On Demand Pay Arrangements & Plan Compensation

How are TPAs handling on-demand/early-access pay with regard to plan compensation?  Is it treated like a traditional payday loan where the employer isn't involved and ignored for plan purposes? Or counted as compensation when the employee has constructive receipt?  I want to think it's ignored, but when the program itself is an employer benefit, it feels a little different somehow.    

I found this an interesting issue and so I googled and found a nice summary here: https://www.paychex.com/articles/payroll-taxes/what-is-on-demand-pay

There are other provider summaries as well. This seems to indicate constructive receipt doctrine, but that tax withholding still happens when the regular pay check is issued. Say my bi-weekly pay is $2,000 and $500 is typically withheld each payroll period for taxes and benefits (medical, 401k, etc.), and I get a full $1,000 advance mid-cycle, then my regular check will net $500 (and maybe less any fees if those get charged to the employee). I'm not sure how else that would work unless they treated the $1,000 advance as a paycheck and then applied withholdings - but that makes it complicated for employee who is targeting a specific amount and must calculate withholdings to gross up the requested amount.

I think this only becomes a TPA issue if an advance is paid before year-end on a paycheck issued and otherwise taxable in the following year. I would hope plan/benefit design would prohibit that potential nightmare.

@CuseFanThanks for the response. 

I think there may be more to this than just the year end scenario.  Let's say in your example above, the employee had a 5% deferral election in place at the beginning of the pay period.  The day after the on-demand pay request is paid, the participant changes their deferral election to 0%.  Would the employer still have to withhold deferrals on the amount paid mid-period?  I think they might, but I'm not sure.  Does the date that the on-demand pay is received start the clock for deposit timing or would that go off of the scheduled payroll date?  

CuseFan, thank you for linking us to a service provider’s article and its link to a Bureau of Consumer Financial Protection Advisory Opinion. https://www.govinfo.gov/content/pkg/FR-2020-12-10/pdf/2020-26664.pdf

Perhaps one of the trade associations might ask the Internal Revenue Service to publish a Revenue Ruling that assumes the facts of CFPB’s “Covered Earned Wage Access Program” and sorts out how an eligible retirement plan’s provisions for elective deferrals apply regarding the before-paydate pay and the later wage-payment adjustments.

I had a discussion with a representative of a trade association on this topic today who pointed to the 2022 Greenbook which gives us some insight into how Treasury was thinking about this a year ago.  You can access that at the following link (page 106):

https://home.treasury.gov/system/files/131/General-Explanations-FY2023.pdf

Their proposals included, in part:

• Section 7701 be amended to define on-demand pay arrangements
• Section 3401(b) be amended to provide that ODP arrangements be treated as weekly payrolls
• Sections 3102, 3111, and 3301 be amended to clarify that ODP arrangements are not loans

It's not specific to plan issues, but it's better than nothing. 

It may also be a prudent practice for the client to document the position they take with regard to the treatment of on-demand pay, and rationale for same, to show that fiduciaries recognized the challenges this creates for their plan and made a reasonable decision that they can consistently apply, absent future regulatory guidance.  

MSN, thank you for pointing us to a 2022 proposals book.

Your last paragraph is apt. Absent legislation and absent Treasury department guidance, an employer (and a plan’s administrator, if not the employer) should get and consider its lawyers’ advice.

That advice might consider a range of issues, including, for example, how to measure a participant’s compensation for one or more purposes and how to determine elective deferrals (if applied as a percentage of compensation).

Query: If a TPA knows an employer has these pay arrangements and knows the employer has not considered any of the tax law issues (including those that affect the retirement plan), how much responsibility should a TPA take on to suggest the employer get advice?

1 hour ago, Peter Gulia said:

Query: If a TPA knows an employer has these pay arrangements and knows the employer has not considered any of the tax law issues (including those that affect the retirement plan), how much responsibility should a TPA take on to suggest the employer get advice?

Great question, Peter!  Most of the TPA agreements I've seen carve out responsibility for errant data so I wouldn't anticipate them drawing a hard line here.  I think it gets more interesting if the TPA is an affiliate of the payroll company facilitating the on-demand pay arrangement and also in plans with outsourced 3(16) duties.