Payroll and Garnishments: Basic Steps to Processing

1. n Payroll and Garnishments: Basic Steps to Processing

2. Protect Your Company and Yourself If you do not withhold properly on a garnishment, your company can be held liable for the entire amount of the garnishment

3. Do You Have a Court Order? • Garnishments • Court ordered • Involuntary • Different types • Wage Assignments • Voluntary • State law governs • Different types

4. Three Things You Must Do • Prioritize • Check the limits (Federal vs. State) • Check when to withhold and when to remit Which law do I follow: Federal or State? Answer: Whichever law gives the employee the most protection.

5. Court Order Priority Chart • Bankruptcy • Support Order • IRS Levy • unless state law dictates whichever is served first, second, etc. • Federal Student Loan - Federal Non-Tax Debt (AWG) • State Tax Levy - State Student Loan • Local Tax Levy • Creditor

6. Who’s On First Date Received: Order Withhold: 1. Creditor A - Jan. 15, 1998 2. Child Support A - Mar. 20, 1999 3. Child Support B - April 1, 1999 4. Federal Student Loan - June 10, 1999 5. Creditor B - June 30, 1999 6. Federal Tax Levy - Aug. 2, 1999 7. Child Support C - Aug. 2, 1999 8. State Tax Levy - Aug. 2, 1999 1. Child Support A Child Support B 3. Child Support C 4. Federal Tax Levy 5. Federal Student Loan 6. State Tax Levy 7. Creditor A 8. Creditor B

7. Federal Garnishment Limits • Bankruptcy • no limit • Support • 50% if there is a second family, 60% if not, additional 5% for arrearage (some states limit this to 50% no matter if there is a second family or not) • IRS Levy - • calculation based on 668-W and employee actual income tax deductions

8. Federal Garnishment Limits • Student Loans • 15% - Federal • 10% - State • State and Local Tax Levies • 25% of disposable or read the order • Creditor • 25% of disposable or 30 times federal minimum wage from disposable (some states are more restrictive)

9. Bankruptcy Orders • Takes priority (unless receive federal tax levy first) • Chapter VII exception • Procedures • Notify trustee of garnishments already in effect • Request instructions from trustee • Notify all other garnishments that you are to discontinue to withhold

10. Points to Remember for Bankruptcy • If you are not sure what to do – call the court or your attorney • Do exactly what the order says • Bankruptcy order can take the employee’s entire check.

11. Federal Tax LevyDefault Plan • Form 668W or Form 668C not returned within three (3) days: • Married • Filing Separately • One Exemption

12. Federal Tax Levy Take-Home Pay • Gross wages • Less: FITW, FICA, SITW, Medicare and any other statutory requirements (i.e. state retirement, etc.) • Less: Existing Voluntary Deductions (exception: Monies going directly to savings account or savings bond • Less: Existing garnishments – Child Support • Equals: Take-Home Pay

13. Federal Tax Levy Calculations – allowing savings deduction • Income $450.00 • Taxes 101.95 • Health ins. 50.00 • 401(k) 9.00 • United Way 5.00 • Savings 100.00 • Take Home Pay $184.05 • 668-W Chart (162.50) • IRS Amount $ 21.55

14. Federal Tax Levy Calculations – disallowing savings deduction • Income $450.00 • Taxes 101.95 • Health ins. 50.00 • 401(k) 9.00 • United Way 5.00 • Take Home Pay $284.05 • 668-W Chart (162.50) • IRS Amount $121.55

15. Federal Tax LevyAllowable Deduction Changes • Federal Income Tax Withholding • W-4 can be changed anytime • Voluntary Deductions • Can be cancelled/dropped • Add Union Dues • Requirement of employment • Health Insurance • Not in the employee’s control

16. Federal Tax LevyIndependent Contractors • Form 668A – One shot attachment of all assets due and owing • Form 668C – Exempt chart will be used

17. Points to remember for Federal Tax Levy • Give employee 3 days to return 668-W. • Encourage employee to call IRS and work something out • Withhold until you receive a 668-D – release from levy.

18. Family/Child SupportFour Basic Steps • Document receipt • Give copy to employee • Determine the “regularity” of the order • Follow the terms of the order • Note: If no federal tax levy is already in place: • Withhold the maximum allowable disposable income • Withhold your administrative fee, if allowed

19. Family/Child SupportWhen Two States Are Involved • Ordering state • Duration and amount • Person or agency to receive payments • Medical insurance support • Arrearage • Payment of fees or costs charged by CSEA, court or custodial party’s attorney

20. Family/Child Support When Two States Are Involved • Working state • When to begin withholding • How soon to remit • Limits • Prioritization • Processing fee • Terms and conditions not specified in the order

21. Family/Child SupportDefinition of Income • 1996 expanded definition of income: • Any periodic form of payment due to an individual, regardless of source, including wages, salaries, commissions, bonuses, workers’ compensation, disability, payments pursuant to a pension or retirement program and interest.

22. Family/Child SupportSpecial Situations • Third party pays employee • Lump sum or irregular payments • Employee leaves company

23. Lump Sum Payment ClauseBEWARE!!!!! Employees In Arrears With Family Support Payments: Entire amount of disposable earnings could be used to be applied to Family Support garnishments in which the employee has an arrears. Note: Contact the court/agency on how to handle.

24. Uniform Interstate Family Support Act (UIFSA) • All states required to adopt 1/1/98 • Requires employers to honor all out of state Family Support orders • Requires states to adopt standardized form - 10/1/98 • Requires states to set up a centralized collection office by 10/1/98, states that still have payments being processed through local courts by 10/1/99

25. UIFSA, Continued • Employee’s work state will rule if ordering state has different time to withhold and remit • Employee’s work state will rule if ordering state has different calculation for disposable earnings

26. UIFSA, Continued • Employee’s work state will rule if ordering state has different limit for exempt percentage • State cannot require you to change your pay period to meet order

27. Take Home Pay vs. Disposable Pay Comparison • Take Home Pay (IRS only): • Gross minus: • Taxes • Existing voluntary deductions • Existing Child supports • Disposable Pay (all other): • Gross minus: • Taxes • Medical insurance premium (if a medical insurance child support order) • Some AWG’s allow insurance and 401(k) deduction.

28. Calculation for Child Support Order • Jerry’s employer receives a child support order that requires $135 to be withheld per week. Jerry’s employer pays weekly and is supporting another family. • Jerry’s gross wages $500.00 • Less statutory taxes (-125.00) • Disposable income $325.00 • CCPA limit of 50% $162.50 • Order requests $135.00 • Jerry’s employer would withhold the lesser of the two limits = $135.00.

29. Medical Insurance Support Orders • A form of Child Support • Specific amount can be ordered • Noncustodial parent must advise court of any changes in coverage • Employer required to cover children***

30. Calculation for Child Support with Medical Insurance Order • Susan’s employer receives a medical insurance support order on Susan. The order instructs the company to use the disposable calculation of gross minus the taxes and the medical insurance premium Susan is paying for the children to be on the medical insurance. Susan is paid weekly and supporting a second family. The order is requesting $185.00 per week.

31. Calculation for Child Support with Medical Insurance Order • Susan’s gross pay $500.00 • Less: statutory taxes (-125.00) • Less: medical ins. Premium (- 75.00) • Disposable Income $300.00 • CCPA limit of 50% $150.00 • Order request $185.00 • Employer would withhold the $150.00 because it is the lesser of the two calculations.

32. Multiple Child Support Order Pro-ration Formulas • Percentage method • Equal division method • Number of children method

33. Pro-ration Calculation – Percentage Method • Employee owes • 1st - $100.00 = 28.5% • 2nd - 100.00 = 28.5% • 3rd - 150.00 = 43% • Total $350.00 • Limit = $171.46 • 28.5% = $48.87 • 28.5% = 48.87 • 43% = 73.72 • Total$171.46

34. When Pro-ration Includes Arrearage Rule of thumb: All current support must be honored first. • If current support cannot be honored – all pro-ration go to current – nothing will go to arrearage even though you are withholding the whole 55% or 65%. • Watch for the lump sum payment clause – it will take care of arrearage

35. Points to remember for Child Support • Is this a straight forward child support order or a medical insurance support order. • Use correct calculation for disposable • If multiple orders exist, pro-rate between them – each order gets a piece of the pie.

36. What Compensation* Is Included In Garnishable Wages? • All Salary and Wages • Commissions • Bonuses • All Compensation In The Hands Of The Employer Cash Tips are not included *Definition of wages varies from state to state

37. Illustration Of Disposable Pay For Creditor Garnishments Employee earns $500 per week Withholdings: •Disposable Pay/Earnings: FITW $75.00 Gross Pay $500.00 FICA $38.25 Taxes (133.25) State W/H $20.00 Disp. Pay $366.75 Medical Ins $55.00 (30 x $7.25) (217.50) 401(k) $50.00 $149.25 Apply limit (25%) $91.69

38. Federal Non-Tax Debt • Debt Collection Improvement Act of 1996 – AWG (Administrative Wage Garnishment) • Certify information about employee • Protection from discharge • Notice before garnishment withholding begins • Grace period after reemployment • Penalties for noncompliance

39. State Student Loan • Protection from discharge • Notice before garnishment withholding begins • Grace period after reemployment • Normal pay period • Penalties for noncompliance

40. Creditor Garnishment • Research Federal law vs. State law for protection • No discharge for one garnishment • If more than one garnishment, establish priority • Withhold and remit according to order

41. Calculation for Creditor Garnishment • Tim’s employer receives a creditor garnishment on Tim. Tim gets paid weekly $500.00.

42. Illustration Of Disposable Pay For Creditor Garnishments Employee earns $500 per week Withholdings: •Disposable Pay/Earnings: FITW $75.00 Gross Pay $500.00 FICA $38.25 Taxes (133.25) State W/H $20.00 Disp. Pay $366.75 Medical Ins $55.00 (30 x $7.25) (217.50) 401(k) $50.00$149.25 Apply limit (25%) $91.69

43. Multiple Garnishments Rule of Thumb: Once a Family/Child Support is taking 25% or more of disposable income – no other garnishment can be honored Exception: another Child Support, Tax Levies or Bankruptcy Order

44. Calculation for Multiple Garnishments • Tim’s employer now receives a state student loan garnishment in addition to the existing creditor garnishment. What do we do now?

45. Calculation for Multiple Garnishments Employee earns $500 per week Withholdings: •Disposable Pay/Earnings: FITW $75.00 Gross Pay $500.00 FICA $38.25 Taxes (133.25) State W/H $20.00 Disp. Pay $366.75 Medical Ins $55.00 (30 x $7.25) (217.50) 401(k) $50.00$149.25 Apply limit (25%) $91.69 Limit 10% $36.68

46. Calculation for Multiple Garnishments • Now Tim’s employer receives a child support order requesting $125.00 per pay cycle. How much will Tim’s employer withhold for these 3 garnishments?

47. Answer • Because the child support order is slightly above the 25% - the only order the employer will withhold on is the child support for a total of $125. The creditor and student loan cannot be honored for this check. • If, however, Tim receives more money on the next check the employer would re-calculate and possibly withhold on one or more of the other garnishments.

48. Points to remember • Prioritize first. • Calculate the limit vs. what you can actually withhold from the employee. • Remember, this can be different every pay cycle. When the employee receives a different amount on their check – you will have to re-calculate these limits and amounts. • When in doubt, contact your attorney.