Jump to content

Coverage of Employees with No Income


Below Ground

Recommended Posts

Client is a high end restaurant where employees are paid a minimal wage, with income primarily from tips.  (They get very good tips.)  While these tips are actually reported on on Form W-2, they are not paid through the firm.  Instead, the employees declare tip values to the employer, who then includes in records for taxes and such.  When taxes, health premiums, etc... are applied, many of these employees actually owe the firm money and must pay back the firm these costs with a check they provide to the employer.  My first question is are these employees required to be covered?  Looking purely from an IRC 410(b) Ratio Percentage, the answer would be yes.  (They are a big chunk of the workforce.)  Another concern is that these employees have no monies paid under the payroll system that could be deferred, outside of a personal check the person writes and gives to the firm to pay back any deferral processed through the payroll system.  From a "paycheck perspective", these employees have zero income (no check) but do show W-2 Wages from the tips they declare to the employer.  So how can such a person make a deferral?  My guess is that they make the election against the "W-2 Wage Amount"  (base pay plus declared tips) which the firm contributes, which they employee must then repay to the firm with a personal check.  In summary, my 2 questions are how do you handle coverage and deferrals of these types of employees?

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

QPA, QKA

Link to comment
Share on other sites

In the 1990s, I, as a recordkeeper’s inside counsel, tried to help an AmLaw 200 firm design a mainstream § 401(k) plan for a large national restaurant chain.

The (unwritten) guidance from Internal Revenue Service lawyers was that an employee could not make a § 401(k) deferral from compensation she had already received by collecting from a table, or directly from a diner, a tip paid in currency.

IRS people listened to explanations about how this deprived tens or hundreds of thousands of workers from an opportunity open to others. But no one had a solution for the idea that a cash-or-deferred election applies to compensation not currently available.

Beyond increasing use of credit-card tips, has anything changed?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

Thank you both Peter and Lou.  I really appreciate your replies.  Anyway...

No, I was not thinking I could pretend they don't exist.  I can see how my post could be interpreted that way, but that was my not having the right words.  Beyond using an excluded class that passes 401(b), which I don't, I was wondering if there was any special rule for this type of employee with respect to coverage.  I don't believe there is any but, I asked just in case.

Peter, was there any resolution to the issue or does it remain something where there is still no guidance?  I assume that a "strategy" of having the employee reimburse the employer is not workable?  I believe they do that with health premiums.  If I am reading your post correctly, it seems that there is no solution for these employees.  Basically, they are covered just in case they make enough money to actually have enough money to defer, otherwise they are just a participant who can never defer to the plan?  That just sounds wrong.

Again, thank you for your comments.

 

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

QPA, QKA

Link to comment
Share on other sites

I don’t know whether relevant tax law, or the IRS’s interpretations (written or unwritten), have changed since I worked on this issue.

The fact change is more payment-card tips processed by an employer (rather than paid in currency or delivered in other ways immediately available to the worker).

Even those tips might not practically support a § 401(k) elective deferral. For example, a Federal court complaint alleges:

“Hyatt has a mandatory policy of requiring tipped employees . . . to be paid all charged tips in cash rather than through payroll, interfering with Plaintiff’s and Class members’ ability to defer income under the terms of the [Hyatt Corporation Retirement Savings] Plan.”

https://si-interactive.s3.amazonaws.com/prod/plansponsor-com/wp-content/uploads/2022/03/15112816/BairdvHyattCorpComplaint.pdf

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

On 10/1/2022 at 2:14 PM, Peter Gulia said:

I don’t know whether relevant tax law, or the IRS’s interpretations (written or unwritten), have changed since I worked on this issue.

The fact change is more payment-card tips processed by an employer (rather than paid in currency or delivered in other ways immediately available to the worker).

Even those tips might not practically support a § 401(k) elective deferral. For example, a Federal court complaint alleges:

“Hyatt has a mandatory policy of requiring tipped employees . . . to be paid all charged tips in cash rather than through payroll, interfering with Plaintiff’s and Class members’ ability to defer income under the terms of the [Hyatt Corporation Retirement Savings] Plan.”

https://si-interactive.s3.amazonaws.com/prod/plansponsor-com/wp-content/uploads/2022/03/15112816/BairdvHyattCorpComplaint.pdf

I am pretty sure that the client follows the "Hyatt Method", paying all tips from credit cards in cash, since the client has stated that these employees all need to do quarterly filings to account for withholding on those tips.  The more I look into this, the more I find that no one seems to have a solution, and the IRS and/or DOL is providing no relevant guidance.  I am beginning to think I should resign from this case, but I hate the thought of leaving parties involved with unresolved issues.  I have a serious problem with that.  Again, your insights are greatly appreciated.

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

QPA, QKA

Link to comment
Share on other sites

Nate, yes.  The document uses W-2 Compensation, which of course includes tip income.  The Plan is Safe Harbor so employees can defer tip income per the Plan.  I assume that is the focus of your question.  If it is another topic, let me know.  As practice we always go to the Plan document first.

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

QPA, QKA

Link to comment
Share on other sites

Nate, I see from the thread you included that an issue might be related to fringe or non-cash compensation?  I don't think this is would work since the tips are W-2 Wages.  I would note that we do see plans with policies on deferrals where a special election can be applied for certain compensation forms, like bonus pay.  That is, the employee can specifically state that their deferral is not on bonus pay, or conversely, this election only applies to bonus pay.  I stress this is processed as a choice of the employee, and is not subject to administrator discretion.

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

QPA, QKA

Link to comment
Share on other sites

On 9/30/2022 at 1:41 PM, Peter Gulia said:

The (unwritten) guidance from Internal Revenue Service lawyers was that an employee could not make a § 401(k) deferral from compensation she had already received by collecting from a table, or directly from a diner, a tip paid in currency.

Peter, does this apply only to the tips that the employee him- or herself picks up from the table and is allowed to keep, without the cash ever physically coming into the possession of any other employee of the employer, or also to tips that the employees in general are required to pool if there is a rule that all tips for the shift are pooled and shared? It would seem to me that in the latter case the employee has not received the income but is acting as the employer's agent. And even in the former case, in addition to the policy argument, did you make the case that the waiter or waitress or other tipped individual, to the extent of his or her deferral amount, was, just the employer's agent to the extent of his or her deferral? Also, if the patron pays the entire bill in cash, the waiter or waitress may need to have a non-tipped employee of the employer break large bills in order to received the tipped portion, and in such a case it would seem to me that the employer is receiving the tips and then paying them to the employee. Obviously, the facts of any particular workplace could be very complicated.

Also, we're agreed that in any case it's good 415(c) compensation, right, if reported on W-2? So the only problem would be where everything is taken by the employee off the table in cash, so there is literally not enough cash in the employer's hands to cover the deferral amount over some period, e.g. monthly?

And we're also clear that the fact that they are tipped is no basis for an exclusion for purposes of 410(b) or 401(k) ADP or matching, right? So all these folks would go into the various tests as eligible but no- or low-deferrers?

On 10/1/2022 at 1:14 PM, Peter Gulia said:

The fact change is more payment-card tips processed by an employer (rather than paid in currency or delivered in other ways immediately available to the worker).

Even those tips might not practically support a § 401(k) elective deferral.

I don't see how an employer could cash out credit card tips (e.g., that evening) and collect the info to put the amount on the W-2, but then say it didn't go through payroll. I get the issue, I think, for tips that the employee picks up off the table and keeps, i.e., arguably it's too late to defer those, even though they are 415(c) comp, because it is compensation that has been paid to the employee in cash. But cashing out the credit card tips, even if done the evening of the work and at the local level still means the money moves from the customer to the employer and then from the employer to the employee, which seems to me like "payroll." Maybe 20 years ago it would have been impossible to accomplish withholding in such a situation, but today the same systems that allow the waiter or waitress to tap pictures of the food and beverages you're ordering on a tablet and have that instantly sent wirelessly to the kitchen staff should make it possible for the employer to know how much to hold back from tips for the employee's 401(k) on a shift-by-shift basis.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

Link to comment
Share on other sites

8 hours ago, Below Ground said:

Nate, I see from the thread you included that an issue might be related to fringe or non-cash compensation?

Maybe not.  Your comments lead me to believe you are making the same error as the OP in the cited thread and you've fixated on compensation definitions.  Go instead to the deferral section of your document and search for non-payable income treatment for items including imputed, fringe benefits, and tips.

Link to comment
Share on other sites

When (in the 1990s) I last had any observation about this point, the IRS’s hang-up was about currency tips a server collected from the diner’s table.

I do not remember any discussion about tip pooling, or even whether any of that client’s restaurant chains or franchisees used such a business practice.

The AmLaw 200 lawyer told me he presented possible reasonings of the kind Luke Bailey describes.

This was before the Treasury adopted, or even proposed, the § 401(k) regulation, which some might argue could support different interpretations.

About payment-card tips, perhaps one or more of the lawsuits (the complaint I hyperlinked above is not the only one) will survive a motion to dismiss for failure to state a fiduciary-breach claim, and result in some information about the facts (or even about private Internal Revenue Service determinations).

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

14 hours ago, Nate S said:

Maybe not.  Your comments lead me to believe you are making the same error as the OP in the cited thread and you've fixated on compensation definitions.  Go instead to the deferral section of your document and search for non-payable income treatment for items including imputed, fringe benefits, and tips.

I will indeed check further on this.

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

QPA, QKA

Link to comment
Share on other sites

15 hours ago, Luke Bailey said:

Peter, does this apply only to the tips that the employee him- or herself picks up from the table and is allowed to keep, without the cash ever physically coming into the possession of any other employee of the employer, or also to tips that the employees in general are required to pool if there is a rule that all tips for the shift are pooled and shared? It would seem to me that in the latter case the employee has not received the income but is acting as the employer's agent. And even in the former case, in addition to the policy argument, did you make the case that the waiter or waitress or other tipped individual, to the extent of his or her deferral amount, was, just the employer's agent to the extent of his or her deferral? Also, if the patron pays the entire bill in cash, the waiter or waitress may need to have a non-tipped employee of the employer break large bills in order to received the tipped portion, and in such a case it would seem to me that the employer is receiving the tips and then paying them to the employee. Obviously, the facts of any particular workplace could be very complicated.

Also, we're agreed that in any case it's good 415(c) compensation, right, if reported on W-2? So the only problem would be where everything is taken by the employee off the table in cash, so there is literally not enough cash in the employer's hands to cover the deferral amount over some period, e.g. monthly?

And we're also clear that the fact that they are tipped is no basis for an exclusion for purposes of 410(b) or 401(k) ADP or matching, right? So all these folks would go into the various tests as eligible but no- or low-deferrers?

I don't see how an employer could cash out credit card tips (e.g., that evening) and collect the info to put the amount on the W-2, but then say it didn't go through payroll. I get the issue, I think, for tips that the employee picks up off the table and keeps, i.e., arguably it's too late to defer those, even though they are 415(c) comp, because it is compensation that has been paid to the employee in cash. But cashing out the credit card tips, even if done the evening of the work and at the local level still means the money moves from the customer to the employer and then from the employer to the employee, which seems to me like "payroll." Maybe 20 years ago it would have been impossible to accomplish withholding in such a situation, but today the same systems that allow the waiter or waitress to tap pictures of the food and beverages you're ordering on a tablet and have that instantly sent wirelessly to the kitchen staff should make it possible for the employer to know how much to hold back from tips for the employee's 401(k) on a shift-by-shift basis.

Luke, being a simple man, the thought I get from your post is that the Employer should be able to apply deferrals to the "pay-out of tips" given the improvement of technology.  Sort of like the payroll system should have the deferral election in the system, so the payout from the shift payout should be able to (1) reduce the payout, and (2) record the deferral amount fro deposit in a timely fashion.  Am I reading this right?  I would also say that with respect to cash tips the waiter picks up off the table, my simple mind see no way this can be included in normal deferral processing.

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

QPA, QKA

Link to comment
Share on other sites

1 hour ago, Below Ground said:

Luke, being a simple man, the thought I get from your post is that the Employer should be able to apply deferrals to the "pay-out of tips" given the improvement of technology.  Sort of like the payroll system should have the deferral election in the system, so the payout from the shift payout should be able to (1) reduce the payout, and (2) record the deferral amount fro deposit in a timely fashion.  Am I reading this right?  I would also say that with respect to cash tips the waiter picks up off the table, my simple mind see no way this can be included in normal deferral processing.

Below ground, pretty much yes, although I think there could be a way of including even the cash tips picked off the table, although per Peter the IRS, at least at one point, would not agree. I guess the issue there is that in the mind of the IRS folks Peter was working with, the cash had been received as compensation, and so was no longer eligible for "deferral," whereas I think there might be a way of characterizing the waiter or waitress as the employer's agent for purposes of taking the tips off the table.

It would seem that an employer could take the position that taking deferrals from cash tips under any scenario is not practical, and that could be right. I'm just speculating on what could be done. If an employer that takes such a position makes it part of its plan document and/or plan policies that deferrals won't be taken from cash tips, it could probably do that, i.e., not take 401(k) from cash tips. But unless I'm missing something, such a policy, even if effectively implemented, is not going to change the fact that the employees in question are eligible or potentially eligible for the plan and have to be counted for 410(b) if they meet the plan's service and age requirements, and would have to be counted for ADP and ACP if they are actually eligible under the plan's terms. Furthermore, the cash tips, to the extent reported to the employer and on the employee's W-2, would be 415(c) comp and would also be includable in testing comp unless excluded under a 414(s)-compliant non-safe harbor definition of plan comp.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

Link to comment
Share on other sites

22 hours ago, Luke Bailey said:

Below ground, pretty much yes, although I think there could be a way of including even the cash tips picked off the table, although per Peter the IRS, at least at one point, would not agree. I guess the issue there is that in the mind of the IRS folks Peter was working with, the cash had been received as compensation, and so was no longer eligible for "deferral," whereas I think there might be a way of characterizing the waiter or waitress as the employer's agent for purposes of taking the tips off the table.

It would seem that an employer could take the position that taking deferrals from cash tips under any scenario is not practical, and that could be right. I'm just speculating on what could be done. If an employer that takes such a position makes it part of its plan document and/or plan policies that deferrals won't be taken from cash tips, it could probably do that, i.e., not take 401(k) from cash tips. But unless I'm missing something, such a policy, even if effectively implemented, is not going to change the fact that the employees in question are eligible or potentially eligible for the plan and have to be counted for 410(b) if they meet the plan's service and age requirements, and would have to be counted for ADP and ACP if they are actually eligible under the plan's terms. Furthermore, the cash tips, to the extent reported to the employer and on the employee's W-2, would be 415(c) comp and would also be includable in testing comp unless excluded under a 414(s)-compliant non-safe harbor definition of plan comp.

Luke, I find that I agree with almost everything you post, including back several years.  Just as an FYI, I have always believed that (1) these people must be included (unless some special rule I don't know about exists), and (2) the Plan says Compensation is W-2 Compensation which includes tips.  I would be careful with the "agent position" since that could be expanded to allow for the employee reimbursing the employer for deferrals from tips which I don't think would be allowed.  I KNOW that some firms do this with with health insurance, even with 125.  No, I don't recommend that.  Just have seen that used.  Anyway, it seems that the post by Nate S. for looking at "deferral application" might lead to something of value, but I am not yet at a point where I can comment there.  We do have the 10/15 Deadline to worry about, so time is limited for this concern.  Regardless, I value your opinions and comments and wish you well.

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

QPA, QKA

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...