Payroll Articles
Voluntary Deductions
An Employee can voluntarily agree to wage Deductions that must be implemented by the payroll department. These Deductions may include wage assignments to repay a debt, charitable Deductions, wages withheld to purchase U.S. savings bonds, credit union loan repayments, etc.
Wage Assignments
A wage assignment is a voluntary agreement by an Employee (assignor) to have a portion of the Employee's
wages assigned to a third party (assignee). Generally, Employees assign wages to secure a debt. The
assignment gives the creditor an opportunity to recover the unpaid amount if the Employee fails to repay the
debt. A wage assignment also allows both the third party and the Employee to avoid the time and expense
connected with court-run Garnishment proceedings.
Wholesale or retail outlets that allow customers to pay for merchandise in installments will sometimes
ask the customer to enter into a wage assignment agreement as a manner of guaranteeing payment.
Assignments are also used to secure loans from financial institutions. Sometimes an assignment will be
used to pay the debt directly, rather than waiting for the Employee to default. And in some cases, noncustodial parents may be allowed to voluntarily assign a portion of their wages to pay child support rather than having to submit to a Child Support Withholding order.
Garnishment limits do not apply.
Voluntary wage assignments are not covered by the Consumer Credit Protection Act, which sets the maximum amounts that can be deducted from an Employee's pay to satisfy creditor Garnishments and Child Support Withholding orders. But if the debt secured by the assignment remains unpaid and becomes the subject of a court-ordered Garnishment, the resulting Garnishment is governed by the CSEA.
State law governs wage assignments.
While wage assignments are not subject to federal law restrictions, the states regulate them to varying degrees. Where they do not, wage assignments are governed by the general law of contracts as developed by state courts. Following is a discussion of some of the facets of wage assignments that are generally regulated by the states.
Validity of wage assignments.
Some states do not allow voluntary wage assignments of any kind. Most of the others allow Employees to agree to an assignment of wages that have already been earned, although not yet paid, while many states prohibit the assignment of future wages (i.e., wages not yet earned). This also is one area where the federal government has become involved. Federal Trade Commission regulations prohibit loan companies and retail installment sellers from securing payment with a wage assignment unless:
* the assignment can be revoked at any time by the Employee;
* the assignment is a payroll Deduction plan starting at the time of the transaction; and
* the assignment applies only to wages already earned when the assignment is made.
Several states have passed laws incorporating similar restrictions on assignments arising out of consumer credit transactions or prohibiting such assignments altogether.
Maximum amount that can be assigned.
Those states that allow assignment of future wages often restrict the amount of an Employee's wages that can be assigned in the form of a maximum percentage or a dollar amount. They also may put a limit on how long into the future an assignment can be enforced.
Priorities.
Where more than one wage assignment is presented to the employer, generally the one received first must be given priority if the full amount for both cannot be withheld. In those states that require wage assignments to be registered with a local court or municipal clerk, priority must be given to the assignment filed earlier. In such a state, an employer that has been withholding to satisfy an assignment that has not been properly registered may have to give priority to a subsequent assignment for which the proper procedures have been followed.
Small loan restrictions.
Many states have special laws regarding wage assignments to secure small loans provided by finance companies. These laws usually limit the amount of the loan that can be secured by a wage assignment and attach several procedural requirements, including:
* the assignment must be in writing;
* the assignment must be signed by the Employee and his or her spouse;
* the amount borrowed must be given to the Employee when the assignment is signed; and
* the employer must receive a copy of the loan agreement, the assignment, and the state laws regulating the assignment.
Notice requirements.
In several states, creditors holding a wage assignment cannot collect from the employer without providing notice to the employer and/or the Employee either before or at the time the wage assignment is presented to the employer. In states where an assignment is not binding on the employer unless the Employee has received notice of its pending execution, the employer should check with the Employee once an assignment is received to make sure the notice requirement has been met. If the Employee claims that no notice was given, the employer should contact the creditor for a copy of the notice and proof that it was served on the Employee.
Federal, state, and local Employees.
As with Garnishments, wage assignments cannot be enforced against a public sector employer unless a law allows public Employees to assign their wages. Some states have enacted laws that treat government Employees the same as private sector Employees where wage assignments are concerned, while others place more restrictions on the public sector.
STATE LAWS.
Because of the different treatment of wage assignments provided by the states, employers must be sure to check their own state's laws when faced with a wage assignment. Notifying legal counsel might also be a good idea, at least where there are any questions regarding the validity of a wage assignment or its priority if the Employee involved has any other proceedings against his or her wages.
Union Dues
In addition to mandatory Deductions for union dues required by a collective bargaining agreement, in some situations Employees have the option of paying union dues on their own or having them deducted from their wages by their employer. This voluntary check-off procedure is authorized by federal labor law, so long as the amount withheld is for union dues, initiation fees, and assessments only.
The federal law also requires the employer to get a written, signed authorization from each Employee
allowing wages to be deducted. Once signed, the authorization cannot be revoked for one year or until the
union contract expires. To be irrevocable beyond that point, the Employee would have to sign another authorization.
Credit Union Deductions
Many Employees save money with or borrow money from a credit union. an organization formed by
Employees (often in conjunction with their collective bargaining representative) that serves as a savings and
loan company. When it is time to repay a credit union loan or place funds in a savings account, the Employee may wish to have a portion of his or her wages deducted by the employer and paid over to the credit union. Employers often encourage the formation and use of credit unions by agreeing to the payroll Deductions.
Before deducting any wages, however, employers should get written, signed authorizations from
Employees that detail the amount to be withheld, the duration of the withholding, and the party to whom
the withheld wages will be paid.
U.S. Savings Bonds
Another type of voluntary payroll Deduction allows Employees to purchase Series EE U.S. Savings Bonds
in denominations beginning at $100. The purchase price of the bond is one-half of the bond's denomination
or .face value.. Therefore, the purchase price of a $500 bond is $250.
Interest accumulation. Interest begins to accumulate in the month during which payments for the bond
are received by the party issuing the bond. If the Employee cashes in (redeems) the bond less than five years after the month of issue, the value of the bond is the purchase price plus interest earned at a set rate that is somewhat lower than the guaranteed minimum rate. After five years, the bond earns interest at the guaranteed minimum rate or at a market-based rate that is computed every six months (May and November). If the Employee redeems the bond after five years but before it reaches maturity, its value will be computed as the original purchase price plus interest earned at the higher of the two rates. If the Employee redeems the bond at maturity (12 years), the Employee receives the greater of the face value of the bond or the value of the bond based on the market-based interest rate.
Employer responsibilities.
Other than providing enrollment cards and making the Deductions and payments, employers also must make sure the proper amounts have been deducted and remitted by reconciling the Deductions and the bonds purchased. And they must return any excess amounts deducted to the Employees or use them toward the purchase of more bonds. When Employees leave the job, they must receive any amounts that have been deducted but have not yet been used to purchase a bond.
Charitable Contributions
Many employers work with local and national charities to provide their Employees with the opportunity to
make voluntary donations to those charities through payroll Deductions. The payroll department makes the
Deductions and processes their remittance to the appropriate charitable organizations. This process became somewhat more complicated in 1994, when Section 13172 of the Omnibus Budget Reconciliation Act of 1993 went into effect. That section created IRC §170(f)(8), which prohibits taxpayers from deducting charitable contributions of $250 or more without substantiation of the gift and any substantial goods or services received in return. The required substantiation is a contemporaneous written acknowledgement. (before the taxpayer files his or her personal tax return for the year of the contribution) from the charitable organization that includes the following information:
· the amount of cash and a description of any noncash property contributed,
· whether the charitable organization provided any goods or services in return for the contribution,
· a description and good faith estimate of the value of these goods or services.
Payroll problems recognized.
In issuing regulations to deal with the new law, the IRS recognized that, in a payroll Deduction situation, the charitable organization will generally not know the names of the contributing Employees or the amounts they contributed during a given year, since employers do not pay over the withheld amounts in separate checks for each Employee, but in one lump sum. This makes it difficult for charities to provide, and for Employees to obtain, the acknowledgement required to substantiate the contributions.
Employer and charity share reporting burden.
To make it feasible for Employees to obtain the
required acknowledgement, the regulations allow them to substantiate contributions by a combination of
two documents:
· a pay stub, Form W-2, or other document provided by the employer that shows the amount withheld
for payment to a charitable organization, and
· a pledge card or other document prepared by the charitable organization
or another party (e.g., the employer) at the direction of the charitable
organization that includes a statement that no goods or services
are provided in return for Employee contributions made by payroll
Deduction