Constructive Receipt County of Ventura Auditor-Controllers Office December,
Constructive Receipt County of Ventura Auditor-Controllers Office December, 2016 1 Constructive Receipt Doctrine Under Treasury Regulations 1.451-2(a): income, although not actually reduced to a taxpayers possession, is constructively received by him in the taxable year during which the income is: Credited to the taxpayers account; Set apart for the taxpayer; Made available so that the taxpayer may draw upon the income at any time; or Made available so that the taxpayer could have drawn upon it during the tax year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayers control of the incomes receipt is subject to substantial limitations or restrictions. 2 Constructive Receipt Doctrine The Doctrine of Constructive Receipt is a taxation principle that taxes income before that income is actually received. You need not have
possession of it. Gross income under a taxpayers control before it is actually received must be included by the taxpayer in gross income, unless the actual receipt is subject to significant constraints. Example: Interest credited to the taxpayers savings account on 12/31/16 is reportable as income in 2016, even though it may not be used until 2017. Therefore, even if the income is not actually received, the fact that the person could have had it if he/she had simply requested it, means that, for all intents and purposes, that person did have it. 3 Constructive Receipt Explained As a general rule, compensation is included in an employees gross income in the year the amounts are received, whether actually received or constructively received. Actually received: On or about the Friday of each biweekly pay period, an employee receives a paper check or direct deposit for wages earned in the preceding work period. A paper check may be presented to a financial institution for an exchange in cash; or A direct deposit at a financial institution of amounts received is available for immediate withdrawal of funds in the form of cash.
4 Constructive Receipt Explained As a general rule, compensation is included in an employees gross income in the year the amounts are received, whether actually received or constructively received. Constructively received: Accrued hours are credited to an employees account or otherwise made available so that the employee can draw upon it at any time during the taxable year in the form of compensation. An employee has the discretion to convert unused leave hours to cash, without substantial limitations or restrictions. The employee is constructively in receipt of income as soon as the right to receive cash in exchange for hours becomes fixed. 5 Tax Implications Memoranda of Agreement with employee unions (MOAs) and the Management, Confidential Clerical and Other Unrepresented Employees Resolution (Management Resolution) give some employees the option to redeem (i.e., cash-out) specified amounts of accrued leave subject to certain conditions.
If these conditions are determined not to be substantial limitations and restrictions on employee control over the cash-out of leave hours, employees who had the option to cash out leave hours would be subject to taxation under the constructive receipt rule even when they had not, in actuality, cashed out leave. 6 Tax Implications Even though the employee has received no cash compensation, the County is required by law to include the cash value of what the employee could have received in the employees taxable wage base as of December 31 of the tax year. If the amount is not reported as W-2 wages until used, the County and employee will be subject to penalties for failure to properly withhold: Federal and State income taxes; Federal Insurance and Contributions Act (FICA- Social Security/Medicare) taxes; and Federal and State Unemployment taxes. 7 Other Implications Amounts reported as W2 wages may be treated as wages again when they are paid out. Further, a true up of withholding amounts may be
necessary. Amounts reported as W2 wages may be compensation earnable for retirement reporting and may be reportable to VCERA when earned, as opposed to when paid. Statistics: 2015 Actuals Eligible in 2017 Employees Purchased Amount Employees Eligible Amount 2,303 $11,676,778 5,760 $30,232,284 8
Examples: Fines and Penalties for Violations Offense Fine/Penalty Late tax deposits 2% - 25% penalty Failure to file a return 5% - 25% penalty of what the return should have shown Failure to withhold required income or FICA taxes Up to 100% of taxes owed Willfully evading federal employment taxes Felony, fines, imprisonment up to 5 years Willfully failing to collect or pay federal employment taxes
Felony, fines, imprisonment Willfully fail to file a return Misdemeanor; step financial penalty, imprisonment up to 1 year Willfully submitting a false claim Fines, imprisonment up to 1 year Person responsible for withholding, collecting, accounting for, and paying federal employment taxes, and willfully sign or submit a false document Felony; fines, imprisonment IRS Trust Fund Recovery Penalty is 100% of the unpaid tax, plus interest 9 Remedy: Cash In Lieu of Leave Program To avoid this risk, the County has established a leave cash-out program modeled on plans approved by the Internal Revenue Service in private letter rulings. The Countys program contains two key limitations on the option to
cash-out leave: 1. The employee must make an irrevocable election to cash-out leave in the calendar year (2016) preceding the year in which the leave is cashed out (2017); and 2. Only leave accrued during calendar year 2017 may be cashed out, and only after earned. Accrued hours carried over from a prior calendar year are not eligible for cash in lieu of leave. Applicable only to unions that adopt program changes 10 Remedy: Cash in Lieu of Leave Program Exceptions Under certain CBAs, an employee may cash out leave hours carried over from a prior calendar year if and only if the following conditions are met: At the time the employee makes an irrevocable election to receive cash in lieu of leave, the employee must submit a notice of intent to the County Executive Office- Human Resources (CEO-HR) to retire in the calendar year in which the leave will be cashed out. At the time the employee makes a request for cash out payments, the employee must submit an irrevocable notice of resignation/retirement to the CEO-HR on a specified date in the calendar year during which the payment is to be made. Sunset provisions: Tier I: January 1, 2018
Tier II: December 31, 2020 Refer to your CBA for additional provisions governing the Program. 11 Timeline December 2016 December 6 and 13 - Board letters and amendments approved by BOS - Unions ratify amendments - Election forms mailed December 13-15 Open House Forums December 13: Department of Airports December 14: BOS Hearing Room December 15: VCMC Large Auditorium December 31 Election forms due to ACO 12
Timeline Calendar Year 2017 January 1 - December 16 - Cash out period for leave accrued in calendar year 2017 or for Retiree elections November 1 December 29 - Open enrollment for 2018 Cash in Lieu of Leave Elections December - Final payouts for 2017 elections by ACO - Constructive Receipt included on W2; applicable taxes withheld 13 Election Process Covered Employees Employees covered by the Management Resolution or Collectively Bargained Agreements (CBA) that adopt this policy: Employee completes Auditor-Controllers Office (ACO) form: Payroll
Services Election/ Deduction Authorization Cash in Lieu of Leave Hours 2017 making an irrevocable election to cash out leave in the calendar year preceding the year in which the leave is to be cashed out. Forms are available from the ACO internet website located at: http://www.ventura.org/auditor-controller/payroll-information Employees anticipating retirement within the exception period window submit forms to CEO-HR. Employee returns the ACO Election form to the ACO by close of business December 30, 2016. Signed electronic (e.g. PDF) copies may be sent to [email protected] followed by the original with a wet signature. 14 Election Process Covered Employees Employees who do not make an election will not be eligible for cash in lieu of leave hours for calendar year 2017. Exception: Financial hardship provision
Employees expecting to become eligible during calendar year 2017 due to a CBA cumulative service hours requirement may elect to purchase accrued leave. Complete and submit the form and return to ACO by December 30, 2016. Complete the form by indicating the number of election hours you intend to purchase in calendar year 2017. Sign and date the form. Return the form to ACO by December 30, 2016. All forms will be date stamped when received by ACO Administration. Forms received after this date will not be honored. Incomplete forms will be returned to the employee for correction. The employee is responsible for obtaining, completing and submitting request forms by the statutory deadlines imposed. The ACO is not responsible for lost, destroyed, or misdirected forms. 15 Purchase Process Employee completes and submits ACO Payroll Services Request for Payment of Cash in Lieu of Leave Hours 2017 form. Forms are available from the ACO internet website located at:
http://www.ventura.org/auditor-controller/payroll-i nformation ACO will confirm qualifications and process request, if applicable. ACO will notify employee should disqualification occur. 16 Election Process Non-Covered Employees Employees not covered by the Management Resolution or Collectively Bargained Agreements (CBA) that adopt this policy: Employee election forms received from non-covered union members will not be honored. Existing collectively bargained agreement provisions for purchasing leave will be honored. However, for employees eligible to receive cash in lieu of leave in calendar year 2017, who choose not to receive cash in lieu of leave and, instead, carry over accrued leave, the following will occur: ACO will calculate the amount the employee could have received, to include any CBA gross-up provisions, and will add that amount to the employees 2017 IRS Form W-2. ACO will withhold and report all employee and employer applicable taxes and retirement contributions, potentially resulting in a Net Pay Distribution balance of -0- on the final pay check received for calendar year 2017. The IRS regulations contain a three-year claw back and additional employee tax
consequences may apply. 17 Sample: Non-Covered Employee Regular Check (SEIU Legacy) Earnings: Educational Incentive Flex Credit *Regular Earnings Total Earnings: Deductions: Medical Dental Vision Life1X 401K FID457 LOAN *Ret EE COL Before Tax *Ret EE Reg Before Tax SEIU Dues Total Deductions: Buydown Only (SEIU Legacy) Earnings:
* Ret EE COL Before Tax * Ret EE Reg Before Tax Total Deductions: $ (12.00) $ (63.19) $ (175.16) $ (250.35) Taxes: * MEDI * FICA * Federal Withholding * SDI * State Withholding Total Deductions: $ (34.84) $ (148.98) $ (105.12) $ (21.62) $ (60.62) $ (371.18) Educational Incentive Flex Credit * Regular Earnings Total Earnings:
Deductions: Medical Dental Vision Life1X 401K FID457 LOAN * Ret EE COL Before Tax * Ret EE Reg Before Tax SEIU Dues Total Deductions: $ 60.07 $ 297.00 $ 2,402.73 $ 2,759.80 excludes buydown earnings $ (352.95) $ (19.40) $ (4.60) $ (3.09)
Net pay: $ 1,582.84 * MEDI * FICA * Federal Withholding * SDI * State Withholding $ (69.39) includes buydown taxes $ (296.71) includes buydown taxes $ (552.51) includes buydown taxes $ (43.07) includes buydown taxes $ (269.41) includes buydown taxes $ (1,231.09) Net pay: $ 453.27 18 QUESTIONS 19
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