Federal Contractor Selection System. The Office of Federal Contract Compliance Programs (OFCCP) has replaced the Equal Employment Data System (EEDS) methodology for selecting contractors for compliance reviews with the Federal Contractor Selection System (FCSS). Considered to be a trial system, the OFCCP plans to validate the model with a pilot sample of approximately 700 top ranked establishments. Unlike prior OFCCP systems that were developed internally by OFCCP, the FCSS is based on external research and a systematic study and analysis of data from ten years of OFCCP compliance reviews.

The OFCCP also announced that it will use a "Corporate Scheduling Announcement Letter" to advise corporate headquarters of potential federal contractor establishments that have been selected for evaluation under the OFCCP's new Federal Contractor Selection System. The announcement letter is not a scheduling letter; as establishments are selected for a review they will be provided notice of the review under established OFCCP scheduling procedures. OFCCP has posted the text of the "Corporate Scheduling Announcement Letter" to its Web site.

Partnership to promote awareness of labor laws. The U.S. Department of Labor (DOL) and the Equal Employment Advisory Council (EEAC) have signed an agreement to work together to promote greater awareness of and compliance with DOL's employment laws among EEAC members. The partnership was established through DOL's new Partnerships for Compliance Assistance Program (PCAP).

As a partner, EEAC will help DOL educate EEAC members about compliance assistance resources available to assist them in fulfilling their responsibilities under federal employment laws that DOL administers. Examples of activities on which DOL and EEAC will collaborate include the promotion of new compliance assistance tools and the distribution of compliance assistance information through Web sites and other electronic media and print publications. In addition, DOL and EEAC representatives will distribute DOL compliance assistance materials and coordinate speaking engagements at EEAC membership meetings, forums and training programs.

Employment eligibility bill. A House subcommittee approved a bill that would revise the process for verifying an individual’s eligibility for employment. The bill (H.R. 4306) would amend the Immigration and Nationality Act to authorize both handwritten and electronic signatures on attestation forms required for verifying eligibility for employment. The bill would authorize the retention of paper or electronic versions of forms. The House Judiciary Subcommittee on Immigration, Border Security and Claims voted to send the bill to the full committee on September 14.

Labor/Wage Hour     Top of Page

DOL issues proposed regulations concerning veteran's reemployment rights. The Veterans' Employment and Training Service ("VETS") of the Department of Labor (DOL) has issued proposed rules that would implement the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), as amended 20 CFR Part 1002). Congress enacted USERRA to protect the rights of persons who voluntarily or involuntarily leave employment positions to undertake military service. Comments regarding this proposal must be received by the Agency on or before November 19, 2004. See 69 FR 56266, September 20, 2004.

USERRA prohibits an employer from engaging in acts of discrimination against past and present members of the uniformed services, as well as applicants to the uniformed services. The anti-discrimination prohibition applies to both employers and potential employers. The Act prohibits any employer from discriminating or taking reprisals against any person who acts to enforce rights under the Act. The proposed regulations make clear that the prohibition on discrimination applies to any employment position, regardless of its duration.

Senate Appropriations Committee votes to block overtime rules. The Senate Appropriations Committee voted to block the Bush administration's controversial new overtime pay rules through an amendment to a bill to fund the Department of Labor (DOL) and other agencies (S. 2810). The committee approved the measure on September 15, 2004, by a 16-13 vote. The full House on September 9 voted to include a similar amendment to block the rules in its version of the bill (H.R. 5006).

The following bills introduced over the month would:

Amend the Fair Labor Standards Act to provide for an increase in the Federal minimum wage (H 5043).

Amend Title 4 of the United States Code to prohibit the double taxation of telecommuters and others who work at home (S 2785).

Benefits Top of Page

IRS issues corrections to first round of HSA guidance. The IRS has issued corrections to A-14 in Notice 2004-2, which was issued on January 12, 2004.

The last sentence in A-14 of Notice 2004-2 currently reads as follows: "After an individual has attained age 65 (the Medicare eligibility age), contributions, including catch-up contributions, cannot be made to an individual's HSA." This sentence is corrected to read as follows: "After an individual has attained age 65 and becomes enrolled in Medicare benefits, contributions, including catch-up contributions, cannot be made to an individual's HSA."

The IRS is also replacing the phrase "becomes eligible for" in the first sentence of the Example in A-14 of Notice 2004-2 with the phrase "becomes enrolled in."

IRS issues finalized HSA trust and custodial agreements. The IRS has issued final versions of two model Health Savings Account (HSA) documents, one that can be used as a trust agreement and one for use as a custodial agreement.

Earlier in June, when the draft versions of these forms were released, Acting Assistant Secretary for Tax Policy, Greg Jenner, noted that the finalized forms would be safe-harbor forms but they would not be required; rather, they would be provided "for those trustees and custodians who wish to use them."

Custodial and trust forms similar. The agreement forms are identical, except that one refers to custodians and custodial accounts and the other refers to trustees and trustee accounts. The instructions to both forms note that "an HSA is established after the form is fully executed by both the account owner and the trustee/custodian. The form can be completed at any time during the tax year." Forms 5305-B (trust agreement) and 5305-C (custodial agreement) are not filed with the IRS, but they are kept with the account holder's and trustee's/custodian's records.

Information requested on both forms includes the following:

• name and address of account holder and trustee/custodian;
• date of birth of account holder;
• amount of dollars assigned to the account;
• an identifying number that generally is a Social Security number for individuals and an EIN for an employer common fund created for HSAs.

HHS announces Medicare premium, deductibles for 2005. The Department of Health and Human Services (HHS) has announced the Medicare premium, deductible and coinsurance amounts to be paid by Medicare beneficiaries in 2005. The new premiums, approximately the same as the actuarial forecast published in March for the Medicare Trustees Report, reflect general growth in health care costs, higher payments to physicians and Medicare Advantage coordinated care health plans under the Medicare Modernization Act (MMA), and building trust fund reserves.

Part A deductibles. For Medicare Part A, which pays for inpatient hospital, skilled nursing facility, and some home health care, the deductible paid by the beneficiary when admitted as a hospital inpatient will be $912 in 2005, an increase of $36 from this year's $876 deductible. The Part A deductible is the beneficiary's only cost for up to 60 days of Medicare-covered inpatient hospital care in a benefit period. Beneficiaries must pay an additional $228 per day for days 61 through 90 in 2005, and $456 per day for hospital stays beyond the 90th day in a benefit period. For 2004, per day payment for days 61 through 90 was $219, and $438 for beyond 90 days.

For beneficiaries in skilled nursing facilities, the daily co-insurance for days 21 through 100 in a benefit period will be $114 in 2005, compared to $109.50 in 2004. Those who enroll in Medicare Advantage plans may not be affected by the Part A increase, and may receive additional benefits with different cost-sharing arrangements. All of these Part A payment changes are determined by a statutory formula.

Part B premium. The monthly premium paid by beneficiaries enrolled in Medicare Part B, which covers physician services, outpatient hospital services, certain home health services, durable medical equipment and other items, will be $78.20, an increase of $11.60 over the $66.60 premium in 2004.

Section 629 of the MMA requires raising the Part B deductible in 2005 and indexing it thereafter. In 2005, the Part B deductible will be $110. Beginning January 1, 2006, the deductible will be indexed to the increase in the average cost of Part B services for aged beneficiaries.

Payroll Top of Page

IRS grants tax relief for Hurricane Frances victims. The IRS has announced that it will provide special tax relief for taxpayers in the presidentially declared disaster areas struck by Hurricane Frances beginning September 3, 2004. The IRS has also lengthened the extension period it had earlier granted for the disaster area counties struck by Tropical Storms Bonnie and Charley (see CCH PAYROLL MANAGEMENT GUIDE Report Letter 1848, dated August 24, 2004), most of which are also in this latest disaster area. The disaster areas include the following 36 Florida counties: Alachua, Brevard, Broward, Charlotte, Citrus, Columbia, DeSoto, Dixie, Duval, Flagler, Gilchrist, Glades, Hardee, Hendry, Hernando, Highlands, Hillsborough, Indian River, Lake, Levy, Marion, Martin, Miami-Dade, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Polk, Putnam, Seminole, St. Johns, St. Lucie, Sumter and Volusia. Relief is extended to those individuals and businesses that are located or have records in these areas, as well as to relief workers.

The IRS is granting affected taxpayers extensions of time to file or pay taxes for the period that runs from September 3, 2004, through December 30, 2004. Specifically, taxpayers will have until the last day of the extension period to file tax returns or make tax payments, including estimated tax payments that would otherwise be due during this period under an original or extended due date. Interest and late-filing or late-payment penalties that would apply will be abated. Taxpayers should put the assigned disaster designation in red ink at the top of the return. Taxpayers are also given until the end of the extension period to perform other time-sensitive acts.

Information returns or employment taxes. The extension of time to file and pay tax does not apply to information returns or employment and excise tax deposits. However, the IRS may abate penalties on such deposits for reasonable cause during the Federal Deposit Waiver Period, provided payments are made by the last day of the period. Taxpayers whose specific disaster-related circumstances prevent them from making tax deposits within that period may seek penalty abatements on a case-by-case basis.

The IRS will waive fees and expedite requests for copies of previously filed returns. Taxpayers should put the disaster designation in red ink at the top of either Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return. (IRS News Release IR-2004-115, September 10, 2004.)

Pension Law Top of Page

IRS issues draft of revenue procedure implementing staggered plan amendment periods. The IRS has proposed a system of staggered remedial amendment periods in a draft revenue procedure, which was issued in the form of an appendix to IRS Announcement 2004-71. The draft procedures are consistent with the IRS’s previously stated intent to replace current procedures for employee plans.

Under the new proposed procedures, individually designed plans qualified under Code Sec. 401(a) would have a regular five-year amendment cycle. The cycles would be staggered, so that the cycles of different plans would commence on different years. The applicable cycle would generally be determined by the tax identification number of the plan sponsor. The intended effect of this system is that plan sponsors of individually designed plans will normally need to adopt remedial amendments of disqualifying provisions, and apply for new determination letters, only once every five years. Similarly, under the proposed system, pre-approved plans, i.e., master and prototype and volume submitter plans, would have a regular six-year amendment cycle.

The IRS intends to accept comments on the proposed procedure until January 3, 2005.

Guidance issued on restrictions on plan amendments by employers electing alternative deficit reduction contributions. The IRS has issued guidance in a question-and-answer format regarding the restrictions placed on plan amendments by those employers electing the alternative deficit reduction contribution under Code Sec. 412(l)(12) and ERISA Sec. 302(d)(12), added by the Pension Funding Equity Act of 2004 (P.L. 108-218, enacted April 10, 2004).

Employers electing the alternative deficit reduction contribution are generally not allowed during the period of relief to adopt "restricted amendments" that increase plan liabilities by increasing benefits, modifying the accrual of benefits, or changing the rate at which benefits vest under the plan. However, under the Pension Funding Equity Act, an exception is authorized where the plan's enrolled actuary certifies that the restricted amendment provides for an increase in annual contributions that will exceed the increase in annual charges to the funding standard account attributable to the amendment.

Notice 2004-59 provides guidance on how the plan's enrolled actuary may provide this certification. According to the guidance, the enrolled actuary must file a certification with the IRS stating that, following the adoption of the plan amendment, the plan includes terms that state that contributions to the plan, while the alternative deficit reduction contribution election is in effect, will exceed the Code Sec. 412(l)(12)(B) amount.

Social Security Top of Page

IRS releases new revenue procedure for merged, acquired employers. In a case of first impression, the U.S. Court of Appeals for the Ninth Circuit has held that posthumously conceived children of an insured wage earner are eligible to receive Child Insurance Benefits (CIB) under the Social Security Act (SSA). Gillett-Netting v. Barnhart, 371 F3d 593, (2004), CCH Unempl. Ins. Rptr ¶17,251B. In a unanimous ruling, the court held that because the children were the deceased wage earner's biological children, they were his children for purposes of the Act. And, because they were his legitimate children, as determined by Arizona law, they are considered to have been dependent under the Act and thus entitled to benefits. The case was remanded back to the SSA for an award of benefits.

The IRS has issued guidance that explains both the standard and alternate procedures for preparing and filing employment tax returns after a statutory merger, acquisition or consolidation. The new revenue procedure, IRS Rev. Proc. 2004-53 (IRB 2004-34, p. 320, Aug. 18, 2004) also explains the new Schedule D (Form 941), Report of Discrepancies Caused by Acquisition, Statutory Mergers or Consolidations. The new schedule will make it easier for employers to provide the IRS with information about employment tax discrepancies created by an acquisition, statutory merger or consolidation.

New Schedule D limited to certain employers. If an acquisition, statutory merger or consolidation creates a discrepancy between what was reported on Form W-2, Wage and Tax Statement, and what was reported to the IRS on Form 941, Employer's Quarterly Federal Tax Return, the employer can use the new Schedule D (Form 941) to explain the discrepancy, even if the employer e-filed its employment tax returns. Only employers that experience a statutory merger or consolidation, or an acquisition that satisfies the requirements for predecessor-successor status should use Schedule D (Form 941). It should be used to explain discrepancies for acquisitions, statutory mergers, or consolidations that are effective on or after January 1, 2005.

Standard procedure detailed. Generally, under the standard procedure, the acquired employer reports all of the wages and compensation it pays by filing Forms 941 and furnishing and filing Forms W-2. After an acquisition, the acquired employer may go out of business, in which case the acquired employer must file a final Form 941 for the quarter of the acquisition. If the acquired employer goes out of business, it must furnish and file Forms W-2 on an expedited basis. Additionally, the acquired employer must keep all records, including Forms W-4, Employees Withholding Allowance Certificate, and W-5, Earned Income Credit Advance Payment Certificate, for all its employees, even those who transfer employment to the acquiring employer. Employees who transfer employment to the acquiring employer must provide new Forms W-4 and W-5. The acquiring employer now becomes responsible for deducting and withholding tax from wages paid to those employees and reporting all of the wages and compensation that it pays.

Responsibilities under alternate procedure. Under the alternate procedure, the acquiring employer becomes responsible for filing and furnishing all employment-related tax forms. If the acquiring employer assumes this obligation, the Forms W-2 furnished to the acquired employees must include wages paid and taxes withheld by both the acquired and acquiring employer. However, the acquired employer must provide and file Forms W-2 on an expedited basis to any employees who are not employed by the acquiring employer. Thus, there may be differences between the Forms W-2 (Copy A) filed by the acquired employer and the amount shown on its Form 941. In this case, the acquired employer would use Schedule D to report and explain the discrepancies. Similarly, the acquiring employer should use Schedule D to report and explain discrepancies between its Forms W-2 (Copy A) and Form 941. Schedule D should be filed with the first quarter return for the year after the calendar year of the acquisition.

Schedule D will also provide notice to the IRS of a statutory merger or consolidation under Rev. Rul. 62-601962-1 CB 186.

Rev. Proc. 96-60, 1996-2 CB 399, is superseded. Rev. Rul. 62-60, 1962-1 CB 186, is amplified.

Stepmom's childcare excludable for purposes of dependency test. The U.S. Court of Appeals for the Eighth Circuit has denied surviving child's insurance benefits to a claimant by refusing to allow the value of her deceased stepmother's homemaking to be counted when determining if she provided at least one-half of the child's support. It has been longstanding administrative policy to exclude personal services when assessing the amount of provided support, unless such services are purchased, and the court deferred to this interpretation of the support requirement, although it invited congressional and administrative reexamination of the policy.

Under the Social Security Act, eligibility for surviving child's insurance benefits on the account of a deceased wage earner is predicated upon demonstrating the child's dependency upon the deceased wage earner. A child is deemed dependent upon a stepparent only if he or she was receiving at least one-half support from the deceased stepparent during the last twelve months of his or her life (SSA §202(d)(4)). The statute does not define "support" and the implementing regulation, Reg. §202.366(b), states that "support" may be in cash, goods or services. However, the SSA's internal operating manual, the Program Operations Manual System (POMS), clearly excludes "personal services" from being counted when determining support, unless such services are purchased (POMS RS 01301.030C.13).

In this case, Reutter v. Barnhart, 372 F3d 946 (2004), the deceased stepmother had earned about 37 percent of the household income in the year prior to her accidental death. However, the district court held that because the regulations recognize that a contribution to support may include in-kind services, the Administrative Law Judge erred by failing to assign a cash value to the stepmother's homemaking services. The district court determined that these services, together with her earned income, provided at least one-half of the child's support.

Agency's interpretation of its regs controls. In reversing the district court, the court of appeals, in a June 16 decision, cited the rule that an agency's interpretation of its own regulation "is controlling unless plainly erroneous or inconsistent with the regulation" and determined that the agency's policy was neither inconsistent with the regulation nor plainly erroneous. Nevertheless, the court recommended that because services such as childcare and cleaning are now frequently purchased, "making it possible to assign them a cash value," Congress and the SSA should "consider whether this regulatory scheme accurately reflects the economic realities of modern family life".

No evidence of adoption by stepparent. The court also rejected claims that the deceased stepparent had equitably adopted the child because there was no "clear, cogent, and convincing evidence" of a contract to adopt. Had the deceased wage earner been the child's adoptive parent, the dependency test would have been met because adoptive and biological parents may meet the dependency test by living with the child rather than by providing one-half support.

Constitutional challenge also fails. The claimant's constitutional challenge also failed. The court rejected an argument that the one-half support statute violated the equal protection clause of the Fifth Amendment by discriminating against the stepchildren of lower-paid women. The court found that the Social Security Act and relevant regulations classify on the basis of support rather than gender, and that there was no evidence of "invidious gender-based discrimination.”

Social Security -- Interest Rates Increase for the Fourth Quarter of 2004. IR-2004-112, Aug. 30, 2004

The Internal Revenue Service announced on August 30, 2004, that there will be a one percentage-point increase in the interest rates for the calendar quarter beginning October 1, 2004. The interest rates are as follows:

• five (5) percent for overpayments [four (4) percent in the case of a corporation];
• five (5) percent for underpayments;
• seven (7) percent for large corporate underpayments; and
• two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000.