured.” Assurer Same as “insurer” (insurance company). Attachment See Wage Attachment. Attorney-in-Fact A person to whom authority is given by an individual to exchange insurance with other persons, as in reciprocal insurance. Audit A review of a business’s records and procedures to determine their accuracy and completeness. Authorization The amount of insurance an underwriter says he will accept on a risk of a given class or on specific property, given for the guidance of agents and in response to requests from them. Authorization Agreement In general, a written agreement (entered into voluntarily) (authorizing an employer to withhold and distribute a portion of an employee’s wages to a party designated by the employee (e.g., direct deposit, union dues, savings bonds). Average Weekly Wage A term generally used in Workers’ Compensation laws. It is the basis for determining weekly benefits under such laws. Avoidance of Risk Taking steps to remove a hazard, engage in an alternative activity, or otherwise end a specific exposure. One of the four major risk management techniques. [see Risk Management] Annual Wage Reporting AWR The Social Security Administration’s system of recording wages reported annually by employers on Forms W-2. Back Pay Award A cash award made to an employee that generally results from legal action to remedy a violation of federal or state wage-hour or employment discrimination laws. Backup Withholding Income tax withholding required from non-employee compensation when the payee fails to furnish the payer with a taxpayer identification number or the payer is notified by the IRS that the payee’s TIN is incorrect. Balance The value of an account, as determined by calculating the difference between the debits and credits in the account. Balance Sheet A financial statement that presents a business’s financial position in terms of its assets, liabilities, and owner’s equity as of a certain date (generally the end of the company’s fiscal year, but may be issued quarterly as well). Base Period When dealing with unemployment compensation, it generally consists of the 52 weeks, or 4 of the last 5 quarters, immediately preceding the claimant’s benefit year. Base Period Wages Wages earned during the base period. The amount is generally one of several criteria used in determining a claimant’s eligibility for unemployment compensation. Basic Medical Expense A basic form of hospitalization insurance which provides some limited benefits for in-hospital, surgical and outpatient expenses. Basic Rate The manual rate, from which are taken discounts or to which are added charges to compensate for the individual circumstances of the risk. Batch Processing Processing data as a group, either to assist controls or processing efficiency. Benefit Period The length of time, following the elimination period, that a disability income contract will provide benefits. Benefit Portability The ability of the employee to maintain benefits and wages while remaining with the PEO even if the client business experiences a staff reduction, discontinues the services, or goes out of business. Since the employee is a participant in the benefits of the PEO the employee may carry or port these benefits with them when they become assigned employees with another client. Benefit Ratio In the context of unemployment compensation, it is a type of experience rating system that bases an employer’s unemployment tax rate on the ratio of the employer’s benefit charges to its taxable payroll for a specific period of time. Benefit Wage Ratio In the context of unemployment compensation, it is a type of experience rating system that bases an employer’s unemployment tax rate on the ratio of the employer’s benefit wages to its taxable payroll for a specific period of time. Benefit Wages In the context of unemployment compensation, an amount charged to an employer’s account when a former employee receives unemployment benefits. The amount is determined by the base period wages paid by that employer to the claimant. Benefit Year In the context of unemployment compensation, the 52-week period beginning on the first day a claim for benefits is filed. Binder In lines other than life and (usually) health, a binder is an acknowledgment (usually from the agent) that insurance applied for is in force whether or not premium settlement has yet been made or the policy issued. Blanket Insurance (1) Property-liability insurance that covers more than one type of property in one location in one policy or form instead of under separate items, or one or more types of property at more than one location. (2) A contract of health insurance that covers all of a class of persons not individually identified. BLS Bureau of Labor Statistics. Blue Cross / Blue Shield A health care provider licensed in most states as a non-profit service organization providing benefits to clients on a prepaid service basis. Bodily Injury Liability The liability which may arise from injury or death of another person. Bona Fide Refers to actions taken in good faith, without pretense or fraud. Bond An obligation of the insurance company to protect one against financial loss caused by the acts of another. Borrowed Servant Doctrine A third party who hires the regular employees of another to perform temporary services may sometimes be held liable for the torts of his or her “borrowed servant.” The borrowed servant doctrine springs from the common-law and is used in the context of two employers having some control of a shared worker. The two employers are called the general employer (one having broad control), and the special employer (short-term or temporary employer). Borrowed servant doctrine is applied to employer liability cases and workers’ compensation. [see Broker, General and Special Employer, Dual Employment and Joint Employment] Broker One who represents an insured in the solicitation, negotiation or procurement of contract of insurance, and who may render services incidental to those functions. By law the broker may also be an agent of the insurer for certain purposes such as delivery of the policy or collection of the premium. Broker Employer Used in a general sense to describe the employer who, in alleged joint or multiple employer relationships, supplies the work force. The broker employer in the “borrowed servant” perspectives is the general employer who hired the employee and then loaned the employee for a fee to a special employer. That transaction serves the business needs of the special employer. The broker employer pays the employee and maintains the general employer relationship. Broker of Record A broker who has been designated to handle certain insurance contracts for the policy holder. Cafeteria Plans Plans allowing employees to choose from a “menu” of one or more qualified benefits and cash (including nontaxable benefits). Under Code Section 125, benefits from a properly drafted cafeteria plan are not taxed to the employee who selects them – unless the employee actually chooses taxable benefits (and is not merely entitled to do so). Cancellation Termination of contract of insurance in force by voluntary act of the insurance company or insured, effected in accordance with provisions in the contract or by mutual agreement. Capitation Fee The set fee that an employer pays an HMO to provide care for each member employee, regardless of the actual cost of the care. Captive Insurance Company An insurance company that is partially or wholly owned by an employer. Carrier An insurance company which “carries” the insurance. (The terms insurance company” or “insurer” are preferred because of the possible confusion of “carrier” with transportation terminology.) Casualty Insurance That type of insurance that is primarily concerned with losses caused by injuries to persons and legal liability imposed upon the insured for such injury or for damage to property of others. It also includes such diverse forms; as Plate Glass, insurance against crime, such as robbery, burglary and forgery, Boiler and Machinery insurance and Aviation insurance. Many casualty companies also write surety business. Catastrophe Hazard The risk of loss by reason of simultaneous occurrence of a peril to which all insured in a group (or a very large number of insured’s) are subject. Consumer Credit Protection Act (CCPA) Federal law that restricts the amount of an employee’s earnings that can be garnished to pay creditor debts, including child support. Certificate A statement evidencing that a policy has been written and stating the coverage in general.
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