Employee Benefits Unplugged - Straight Talk. Plain English.

BACKGROUND

With 2011 W-2s due right about now, the IRS is committing manpower and enforcement on compliance relating to 2011 compensation that a grower paid to its foreign agricultural workers admitted into the US on H-2A visas.  See most recent IRS guidance.  The IRS now mandates W-2 reporting of such compensation (and the grower must obtain the worker’s SSN or ITIN when reporting) and possible 28% backup withholding (where the worker fails to provide an SSN or ITIN).

ISSUES

Federal Tax Issues.

• What happens to the grower who filed 1099s for years prior to 2011? 
• What happens to the grower who filed a W-2 or 1099 for prior years, but did not enter a worker’s SSN or ITIN?
• What happens to the grower who filed neither a 1099 nor a W-2 for prior years?
• How real is the IRS-threatened penalty on the grower who failed to backup withhold and remit that 28% (that is, the grower overlooked withholding or wanted to withhold but did not obtain an SSN or ITIN)? 
• What happens to the (Mexican, Jamaican, for example) worker who was required, but never filed, a US tax return for prior years?
• What happens especially where that H-2A worker would have had enough exemptions such that the worker would not have owed any federal income tax?

Other Issues:  State Tax; Immigration; Agricultural Production in the US.

In addition to this federal tax exposure, both grower and worker have exposure with respect to possible state tax issues and immigration concerns.  Visas might be affected; farming operations across the US will suffer.

AN ODD, BUT UNIQUE, SHARED INTEREST?  

The natural stakeholders affected by this enhanced IRS tax compliance effort are the H-2 worker, the H-2A worker advocates, growers, grower associations, and their agents.

Challenges; Logistical Hurdles.  The natural stakeholders affected by this enhanced IRS compliance effort are the H-2 worker, the H-2A worker advocates, growers, grower associations, and their agents.  Given the above interwoven risks/issues/exposures, these various stakeholders – typically on differing sides on H-2A matters – might find themselves aligned.  That is, there is uncertainty with respect to past federal tax issues that threaten the immigration program, staffing operations, and ultimately agricultural production; there are also logistical challenges where contact between grower and H-2A is typically limited to when the worker has entered the country.   

IRS Coordination?  Perhaps there is a need to coordinate at the national level (with IRS officials who drafted the recent H-2A guidance and exam agents), regional level (the regional IRS office that controls operations within each state), and the Taxpayer Advocate professionals.

Perhaps there's room for latitude for both grower and worker for the 2011 (after all, the IRS guidance came out in late 2011) and prior tax years?  It seems like any coordinated program might well involve politicians, the Department of Labor, the Department of Agriculture, the Mexican Consulate, Mexican Employment Agencies, Jamaican Employment Agencies, etc.

In any case, the new guidance is causing growers and their accountants huge consternation as W-2s are being issued for 2011, and perhaps the IRS or Treasury just needs to be apprised in the difficulty of immediate compliance when SSNs and ITINs still have not been obtained or confirmed. 

It's an invitation to the various stakeholders of the H-2A program to weigh in regarding the  enhanced focus on federal tax reporting of and mandatory withholding on H-2A worker compensation (where there is no SSN or ITIN). 

Welcome to the Worker Classification Casino!

First, the IRS is scrutinizing the employ/independent contractor issue -- and offering a very nice settlement program to encourage companies to prospectively classify as "employees" workers who they improperly classified as "independent contractor."  See our earlier blog piece about the IRS's new program at 2011 Voluntary Amnesty Employee Classification.pdf.

Second, the Department of Labor and 11 state governments (Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah and Washington) are working together to fight improper classification of workers as "independent contractors." 

And now, California -- who is NOT a state listed above -- has enacted legislation effective for the new calendar year that imposes as high as a $25,000 per violation penalty for companies  who willfully misclassify "employees" as "independent contractors."   See CA Penalties.pdf. 

The federal government and state legislatures send a clear message:  misclassification is wrong.  

Companies should expect challenges not only from the federal and state governments, but plaintiffs' lawyers who can use "whistle blower" statutes to coax employers to confront the statutory penalties (at least in California), wage-and-hour liability, federal/state employment taxes, and ERISA obligations.  

Companies must grapple with the worker classification issue now.  To not do so is to take a big gamble, with very bad odds.

Late last month, the IRS issued guidance on how employers will report the aggregate cost of employer-sponsored health coverage provided to an employee on Form W-2.   The Patient Protection and Affordable Care Act (PPACA) imposed the reporting requirement, originally effective for the 2011 Form W-2s (for issuance in 2012).  However, an earlier IRS Notice postponed this reporting requirement until the 2012 Form W-2s (for issuance in 2013). 

Calculation of Aggregate Cost.  The aggregate cost of coverage provided to the employee includes amounts that both the employer and the employee pay.  In addition, the aggregate cost includes any portion of the cost of coverage that is includable in the employee's gross income (for example, the cost of coverage provided to over-age 26 dependents).  The reporting requirement applies to only "applicable employer sponsored coverage," defined as coverage under any group health plan that is excludable from the employee's gross income under Internal Revenue Code Section 106, or that would be so excludable if it were employer-provided coverage that same section.     

In Notice 2011-28, the IRS provides that an employer should determine the aggregate cost of coverage in a manner similar to that used to determine COBRA premiums.  That Notice specifies that the employer may use one of the following methods to determine cost to be reported: 

• the COBRA applicable premium method under Code Section 4980B(f)(4),  
• the premium charged method, or  
• the modified COBRA premium method (where the employer subsidizes COBRA premiums or bases them on premiums calculated in a prior year.)   

The Notice clearly states that this reporting requirement is for the employees’ information only, to inform them of the cost of their health care coverage.  Such reporting does not affect whether or not the health coverage is taxable.  Nothing in this requirement or the related guidance causes otherwise excludable employer-provided health care coverage to become taxable.

 Some Relief for Smaller Employers.  For employers who will have fewer than 250 Form W-2s in 2011 (for issuance in 2012), the Notice postpones the reporting requirement for at least one year.  The Notice provides that this relief will continue until the issuance of further guidance.