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Presidential Action Raises Questions about Payroll Tax Deferral & Unemployment Extension

August 2020

On August 8, President Trump issued an Executive Order and three memoranda with the stated hope of reinvigorating the American economy despite Congress’s failure to strike a deal to relieve the economic impact of COVID-19. Two of the memoranda have potential impact on employers and employees alike.

Payroll Taxes                  

One of the memoranda directs the Treasury Department to defer payment of employee-side Social Security payroll taxes for employees making under $4,000 (pre-tax) per bi-weekly pay period (or below roughly $104,000 annually). Importantly, employers would still be required to pay their portion of these payroll taxes. If implemented, the deferral is slated to begin for any wages paid on or after September 1, 2020, and last through the end of this year. It is important to note that the Memorandum discusses a payroll tax deferral, not a tax cut. This means eligible employees could bring home more of their paycheck in the last quarter of 2020, but unless future Congressional or Executive action is taken, those deferred tax payments must be repaid in the future.

Technically, this is the employee’s tax burden, but reporting as of August 28 indicates the Trump Administration will be seeking to require employers pay the deferred tax bill. We recommend advising employees of this technical option to defer payroll tax and the lack of certainty about when, how, and who will be expected to true up on those taxes in 2021.

As of August 28, the Treasury Department and Internal Revenue Service had not issued guidance on or regarding the President’s directive to defer payroll taxes. Absent that guidance, it is quite difficult to know how this deferral plan might work in practice and what impact it may have on your operation and your employees. Among the as yet unanswered questions:

  • Whether employees must defer their share of payroll taxes;
  • Whether employers must obtain employee consent before deferring payroll taxes;
  • What employers should do if an employee makes no election on deferral;
  • Who will repay the deferred payroll taxes if they are not forgiven;
  • What happens if an employee declines to defer payroll taxes and they are subsequently forgiven.

In the absence of additional guidance, we do not recommend that employers take any action to defer employee payroll taxes as there remains significant uncertainty about employer obligations.

You can read this memorandum here

Unemployment Benefits

President Trump also signed a memorandum regarding unemployment benefits, allocating $400 per week in unemployment benefits. The memorandum indicates that the federal government will contribute $300 of the $400 payment, with states expected to cover the remaining $100 of weekly benefit. Guidance issued by the Department of Labor on August 12, 2020 (available here) provides that “if states wish to provide [the] maximum $400 benefit” they can do so using money allocated under the CARES Act, from the federal Coronavirus Relief Fund, or they may “count funds that are already used to provide regular state” unemployment benefits. This means that states are not required to tack on an additional $100 and may simply provide their normal unemployment benefit in addition to the $300 benefit provided in the Memorandum. The payment is less than the $600 weekly Federal Pandemic Unemployment Compensation provided until late July through the CARES Act. This new benefit would last until either $19 billion in benefits are paid or the week of unemployment ending no later than December 27, 2020, whichever occurs first.

The President seeks to use FEMA funds to cover the payments. With these orders, he has directed $44 billion from the Disaster Relief Fund, at least $25 billion of which will be set aside to support ongoing disaster response and recovery efforts and potential 2020 major disaster costs.

Under the CARES Act, anyone eligible for even $1 of state unemployment benefits became entitled to the $600 federal benefit. Under the President’s Memorandum, however, an individual would need to be entitled to at least $100 in state benefits or benefits under the CARES Act to receive the extra $300 federal benefit. The Memorandum provides the federal benefit retroactive reaching back to the week of unemployment ending August 1, 2020 (the week the CARES benefit expired without extension).

If implemented, this may require states to craft a new or modified unemployment system to administer, because the funds are not allocated or granted by Congress. This administrative complication could cause significant delays in how quickly unemployed (or underemployed) individuals receive benefits. Additionally, were Congress to pass legislation providing a federal unemployment benefit, it would terminate the new benefit plan set forth in this memorandum.

The memorandum is available here.

Potential Legal Challenges

Some contend that President Trump’s memoranda may not be legal, and thus may not ever go into effect. The Constitution gives Congress the power of the purse. This means that the Legislative Branch decides how and when federal money is spent, unless it delegates that authority to the Executive Branch (the President). As such, the argument goes, the President cannot dictate how money will be spent without Congressional authorization. Thus, the likely basis of any challenge to the President’s actions will be that the President has circumvented the power of Congress. Legal challenges of this type could hold up, or even derail, President Trump’s efforts.

However, President Trump is seeking to use funds from the Federal Emergency Management Agency (FEMA) to fund his unemployment benefits program. The text of the Memorandum notes available Department of Homeland Security's Disaster Relief Fund in excess of $70 billion in emergency assistance funding. President Trump plans to direct FEMA to draw on those funds to help provide the proposed weekly unemployment benefits. The President does have unilateral power to make a disaster declaration, when a governor requests it, making victims of the disaster eligible to receive federal money to help with the aftermath. This power will likely be the basis for the Trump Administration’s defense against legal challenges to the memoranda.

The President’s declaration that states will pay for $100/week of the unemployment benefits poses another Constitutional hurdle. Only Congress has the power to levy taxes, to which this mandatory payment will be likened. In fact, the Department of Labor’s guidance makes clear that the state contribution is voluntary. This may lead to states refusing to implement or pay the $100 per week per eligible unemployment or underemployed worker, ultimately reducing the relief to $300, rather than $400.

The legal underpinnings of these executive actions are unclear, but an important matter to monitor as an employer. On August 18, Governor Whitmer requested FEMA funds for unemployment through the State’s Unemployment Insurance Agency. On August 21, FEMA approved the State’s request for funds. Governor Whitmer stated that claimants receiving at least $100 in state benefits or receiving Pandemic Unemployment Assistance under the CARES Act will be eligible for the additional $300 and will not have to take any action to receive the additional benefits. It remains to be seen when claimants will begin to receive the additional benefits.

The experts at FSBR will continue to monitor the development of these important executive actions and provide updates as to their effectiveness when further information becomes available. 

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