Courtesy of Norma Sharara and Joan Vines, BDO USA, LLP
Many employers are giving employees greater flexibility to work alternative schedules, including hybrid arrangements (i.e., some in-person and some remote work) or continuing to work entirely remotely. To meet the moment and help with retention and recruiting, employers are reexamining their employee benefits, focusing on employees’ immediate needs other than cash compensation.
Based on inquiries from BDO clients, we have identified the following as the top five current workplace compensation and benefits trends.
1. Unlimited Paid Time Off (PTO). Chief financial officers might embrace the concept of unlimited PTO, because it eliminates accruals of earned but unused PTO, carryovers and cash-outs upon termination. Getting rid of that liability can boost the employer’s financials and make payroll easier and more consistent. However, management may be concerned that some employees would abuse an unlimited PTO policy, while others would not take enough days off to avoid burnout, so those issues must be addressed.
For employees, unlimited PTO has pros and cons. On the one hand, it could improve morale by giving employees the ability to address their individual work-life balance and demonstrate the employer’s commitment to overall employee wellness. With unlimited PTO, employees would have no incentive to go to work when they are sick, which can help avoid spreading COVID and other contagious diseases among the work force. Some employees may value a job that provides greater flexibility over more pay. Offering a unique benefit may attract or retain top talent in a competitive market. On the other hand, extra cash from PTO cash-outs would no longer be available.
Of course, having an unlimited PTO policy means that employers can no longer offer greater PTO as a reward (for example, as part of a promotion). Also, switching to an unlimited PTO program may be costly if accrued vacation must be paid out under state or local law. Some employers may simply freeze accrued PTO balances, to be used on a FIFO basis. Unlimited PTO also complicates compliance with certain federal and state mandates, such as the Family Medical Leave Act (FMLA) or minimum PTO rules.
2. Employer-paid student loan debt and education. Over the past few years, more employers have expressed an interest in helping employees repay their student loan debt as part of the employer’s recruiting and retention efforts. Unfortunately, if an employer simply pays an employee’s student loan debt, such payment is taxable wage income to the employee and is subject to income and employment tax withholding (and the employer would have to pay its share of employment taxes on those payments).
For 2020, the CARES Act allowed employers to repay up to $5,250 in employee student loan debt tax-free. The Consolidated Appropriations Act of 2020 (CAA) extended that relief through December 31, 2025. To make tax-free student loan payments to employees, employers would need a written plan that complies with Internal Revenue Code (IRC) Section 127 tuition assistance rules. Section 127 plans can provide tax-free payments for current education as well as student loan debt. Courses do not need to be job related. Eligibility for such plans is generally broad-based, provided the employee meets the stated criteria, which cannot discriminate in favor of highly compensated employees or owners.
Employers can also offer employees tax-free, job-related education as a working condition fringe benefit under IRC Section 132. Working condition fringe benefits can be provided on a case-by-case basis and need not be a broad-based program available to all employees.
Some employers want to provide tax-free scholarships to employees (or their family members), but employer-paid scholarships are generally taxable income to the employee (even if the employer pays the school directly). The IRS’s rules for employers providing employees (or their family members) with tax-free scholarships are very narrow.
3. Reimbursing work-from-home expenses. For employers’ reimbursements of business expenses incurred by employees who are working remotely to be tax-free, the reimbursements must be made under what the IRS calls an “accountable plan.” An accountable plan requires that the employer must have a written plan or policy to reimburse expenses that have a business connection, so long as employees submit an expense report within a reasonable period of time (i.e., 60 days). Generally, receipts are required for business expenses unless the amounts are under $75 (or are for lodging). Accountable plans are not only used for business travel, meals, lodging and transportation, but also can be used for any other business costs, such as work-from-home expenses.
When COVID converted many employees into remote workers, numerous employers began reimbursing employees for their business use of home internet and personal cell phones. Although IRS Notice 2011-72 generally makes employer-provided cell phones a tax-free fringe benefit, reimbursement for business use of a personal cell phone (and internet) remains subject to the IRS’s accountable plan rules. In short, despite many employees’ quick pivot to a mandatory remote work environment, the IRS has not published any tax reporting or income inclusion relief for employer-paid business use of personal internet or cell phone. Therefore, employees must submit an expense report within a reasonable period of time after incurring the expense to obtain a tax-free reimbursement from their employer for the business use of their personal internet or cell phone.
Employers who simply “reimburse” employees a flat amount periodically for business use of their personal internet or cell phone outside of the accountable plan rules generally must treat such amounts as taxable wage income.
Separate from the accountable plan rules, IRC Section 139 allows employers to make tax-free, tax-deductible “qualified disaster relief payments” to employees who incurred expenses that “but for” COVID (or another federally declared disaster, such as fires, floods, hurricanes, etc.), they would not have incurred. COVID was declared a federal disaster on March 13, 2020 and at some point, the federal disaster declaration will be lifted. Until that time, IRC Section 139 offers broad relief.
4. State and local taxes and withholding on remote work. Remote employees who work in a state or local jurisdiction that is not the same as their regular work location can trigger state and local taxes for the employer. This is known as the employer having a “nexus” with that state or local area based on the employee’s work presence. Although some taxing authorities announced special COVID relief from their general nexus rules, some did not (and some have lifted the relief). For example, in addition to withholding and paying state and local income and employment taxes, state and local sales tax, property tax, “doing business” tax and other taxes may apply to the employer, even if the employer was unaware that an employee was working in that jurisdiction.
Employers need to have systems in place to know where all of their employees are working at all times. Some employers give employees flexibility on where they can work, but list states or local areas that are off limits.
5. Back-up child care. As the number of COVID-vaccinated individuals increases, many of those vaccinated individuals feel more confident about returning to regular life, including work, child care and school. But since children under age 12 cannot yet get a COVID vaccine and as the highly contagious Delta variant continues to spread even to vaccinated individuals, employees may find that their regular child care provider has sent their child home because of a low-grade fever or coughing or sneezing more than once, or that the employee or their children must self-quarantine due to COVID exposure. To address the sudden, unexpected need for child care, some employers are providing emergency, “back-up” child care, either in employees’ homes or in child care centers.
If an employer pays for a specified number of hours of child care from a provider on a contingency use basis (that is, the employer pays for the care regardless of whether it is used or not) and the employee uses the available back-up child care, the employee generally has imputed taxable wage income equal to the fair market value of the child care provided (regardless of any discount the employer may have received when it purchased the block of child care hours), minus any co-pay the employee may have paid. Employers are generally required to report the imputed income on the employee’s Form W-2 and to withhold income and employment taxes from other earned pay.
For back-up child care to be tax-free to the employee, the employer needs to have a dependent care assistance plan that complies with IRC Section 129. Employers generally can provide, at the employer’s expense (and exclude from employees’ taxable income) up to $5,000 of child care as long as the employer satisfies Section 129’s nondiscrimination and usage rules.
If employers want employees to pay for the back-up child care, employees can do so on a tax-free basis if the employer makes the IRC Section 129 plan available under an IRC Section 125 cafeteria (“flexible benefits”) plan. In that case, the employee must have made a timely election under the cafeteria plan to set aside a designated amount of their salary to be used to pay dependent care expenses pre-tax.
Annual caps apply to how much can be set aside tax-free under IRC Section 129 plans (the cap is generally $5,000 per year, but for 2021 only, the cap is $10,500). Cafeteria plans have a “use it or lose it” rule, although certain carryovers are allowed as part of plan design. Even though the IRS has issued some COVID relief for IRC 129 and 125 plans for 2021 and 2022, it is not nearly as broad as what taxpayers had hoped.
Employers are likely to continue to face many other COVID-related issues. Federal, state and local authorities continue to issue rules intended to help them collect their fair share of taxes. At the same time, those agencies also continue to issue rules intended to help employers and employees rebound from the pandemic and avoid triggering further public health emergencies, often in the face of natural disasters. Tax rules generally lag in providing relief, and the rules frequently change.
Written by Norma Sharara and Joan Vines. Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com