deferrals not being taken on "FFCRA sick" wages

[AlbanyConsultant]

This is the first question I've gotten on this, so I'm hoping it's an outlier and not the beginning of a trend...

The plan uses W-2 definition of compensation.  The sponsor noticed that their payroll company was not applying the deferral election for those who elected a percentage of compensation to be deferred against what was being coded as "FFCRA EE Sick" pay on their paychecks (so it was being calculated from "regular wages" only).  The plan sponsor asked the payroll company, and the response was to double-check the plan because "by default" FFCRA wages aren't included.

I admit that I haven't paid much attention to FFCRA from a consulting standpoint, since I figured that it wouldn't matter - taxable wages are taxable wages, so we'd count them.  But this deferral thing is concerning.  I don't know what payroll company they're using, but what can they be thinking?

[Larry Starr]

2 hours ago, AlbanyConsultant said:

This is the first question I've gotten on this, so I'm hoping it's an outlier and not the beginning of a trend...

The plan uses W-2 definition of compensation.  The sponsor noticed that their payroll company was not applying the deferral election for those who elected a percentage of compensation to be deferred against what was being coded as "FFCRA EE Sick" pay on their paychecks (so it was being calculated from "regular wages" only).  The plan sponsor asked the payroll company, and the response was to double-check the plan because "by default" FFCRA wages aren't included.

I admit that I haven't paid much attention to FFCRA from a consulting standpoint, since I figured that it wouldn't matter - taxable wages are taxable wages, so we'd count them.  But this deferral thing is concerning.  I don't know what payroll company they're using, but what can they be thinking?

As usual, payroll company is wrong; that clearly is NOT the "default" (one would ask "default? Say's who?").  FFCRA paid income is indistinguishable from any other income.  Unless the specific definition of comp in some way excludes sick pay, it should be treated the same as any other compensation for deferral purposes.

See this from IRS FAQ:  https://www.irs.gov/newsroom/covid-19-related-tax-credits-special-issues-for-employers-faqs#special_issues_third-party

54. Can employees make salary reduction contributions from the amounts paid as qualified leave wages for their employer sponsored health plan, a 401(k) or other retirement plan, or any other benefits?

The FFCRA does not distinguish qualified leave wages from other wages an employee may receive from the employee’s standpoint as a taxpayer; thus, the same rules that generally apply to an employee’s regular wages (or compensation, for RRTA purposes) would apply from the employee’s standpoint.  To the extent that an employee has a salary reduction agreement in place with the Eligible Employer, the FFCRA does not include any provisions that explicitly prohibit taking salary reduction contributions for any plan from qualified sick leave wages or qualified family leave wages.

[CuseFan]

5 minutes ago, Larry Starr said:

As usual, payroll company is wrong

Favorite quote of day! 

Another example of how payroll providers have difficulty correctly handling their specialty (i.e., doing payroll). So why anyone would trust them with an ancillary service like 401(k) administration, with which they have little expertise? - just sayin'

[hr for me]

I will say that ADP (workforce now system) has it setup correctly for us (processed our first this payroll period) but that I would never take tax or deduction advice on wages from a payroll provider as they can, like in this case, be 100% incorrect. I am glad the sponsor noticed it early!    

[AlbanyConsultant]

Thanks for confirming, everyone.  Now I'm wondering if one payroll company is doing it wrong, how many others are... and who is going to catch it?