Operating SDS Programs: Key Federal and State Employment Tax and Insurance Laws

April 6, 2015

Mollie Murphy Annkissam

Susan Flanagan, M.P.H., Ph.D. Westchester Consulting Group

Who is on the call today?

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Objectives of Today’s TA Webinar• Review Role of VF/EA FMS entity in Managing Federal and

State Taxes and Insurance in SDS Programs.

• Present Key Federal and State Tax, Insurance and Tax Form Requirements.

• Discuss the Tax and Insurance Considerations when Designing Oregon’s SDS Program.

• Address Questions

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• Participant (or representative) is the common law employer of direct support workers (DSWs) hired by participant.

– DSW is employee of the participant/representative-employer.

– Participant/representative-employer hires, establishes work schedules, trains and manages and fires their DSWs.

Overview of Vendor Fiscal/Employer Agent (VF/EA) FMS

Overview of Vendor Fiscal/Employer Agent (VF/EA) FMS (cont’d)

• VF/EA FMS is a private entity contracted by the Medicaid agency or managed care entity.

• VF/EA FMS entity operates under section 3504 of IRS code and Rev. Proc. 70-6 and 2013-39 as the agent to the common law employer.– Manages all payments to employees, tax filings and

payments, and year-end information returns.

Overview of Vendor Fiscal/Employer Agent (VF/EA) FMS (cont’d)

• VF/EA FMS entity is co-liable with the participant/representative-employer for all federal tax non-compliance including penalties and interest.

Overview of VF/EA FMS Entity’s Duties

• Registering participants/representatives as common law employers with tax agencies.

• Assisting common law employer with completing the employer-related paperwork.– Sometimes the responsibility of the Support Broker with

assistance from the VF/EA FMS entity.

• Assisting the common law employer to ensure employees complete all necessary hire paperwork.– Sometimes the responsibility of the Support Broker with

assistance from the VF/EA FMS entity.

Overview of VF/EA FMS Entity’s Duties (cont’d)

• Assisting common law employer to ensure individual-directed goods and services vendors complete all necessary paperwork.– Sometimes the responsibility of the Support Broker

with assistance from the VF/EA FMS entity.

• Making payments in accordance with participants’ budgets/spending plans and program rules.

Overview of VF/EA FMS Entity’s Duties (cont’d #2)

• Withholding filing and paying federal and state taxes on behalf of participant/representative-employers.

• Establishing and maintaining records in secure and confidential manner and for the required time period.

• Providing customer service to participants, representatives, DSWs and individual-directed goods and services vendors.

What a VF/EA FMS Entity is Not.

• A Reporting Agent (RA)- An RA is different IRS classification of agent that

pays employees and handles taxes, but does not share liability under Section 3504 of the Internal Revenue Code.

• A Payroll Service Provider (PSP)- While a VF/EA FMS entity provides payroll

services, it is not a payroll agent. A payroll agent is an IRS classification of lesser responsibility than a VF/EA FMS entity.

What a VF/EA FMS Entity is Not. (cont’d)

• A Professional Employer Organization (PEO)- A PEO is a service to outsource the employer, benefits and management of employees.

- The IRS is wary of PEOs and historically has advised states against their use in SDS programs.

- VF/EA FMS entity has liability for federal tax responsibilities

- VF/EA FMS entity has specific Rev. Procs. to accommodate SDS program operations.

Clarifying the Employer-Employee Relationship

• Rev. Proc. 20013-70, IRS states the common law employer of a home-care service provider is:

Generally, the service recipient [participant/ representative-employer]is the employer of the home-care service provider if the service recipient has the right to direct and control the performance of the services. This control refers not only to the result to be accomplished by the work but also the means and details by which that result is accomplished.

Clarifying the Employer-Employee Relationship (cont’d)

• The IRS has made clear that DSWs who are hired and supervised by participant/representative-employers are their common law employees.

• When an employer pays an employee, compliance with the following tax rules must be maintained:– Federal Income Tax– Social Security and Medicare Tax (together, FICA taxes)– Federal Unemployment Tax (FUTA tax)– State Unemployment Tax (SUTA tax)– State Income Tax– Any Local Taxes (not applicable in Oregon)

Clarifying the Employer-Employee Relationship (cont’d #2)

• Participant/representative-employers are considered “household” or “domestic” employers for federal and state tax and labor purposes.

• DSW working for participant/representative-employers are considered “household” or “domestic” employees.

• The IRS, state tax agencies and state workers’ compensation agencies often have special rules for household employers and their employees.

Special Tax Rules for Household Employees• Withholding Federal Income Tax from

employees is optional, unless the employee requests.

– While this withholding is technically optional, it is a best practice for a VF/EA FMS entity to withhold Federal Income Tax from employees based on their completed IRS Form W-4.

– When withholding is optional, it often does not happen and employees [DSWs] are unpleasantly surprised and often in hardship when their annual income taxes are due.

Special Tax Rules for Household Employees (cont’d)

• Withholding Oregon Income Tax from employees is optional, unless the employee requests.

– Again, while optional, it is a best practice to withhold to avoid surprise and hardship for the employee [DSW] when annual taxes are due.

Special Tax Rules for Household Employees (cont’d #2)

• Per IRS Publication 15, Circular E, Employer’s Tax Guide, Chapter 3, Family Employee, certain family members may be exempt from FICA and/or FUTA/SUTA.

- If parent is employed by his/her child (adult or minor), the parent is exempt from FICA, FUTA and possibly SUTA.

Special Tax Rules for Household Employees (cont’d #3)

– If a child under 21 is employed by his/her parent, the child is exempt from FICA,

FUTA and possibly SUTA.

– If a spouse is employed by his/her spouse, the spouse is exempt from FICA, FUTA and possibly SUTA.

FICA Tax Rules for Household Employees• The IRS has special rules for when wages paid by

an employer to a household employee are taxable for FICA.

• Only when an employer pays a household employee wages over the FICA wage threshold in a year are the total wages taxable for FICA.

• Once the employee is paid at or above the threshold, all wages paid to the employee by the employer are taxable for FICA.

FICA Tax Rules for Household Employees (cont’d)

• In 2015, employees who paid $1,900 or more by an employer must pay FICA and their employers must pay the employer share of FICA.

• Employers must assume they will owe FICA on all wages paid and withhold because an employer can not know whether the employee will be paid up to the threshold or not until the end of a calendar year.

FICA Refunding• At year end, a VF/EA FMS entity identify those

employees who earned less than the FICA wage threshold from a single participant/ representative-employer for the calendar year.

• The VF/EA FMS entity then obtains a refund from IRS of both the employer and employee portions of FICA.– The employee portion is paid to the employee.

FICA Refunding (cont’d)

– The state SDS program agency must decide how it will be refunded for the employer portion• Adjust future Medicaid claims from the VF/EA FMS entity? • Other?

• The maximum employer portion of FICA per employee that could be refunded in 2015 is $145.

IRS Revenue Procedure (Rev. Proc.) 2013-39• Provides guidance on obtaining authorization to

act as an agent and Federal tax filing and payment for VF/EA FMS entities serving SDS programs.– Released in December 2013.– Updates Revenue Procedures 70-6 and 80-4, as

modified by Notice 2003-70.

• As close as SDS programs have ever been to having its own Rev. Proc.

What You Should Know About IRS Revenue Procedure 2013-39?• The IRS calls participant/representative employers Home

Care Service Recipients or HCSRs.

• Rev. Proc. 2013-39 makes clear that all participant/ representative employers must have a Federal Employer Identification Number (FEIN).– Obtained with an IRS Form SS-4, Application for Employer

Identification Number (Discussed later).

• A VF/EA FMS entity must submit an IRS Form 2678, Employer Appointment of Agent, for each participant/ representative-employer it represents. (Discussed later).

Revenue Procedure 2013-39 Aggregate Filing and Payment• VF/EA FMS entity files and pays Federal Income

and FICA taxes in the aggregate on behalf of all participant/representative-employers the entity represents under the entity’s separate agent EIN.– Files an IRS Form 941, Employer’s Quarterly Federal

Tax Return for Federal income and FICA taxes in aggregate for all participant/representative-employers and employees on wages paid.• Attaches a Schedule R to the aggregate Form 941 to

disaggregate the reporting by participant/representative-employer.

Revenue Procedure 2013-39 Aggregate Filing and Payment (cont’d).

• VF/EA FMS entity files and pays FUTA tax in the aggregate on behalf of all participant/ representative-employers the entity represents under the entity’s separate agent EIN.

– Files an IRS Form 940, Employer’s Annual FUTA Tax Return in the aggregate for all participant/employers it represents.• Attaches a Schedule R to disaggregate the information

reported by participant/representative employer.

Revenue Procedure 2013-39 IRS Forms W-2• The VF/EA FMS entity issues a single Form W-2 to each

employee for each participant/representative employer for which the employee worked during the year.

• IRS Forms W-2/W-3 instructions, Special Reporting Situations, includes a section for Agent Reporting.– VF/EA FMS entity’s separate FEIN reported in Box B.– In Box C report (a) name of agent, (b) agent for “Name of

Participant/Representative-Employer, and (c) address of VF/EA FMS entity.

• Employees understand that that they are paid by the agent, but that their employer is the participant/ representative.

Oregon Employment Taxes: State Income Tax

• Withholding State Income Tax from employee wages is optional, but highly recommended.– Federal Form W-4, Employee’s Withholding

Certificate, used for employee withholding and allowance information.

– VF/EA FMS entity withholds Oregon Income Tax from each employee payment and remits the withheld taxes on each participant/representative employer’s behalf.

Oregon Employment Taxes: State Income Tax (cont’d)

• VF/EA FMS entity can file state income tax in the aggregate as an OR Payroll Services Provider.– This designation does not impact the VF/EA IRS

designation as a Section 3504 agent.• Paying state unemployment tax (SUTA)is

not optional.– Any participant/representative-employer who

pays $1,000 or more in a single quarter is required to file and pay.

Oregon Employment Taxes: State Income Tax (cont’d #2)

– Each participant/representative employer is assigned a SUTA Tax Rate.

– Each participant/representative employer must pay SUTA at the assigned rate to each employee up to the Oregon taxable wage base for the year.• In 2015, the Oregon taxable wage base is $35,700.

Federal Employer Tax Forms

• Each participant/representative employer completes the following forms to become an employer and designate the VF/EA FMS entity to represent him/her:– IRS Form SS-4, Application for Employer Identification Number– IRS Form 2678, Employer Appointment of Agent– IRS Form 8821, Tax Information Authorization (optional)

• Many VF/EA FMS entities will pre-populate these tax forms with participant/representative information so they only have to review and sign each form. Then they file them with the appropriate agencies.

Oregon Employer Tax Forms

• Two forms for registering the participant/representative as employer for Oregon income and SUTA tax purposes and designating the VF/EA FMS entity as agent are:– Combined Employer Registration Form– Tax Information and Power of Attorney Form

• VF/EA FMS entities or support brokers often assist the participant/representative to complete these forms.

Oregon Employer Tax Forms (cont’d)

• The Combined Employer Registration Form is used to register the employer for:– Oregon State Income Tax Filing and Depositing– Oregon SUTA Filing and Depositing

• The Tax Information and Power of Attorney Form is used to:– Appoint the VF/EA FMS entity to represent the

participant /representative employer for Oregon employment tax purposes• One form is used for both State Income Tax and SUTA

purposes.

Forms to Avoid

• If you work with a VF/EA FMS entity who suggests using any of the following forms, treat it as a red flag.

• Using these forms is an indication of not

operating as a VF/EA FMS entity under Section 3504 of the IRC, which could result in the state or the participant/representative having more liability than intended.

Forms to Avoid (cont’d)

• Avoid:– Participant/representative employer executing an IRS

Form 8655, Reporting Agent Authorization;– VF/EA FMS entity that files an IRS Form 944,

Employer’s Annual Federal Tax Return; and– VF/EA FMS entity that files a single IRS Form 941,

Employer’s Quarterly Tax Return, for each participant/representative employer.

IRS Notice 2014-7

• States that payments received by individual care providers who live in the same home as care recipients are now considered “difficulty of care” (DOC) payments under Section 131 of the Internal Revenue Code.

– Notice is specific to Medicaid waiver programs, but could apply to similar Medicaid programs operating under authorities other than 1915(c).

IRS Notice 2014-7 (cont’d)

• DOC payments defined in the Internal Revenue Code as “compensation to a foster care provider for the additional care required because the qualified foster individual has a physical, mental, or emotional handicap.”

• In the past, only foster care providers could receive DOC payments.

IRS Notice 2014-7 (cont’d #2)

• IRS agrees that other types of HCBS share the same purpose as foster care—to prevent institutionalization.

• Notice 2014-7 expanded the scope of DOC payments to include any provider living in the same home as the care recipient, including a family member of a participant.– Must be within the context of a Medicaid 1915(c)

waiver program or comparable Medicaid program.

IRS Notice 2014-7 (cont’d #3)

– Must provide nonmedical services, such as personal care, as authorized in the participant’s individual service plan.

– Does not apply to private pay home care.

• Standardizes federal tax treatment of Medicaid HCBS providers performing similar duties.

IRS Notice 2014-7 (cont’d #4)

• DOC payments are excludable from federal income.– Cannot be included in federal gross income for any

reason .– Workers can’t choose to classify DOC payments as

regular income.– Federal income tax can’t be withheld from such

payments.

• Does not affect FICA/FUTA exemption status.

IRS Notice 2014-7 (cont’d #5)

– FICA and FUTA still must be paid unless an employee is exempt due to an eligible family relationship with the participant/representative employer.

• Some states have chosen to follow Notice 2014-7 for state income tax purposes.

• OR has not announced it will follow Notice 2014-7.

IRS Notice 2014-7 (cont’d #6)

• DSWs who receive DOC payments can submit a statement to the VF/EA certifying their exempt status in order to stop federal income tax withholding, or can handle it on their individual tax return.

– IRS will ask the worker for proof of address after his/her individual tax return is filed.• Driver’s license or other government-issued ID• Medical bill• Utility bill

IRS Notice 2014-7 (cont’d #7)

• Bank statement• Document from VF/EA or case management agency

• VF/EA FMS entity is not responsible for verifying accuracy of worker’s statement.– Must accept statement unless already has knowledge

the statement is untrue.

Sample Statement for Exempt Employees Under DOC in Medicaid Waiver (or waiver-like) Program

Under penalties of perjury, I declare that I am an individual care provider receiving payments under a state Medicaid Home and Community-Based Services waiver program for care I provide to (Participant’s Name) under the care recipient’s plan of care.

Signed:Date:

Difficulty of Care Payment Eligibility

• Exempt DSWs must live with participant and cannot have a separate home where they reside, even if only part-time.

• IRS expects exempt DSW will “perform routines of private life” (e.g., share meals & celebrate holidays) in participant’s residence, not elsewhere.

Difficulty of Care Payment Eligibility (cont’d)

• Provider’s family relationship to participant not a determining factor as to whether provider is receiving DOC payments or not.

• Multiple caregivers living in the same house with a participant can receive DOC payments (e.g., parents providing care for a child).

Department of Labor Fair Labor Standards Act

• DOL FLSA Home Care Rule was overturned in DC District Court.

– Scheduled to be appealed by DOL; appellate court decision expected in August or September 2015

• Legally unclear whether one District Court’s ruling affects the rest of the country.

Department of Labor Fair Labor Standards Act (cont’d)

• Assuming the FLSA Home Care Rule does not currently apply, the companionship and live-in exemptions established in 1974 FLSA Domestic Service Rules stand.

1974 Companionship & Live In Exemptions

• Domestic Service Workers who qualify as companions under the 1974 rules are:– Not required to be paid at least minimum wage, – Not required to be paid overtime for hours worked over

40 in a work week.

• Domestic Service Workers who qualify as a live-in under 1974 rules are not required to be paid overtime for hours worked over 40 in a work week.

Current Definition of “Companionship Services”

• “Services for the care, fellowship, and protection of persons who because of advanced age or physical or mental infirmity cannot care for themselves” (DOL Fact Sheet 25).– Includes meal preparation, bed making, clothes

washing and other similar personal services.

Current Definition of “Companionship Services” (cont’d)

• General household work is also included, as long as it does not exceed 20 percent of the total weekly hours worked by the companion.– If the 20 percent threshold is exceeded, minimum

wage and overtime apply.

• General household work does not include services performed by trained personnel such as nurses.

Current Definition of “Live-In Worker” (cont’d #2)

• Worker must reside on the employer’s premises either “permanently” or for “extended periods of time.”– “Permanently”: when worker lives, works, and sleeps

on the employer’s premises seven days per week and has no home of his or her own other than that provided by the employer.

Current Definition of “Live-In Worker” (cont’d #3)

– “Extended period of time”- when worker lives, works, and sleeps on the employer’s premises for five days a week (120 hours or more).• OR if worker spends less than 120 hours per week working

and sleeping on employer’s premises but spends five consecutive days or nights residing on the premises.

Workers’ Compensation

• Oregon does not require household employers to have workers’ compensation policies but they are allowed to voluntarily purchase them.– ORS Chapter 656.027

• Participant/representative-employers could be held personally liable if a worker is injured and the employer does not have a Workers’ Compensation insurance policy.

Workers’ Compensation (cont’d)

• DHCF may consider requiring Workers’ Compensation policies for all participant/ representative employers enrolled in the SDS program.

• DOL has opined that the State of Oregon is an FLSA joint employer in its self direction programs.– Advise to review the impact on Oregon for

Workers’ Compensation purposes.

Workers’ Compensation (cont’d #2)

– Specifically, does Oregon have any liability when a worker is traveling from one participant to another during a work day?

– Additional review here may be warranted.

Considerations & Topics for Further Discussion

• Would DHCF permit a contracted VF/EA to sub-contract with a reporting agent or payroll service provider?– Or would DHCF require a VF/EA FMS entity to perform

all or certain contracted VF/EA duties without subcontracting?

• Will DHCF require participant/representative- employers to have Workers’ Compensation coverage, despite Oregon law not requiring it?

Considerations & Topics for Further Discussion (cont’d)

• If Oregon is a joint employer in the SDS program, does Oregon have workers’ compensation liability when workers travel between participants or any other time?

Processing, Discussion and Questions (cont’d)

• What is your biggest insight about what you just heard?

• What would be needed to implement what has been presented in Oregon?– What resources would be needed?– What challenges would be encounter and how could

they be addressed?– Questions?

Where to Find Help

• To request TA:

http://www.hcbs-ta.org/request.aspx • For additional information:

http://www.hcbs-ta.org