UIPL 01-85 Attachment

EXPLANATION AND INTERPRETATION OF AMENDMENTS
Made by Public Law 98-369

1.  Section 1073.  Tips Treated as Wages for Purposes of Federal Unemployment Tax

Text of Amendment to Section 3306:

"(s) TIPS TREATED AS WAGES. -- For purposes of this chapter, the term 'wages' includes tips which are--

"(1) received while performing services which constitute employment, and

"(2) included in a written statement furnished to the employer pursuant to section 6053(a)."

Under previous law, only a portion of tip income was considered as FUTA wages, and in general as State UI-subject wages.  By expanding the coverage of FUTA wages, it is anticipated that all State UI laws (where the change in FUTA definition is not automatically applied to State coverage) will be amended to include all reported tip income as taxable wages and qualifying wages.  This will provide improved UI protection to employees depending on tips for a part of their usual remuneration.

Section 1073 of P.L. 98-369 amends Section 3306 of FUTA (relating to the definition of terms for the purposes of FUTA) to include all tip income (including charged tips) which is reported by the employee to the employer as "wages" for FUTA purposes.  Under Section 6053 of the IRC and implementing rules, employees are required to furnish a written statement to the employer reporting all tips received if they total $20 or more for a month whether they are received directly from a person other than the employer or are paid over to the employee by the employer.  This includes amounts designated as tips by a customer who uses a credit card to pay the bill.

Prior to this amendment, the regulations pertaining to FUTA excluded from "wages" tips and gratuities paid directly to an employee by a customer of an employer and not accounted for by the employee to the employer.  The mere reporting of tips by an employee to the employer for purposes of the FICA and income tax withholding (under Section 6053) did not mean that the tips are "accounted for" as under FUTA regulations.  Tips reported in writing to an employer were wages for FUTA purposes to the extent that they were taken into account by the employer in determining the employee's compensation under the Federal minimum wage law.

Thus, under the law and regulations in effect prior to the amendment, tip income was considered wages for purpose of FUTA only to the extent that (a) it was paid directly to the employee by the patron; (b) it was reported by the employee to the employer, and (c) it was used by the employer to satisfy the minimum wage rate applicable to the employer under the Fair Labor Standards Act (FLSA).

The effect of the amendment is to bring all tip income reported by the employee to the employer under the definition of wages for purposes of FUTA. The written report of tip income of $20 or more a month provided by the employee to the employer will, by virtue of this amendment, constitute "accounting for" within the meaning of the Internal Revenue Code of 1954.

It will be the responsibility of the Internal Revenue Service to interpret and apply this change in the definition of wages for purposes of FUTA.

Action Required.  States which wish to obtain the maximum tax offset permissible for their employers may need to amend the definition of "wages" in their laws to the extent that they are less comprehensive than the Federal law.

Effective Date.  This provision is generally effective on January 1, 1986.   However, in the case of any State whose legislature (1) did not meet in a regular session which begins during 1984 and after the date of enactment, and (2) did not meet in a session which began before the date of enactment and remained in session for at least 25 calendar days after the date of enactment, the provision is effective on January 1, 1987.

2.  Section 1074.  Exclusion of Certain Services from the Federal Unemployment Tax Act

Section 1074 of the Deficit Reduction Act of 1984, P.L. 98-369, extends the permitted exclusion from coverage under Section 3306(c)(18) of FUTA, for calendar years 1983 and 1984, of "...service described in Section 3121(b)(20) of the Internal Revenue Code of 1954."

Section 3121(b)(20) of the IRC excludes from employment covered by the Federal Insurance Contributions Act (FICA):

"(20)  service performed by an individual on a boat engaged in catching fish or other forms of aquatic animal life under an arrangement with the owner or operator of such boat pursuant to which --

"(A)  such individual does not receive any cash remuneration (other than as provided in subparagraph (B)),

"(B) such individual receives a share of the boat's (or the boats' in the case of a fishing operation involving more than one boat) catch of fish or other forms of aquatic animal life or a share of the proceeds from the sale of such catch, and

"(C) the amount of such individual's share depends on the amount of the boat's (or the boats' in the case of a fishing operation involving more than one boat) catch of fish or other forms of aquatic animal life.

"but only if the operating crew of such boat (or each boat from which the individual receives a share in the case of a fishing operation involving more than one boat) is normally made up of fewer than 10 individuals."

The Internal Revenue Service will have the responsibility for interpreting and applying this provision.

Action Required.  Although this is not a Federal law requirement for conformity, States that want to amend their laws to coincide with this change in FUTA should seek an appropriate amendment at any legislative session scheduled this year in view of the limited time remaining in calendar year 1984.  However, under the requirements of Section 303(a)(5) of the Social Security Act and Section 3304(a)(4) of the FUTA, no cash refund of contribution is allowable with respect to any retroactive exclusion from coverage.

3.  Section 1075.  Taxation of Unemployment Compensation Not to Apply to Compensation Paid for Weeks of Unemployment Ending Before December 1, 1978

Section 112 of the Revenue Act of 1978, P.L. 95-600, provided for the taxation of unemployment compensation paid after 1978 in taxable years ending after 1978.  Thus, benefits paid in 1979 and subsequent years were subject to income tax even if such payments were attributable to weeks of unemployment before January 1, 1979.

Section 1075(a) of P.L. 98-369 amended the Revenue Act of 1978 to exclude from taxation unemployment compensation attributable to weeks of unemployment ending before December 1, 1978, which were paid after calendar year 1978.

In allowing recovery of unemployment compensation for this time period.  Congress waived the applicable statute of limitations under certain circumstances described in Section 1075(b).  If a tax credit or refund permitted under Section 1075(a) is barred as of the date of enactment of the Deficit Reduction Act of 1984 (Act) or at any time during the one year period beginning on the date of the enactment of the Act by operation of law or rule of law (including res judicata), the tax credit or refund permitted under Section 1075(a) may nevertheless be allowed if the claim therefor is filed before the close of such one year period.

These changes could result in requests from claimants for detailed information on unemployment compensation received during 1979 or later which were attributable to periods of unemployment ending prior to December 1, 1978.

The Internal Revenue Service will be responsible for administering and interpreting these provisions.

4.  Section 2651.  Income and Eligibility Verification Procedures

Section 2651(a) of the Deficit Reduction Act of 1984, P.L. 98-369, amends Part A of Title XI of the Social Security Act by adding a new Section 1137 - "Income and Eligibility Verification System."  Section 2651(d) amends Section 303 of the Social Security Act by adding a new subsection (f).

I.  In General.  The purpose of Section 1137 is to develop in all States a new income verification program to provide for a comprehensive exchange of information among State programs that are Federal-assisted, and to provide access by these agencies to information on income of individuals available from the Internal Revenue Service and the Social Security Administration.

The law provides for several effective dates:

(1)  All States must have in effect by April 1, 1985, most elements of a system for exchange of information among State agencies administering programs for AFDC, Medicaid, Food Stamps, UI, and State programs under Titles I, X, XIV and XVI the Social Security Act.  These elements include the requirement of obtaining social security account numbers and use of the numbers in the records system for storage and retrieval purposes (Section 1137(a)(1); requesting and using wage, income and other information available from the various State agencies, the Social Security Administration, and the Internal Revenue Service (Section 1137(a)(2); adhering to standardized formats and procedures (Section 1137(a)(4)), putting adequate safeguards into effect (Sections 1137(a)(5) and 1137(c)); giving claimants sufficient notice (Section 1137(a)(6)); and implementing a system for recovery of costs (Section 1137(a)(7)).

EXCEPTION.  In the case of the UI program, the Secretary of Labor may by waiver grant a delay in this effective date if the State submits a plan describing a good faith effort to comply with the requirements of Section 1137(a) through (i) through but not beyond September 30, 1986.  However, the Secretary may not grant a delay in the effective date of Section 1137(c), which requires an information verification system for the protection of claimants with respect to information obtained under Section 6103(1)(7)(B) of the Internal Revenue Code of 1954.  Details with respect to delay in implementation of the exchange of information requirement and waiver procedure will be made available in a future issuance.

(2)  Title III of the Social Security Act is amended to provide that: "The State agency charged with the administration of the State law shall provide that information shall be requested and exchanged for purposes of income and eligibility verification in accordance with a State system which meets the requirements of Section 1137 of this Act."  Effective date as in (1) above.  The State must comply with this amendment in order to receive grants for administrative costs under Title III.

Compliance with this new Title III requirement may take any of the following forms:

    (a)  Certification of State UI laws or other State law, identifying appropriate citation;

    (b)  Certification of State executive order or general regulation, or state UI regulation, identifying appropriate citation;

    (c)  Certification of State inter-agency agreement in which UI agency is participant.

(3)  All States must require employers, effective September 30, 1988, to make quarterly wage reports to a State agency (which may be the agency administering the State's UI law).

EXCEPTION.  A State may apply to the Secretary of Labor for waiver of this requirement.  To be approved, such application must provide information on the basis of which the Secretary determines that the State has in effect an alternative system which is as effective and timely for purposes of providing employment related income and eligibility data for income and eligibility verification for the purposes described in Section 1137(a)(2).

This requirement does not mandate that a State collect this information through its UI program, nor is any State required to change its UI law to comply with the amendment.  However, any State which now uses quarterly wage reports in its UI program meets this requirement, as does any State which has a separate system of quarterly wage reporting by employers that is accessible by all State agencies specified in Section 1137(b).

II.  Discussion of Specific Items

(1)  Funding of Costs of Implementation

    (a)  Where States use the UI program to operate a wage reporting system, its costs are reimbursable as a UI administrative cost under Title III.  In such cases, other agencies requesting wage information from the SESA are required to make appropriate payment for the costs to the UI system involved in providing the information.

    (b)  Where a State elects to establish a wage record system outside the UI program, the costs of the wage reporting system would be appropriately shared among all the programs required by P.L. 98-369 to use the information it provides and among any other programs for which the State uses the system.  Section 1137(a)(7).

(2)  Use of Social Security Account Number.  The Act specifies that the State shall require, as a condition for eligibility for benefits under listed programs, that each applicant furnish his or her social security account number and that the State agencies use social security account numbers in program administration.  Section 1137(a)(1).

(3)  Use of Data.  UI, IRS, and SSA wage, income and other information shall be used to verify eligibility for and the amount of benefits.  Section 1137(a)(2).

(4)  Standardized Formats.  State agencies must use standardized formats and procedures established by the Secretary of HHS in consultation with the Secretary of Agriculture to exchange information with each other for establishing or verifying eligibility or benefit amounts.  Section 1137(a)(4).  However, any State UI procedure which makes necessary information available need not be changed.

(5)  Protection Against Unauthorized Disclosure.  The Secretary of Treasury will promulgate regulations that establish safeguards and restrictions with respect to information released pursuant to Section 6103(1) of the Internal Revenue Code of 1954, and the Secretaries of HHS, Labor and Agriculture will establish regulations with respect to programs which they administer.  Information must be adequately protected against unauthorized disclosure.  Section 1137(a)(5).

(6)  Claimant Notification.  Applicants for benefits must be notified at the time of application and periodically thereafter that information available through the system will be requested and utilized.  Section 1137(a)(6).

(7)  Reimbursement.  Accounting systems must be used which assure that programs providing data receive appropriate reimbursement from programs utilizing the data for costs incurred in providing the data.  Section 1137(a)(7).

(8)  Due Process.  Agencies maynot terminate, deny, suspend or reduce benefits until appropriate steps are taken to independently verify information relating to amount of the asset or income, whether an individual actually has access to such asset or income for his own use and the period when the individual actually had the asset or income.  Individuals must be informed of the agency's findings and be given opportunity to contest the findings in the same manner that applies to other information and findings relating to eligibility factors under the program.  Section 1137(c).

(9)  Availability of Information.  The Commissioner of Social Security shall, on written request, disclose information on net earnings from self employment wages, and payments of retirement income.  The IRS on written request will disclose current return information with respect to unearned income.  Section 2651(k).

Action Required.  For States with UI wage record systems in existence, there is no need to change State law, except for such changes as may be necessary to authorize obtaining from and exchanging with other agencies the required information and to comply with regulations issued by the Secretaries of Treasury, Labor, HHS, and Agriculture.  For other States, either a change in the State UI law requiring quarterly wage records or adoption of an alternative system of wage records approved by the Secretary of Labor is required.

III.  Reference Material

(1)  Provisions of Section 1137 Applicable to the UI Program.  See following two pages from the "Congressional Record" of June 22, 1984, and excerpts from the Conference Report and the Senate Report.

IV.  Paperwork Reduction Act

Pursuant to the requirements of the Paperwork Reduction Act of 1980, the requirements of the Income and Eligibility Verification System will be submitted to the Office of Management and Budget (OMB) for approval.  The provision of this UIPL will not be effective until OMB approval is obtained and a control number is assigned.

(2)  Excerpt from JOINT EXPLANATORY STATEMENT (Report of the House-Senate Conference Committee).

"Senate Amendment.  The Senate amendment requires, rather than allows, the Secretary of Treasury to disclose unearned income return information upon request of the specified agencies.  Disclosure can only be made upon request of the specified agencies.  Disclosure can only be made to agencies that meet the requirements to safeguard this confidential information against disclosure.  The Senate amendment contains a provision requiring verification of the unearned income information prior to taking action to reduce or terminate benefits that are similar to the House bill.  In addition, the individual must be given notice of the proposed reduction or termination, and an opportunity to refute the information.  Further, all applicants for and recipients of benefits under any program must be notified at the time of application, and periodically thereafter, that information verifying their assets and income will be requested and used.

"The Senate amendment replaces existing statutory provisions relating to use (for purposes of AFDC) of return and other wage information and use of social security numbers, by adding a new section to the Social Security Act requiring States to have in effect an income and eligibility verification system for use in administering the AFDC, Medicaid, unemployment compensation, and food stamp programs (and the adult assistance programs in the territories).  State agencies must request and make use of (1) wage and other income information available under the Internal Revenue Code; and (2) quarterly wage information.  Each State is required to maintain a quarterly wage reporting system, although not necessarily through its unemployment compensation system.

"The income and eligibility system requires use of standardized data formats to facilitate exchange of information, for the purpose of identifying and reducing ineligibility and incorrect payments.  The requirement for standardized formats is intended to assure easy exchange of information by progress (sic-should read programs) within States, and to facilitate the exchange of information among States.  This requirement does not require the use by States of identical systems, but only that each State must be able to provide certain essential eligibility data in a format which can be used by the agencies and jurisdictions with which data exchanges are made.  Information exchanged by State agencies is protected against unauthorized disclosure for other purposes.

"Conference Agreement.  The conference agreement follows the Senate amendment with the following modifications: (1) the effective date of the requirement that States maintain a system of quarterly wage reporting as part of the income and eligibility verification system is delayed until September 30, 1988; (2) the provision regarding verification of IRS unearned income information is broadened to prohibit denial or suspension of benefits until the agency has taken steps to independently verify the information; (3) the amendment includes a provision describing the steps required to independently verify the information; and (4) that only unearned income from the current information file may be disclosed by the IRS.

"Because the unemployment compensation program is part of the income verification system, the amendment requires IRS disclosure of wage and unearned income return information to this program.  However, the managers expect that the data will be supplied to one agency in each State, and will be shared only with agencies which find it useful.  The Conference agreement provides for the State to target the information to those uses most likely to be productive and cost-effective."

(3)  Excerpt from REPORT OF THE SENATE COMMITTEE ON FINANCE (relating to the Senate Amendment) -- as adopted in P.L. 98-369.

"The quarterly wage reporting requirement does not mandate a State to collect data through its unemployment insurance program, nor would any State be required to change its UI system to comply with the amendment.  Further, no State now collecting quarterly wage information through the UI system, or by any other means, would be required to alter its existing wage reporting format or the extent of its coverage so long as an existing system is reasonably comprehensive.

"States which do not have quarterly wage reporting systems would have the option of developing such systems either within their unemployment compensation programs or elsewhere in State government. If States use the unemployment program to operate the wage reporting system, its cost would be reimbursable as an unemployment administrative expense on the same basis and under the same conditions as now apply to those 40 States which currently use wage reporting for the unemployment program.

"(However, the amendment requires that other programs utilizing the data make appropriate payments for the costs involved in providing information.)  If a State elects to establish a wage reporting system in a manner which would not, under existing rules, qualify for reimbursement as an unemployment insurance program cost, the costs of the wage reporting system would be appropriately shared among all those programs required by the amendment to use the information it provides and among any other programs for which the State uses the system."