California New Mandatory Paid Sick Leave

The implementation of the new rules regarding California Sick Leave, which, as of July 1, 2015, will apply to all employees, whether part-time or full-time.

Essentially, there are two (2) different methodologies: (i) the “accrual method”; and (ii) the “allotment method”.

The accrual method basically allows each employee to earn one (1) hour of sick leave, for every thirty (30) hours worked, which applies to both part-time and full-time employees. Although the accrual of sick leave occurs upon employment, it does not vest until after the first ninety (90) days of employment. This method requires a substantial amount of administration, since the law actually allows up to forty-eight (48) hours of sick leave annually, but allows the employer to cap sick leave at twenty-four (24) hours per year. Under this method, there is an ability to roll over unused sick leave annually, of up to forty-eight (48) hours.

The other methodology, the “allotment method”, allows all employees, from July 1, 2015 (or ninety-one (91) days after employment for new employees), to have twenty-four (24) hours annually. (This applies to an employee who joins the company in July, which employee would have twenty-four (24) hours for the remainder of the year.) Like the accrual method, it requires an employee to have worked for the company for at least ninety (90) days. However, the twenty-four (24) hours of sick leave vests immediately and can be used at any time by the employee during the calendar year. There is no rollover from year-to-year.

Each employee, at the beginning of each calendar year, would start with a clean slate; i.e., another twenty-four (24) hours, i.e., a new “piggy bank” of sick leave.

The “piggy bank” is noted on each employee’s pay stub, and shows a reduction, in the event that there is the usage of sick leave. There is no need to set up a separate fund, since, if an employee takes sick leave, they would just receive their regular pay, as if they worked.

Please also note that there is no obligation of an employer, upon termination or under any circumstances, to “payout” monetary compensation, equal to any accrued and untaken sick leave.

After weighing the possibilities, and the pros and cons of the “accrual method” versus the “allotment method”, it is preferable to go with the “allotment method”. From an administrative perspective, it is a much cleaner methodology, and there is no downside to the company. Again, no funds are set aside and each employee has the right, whether part-time or full-time, to accrue up to twenty-four (24) hours. (Please note that the sick leave hours are applied on an hour-by-hour basis. For example, if an employee works a four (4) hours shift, and takes sick leave on that day, then they would use four (4) hours of accrued sick leave.)

IRA One-Rollover-Per-Year Rule

Beginning January 1, 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own (Announcement 2014-15). You can, however, continue to make as many trustee-to-trustee transfers between IRAs as you want. You can also make as many rollovers from traditional IRAs to Roth IRAs (“conversions”) as you want.

Current law

You don’t have to include in your gross income any amount distributed to you from a traditional IRA if you deposit the amount into another (or the same) traditional IRA within 60 days (Internal Revenue Code Section 408(d)(3)). Under Internal Revenue Code Section 408(d)(3)(B), only one IRA-to-IRA rollover can be made in any 12-month period. Proposed Treasury Regulation Section 1.408-4(b)(4)(ii), published in 1981, and IRS Publication 590, Individual Retirement Arrangements (IRAs) interpret this limitation as applying on an IRA-by-IRA basis, meaning a rollover from one IRA to another would not affect a rollover involving other IRAs of the same individual.

U.S. Tax Court decision

The Tax Court recently held that you can’t make a non-taxable rollover from one IRA to another if you have already made a rollover from any of your IRAs in the preceding 1-year period (Bobrow v. Commissioner, T.C. Memo. 2014-21). Following the holding in this decision means:

• you must include in gross income any previously untaxed amounts distributed from an IRA if you made an IRA-to-IRA rollover in the preceding 12 months, and

• you may be subject to the 10% early withdrawal tax on the amount you include in gross income.

Additionally, if you pay these amounts into another (or the same) IRA, they may be:

• excess contributions, and

• taxed at 6% per year as long as they remain in the IRA.

Prospective application

The IRS intends to follow the Tax Court’s interpretation of Internal Revenue Code Section 408(d)(3)(B). However, to give IRA owners and trustees time to adjust, the IRS will delay implementation until January 1, 2015, at the earliest. Proposed Treasury Regulation Section 1.408-4(b)(4)(ii) will be withdrawn and Publication 590 will be revised to reflect the new interpretation.

Only rollovers will be affected

This change won’t affect your ability to transfer funds from one IRA trustee directly to another, because this type of transfer isn’t a rollover (Revenue Ruling 78-406, 1978-2 C.B. 157). The one-rollover-per-year rule of Internal Revenue Code Section 408(d)(3)(B) applies only to rollovers.

Guidance on Annual IRA Rollover Limit

The IRS issued guidance on applying the one-IRA-rollover-per-year rule on tax-free rollovers that was announced in March of this year and that will go into effect in 2015. Transition relief is provided for IRA distributions made in 2015 from rollovers occurring in 2014. If an IRA distribution is received in 2014 and properly rolled over (normally within 60 days) into another IRA owned by the same individual, it will not be included in the one-IRA-rollover-per-year-limit beginning in 2015 if the 2015 distribution is from a different IRA that neither made nor received the 2014 distribution. This will give IRA owners a fresh start when applying the limit in 2015. A rollover from a traditional IRA to a Roth IRA (i.e., a conversion) is not subject to the one-rollover-per-year limit, nor are rollovers from qualified plans or trustee-to-trustee transfers. Announcement 2014-32 , 2014-48; IR 2014-107 .

Mid-size employers may be eligible for recently announced transition relief from the Patient Protection and Affordable Care Act’s employer shared responsibility requirements. Final regulations issued by the IRS in late January include transition relief for mid-size employers for 2015. Mid-size employers for this relief are defined generally as businesses employing at least 50 but fewer than 100 full-time employees. Exceptions and complicated measurement rules continue to apply. The final regulations also describe the treatment of seasonal employees, volunteer workers, student employees, the calculation of the employer shared responsibility payment, and much more.

Delayed Implementation

As enacted in 2010, the Affordable Care Act required applicable large employers (ALEs) to make an assessable payment if any full-time employee is certified to receive a health insurance premium tax credit or cost-sharing reduction, and either:

• The employer does not offer to its full-time employees and their dependents the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan; or
• The employer offers its full-time employees and their dependents the opportunity to enroll in MEC under an employer-sponsored plan, but the coverage is either unaffordable or does not provide minimum value.

The employer shared responsibility requirement was scheduled to apply January 1, 2014, the same effective date for the individual mandate and the health insurance premium assistance tax credit. In July 2013, the Obama administration announced that employer shared responsibility requirements would not apply for 2014.

The final regulations make further changes. Under the final regulations, the employer mandate will generally apply to large employers (employers with 100 or more employees) starting in 2015 and to qualified mid-size employers (employers with 50 to 99 employees) starting in 2016. Employers that employ fewer than 50 full-time employees (including full-time equivalents (FTEs)) are not subject to the employer mandate.

Caution. Determining the number of employees for purposes of the employer shared responsibility requirement is a complex calculation for many employers that is beyond the scope of this article. The Affordable Care Act and the final regulations describe how to calculate full-time employees (including FTEs) and also which employees are excluded from that calculation. Please contact our office for details about the Affordable Care Act and your business.

Transition Relief for Mid-size Employers

Qualified employers are not subject to the employer mandate until 2016 if they satisfy certain conditions. Among other requirements, the employer must employ on average at least 50 full-time employees (including FTEs) but fewer than 100 full-time employees (including FTEs) on business days during 2014.  Additionally, the final regulations impose broad maintenance of previously offered health coverage requirements.

The final regulations do not allow an employer to reduce the size of its workforce or the overall hours of service of its employees in order to satisfy the workforce size condition and thus be eligible for the transition relief. A reduction in workforce size or overall hours of service for bona fide business reasons, however, will not be considered to have been made in order to satisfy the workforce size condition. This provision is certainly one that is expected to generate many questions. The IRS may provide additional guidance and/or clarification in 2014 and our office will keep you posted of developments.

Additionally, the final regulations also modify the extent of required coverage. Proposed regulations required that the employer provide coverage to 95 percent of its full-time employees. The final regulations delay the 95 percent requirement until 2016 for larger employers. For 2015, larger employers need only provide coverage to 70 percent of their full-time employees.

Special Types of Employees

Since the passage of the Affordable Care Act, questions have arisen about the treatment of certain types of employees. These include seasonal employees, short-term employees, volunteer workers, and student employees. The final regulations clarify some of the issues surrounding these employees.

Many industries employ seasonal workers. The final regulations describe who may qualify as a seasonal worker. The retail industry, which employs many workers for the holiday season, asked the IRS to specify which events or periods of time that would be treated as holiday seasons. The final regulations, however, do not indicate specific holidays or the length of any holiday season as these will differ for different employers, the IRS explained.

For volunteer workers, such as volunteer firefighters and first responders, the final regulations provide that an individual’s hours of service do not include hours worked as a “bona fide volunteer.” This definition, the IRS explained, encompasses any volunteer who is an employee of a government entity or a Code Sec. 501(c)(3) organization whose compensation is limited to reimbursement of certain expenses or other forms of compensation.

Many colleges, universities, and vocational students are engaged in federal and state work-study programs. The final regulations provide that hours of service for purposes of the employer mandate do not include hours of service performed by students in federal or other governmental work-study programs. The IRS noted the potential for abuse by labeling individuals who receive compensation as “interns” to avoid the employer mandate. Therefore, the IRS did not adopt a special rule for student employees working as interns for an outside employer, and the general rules apply.

The final regulations also describe how the employer mandate may or may not apply to adjunct faculty, members of religious orders, airline industry employees, employees who must work “on-call” hours, short-term employees, and others. Special rules may apply to these employees in some cases.

Waiting Period Limitation

The Affordable Care Act generally requires that an employee (or dependent) cannot wait more than 90 days before employer-provided coverage becomes effective. The IRS issued final regulations in February on the 90-day waiting period limitation. The IRS also issued proposed regulations generally allowing employers to require new employees to complete a reasonable orientation period. The proposed regulations set forth one month as the maximum length of any orientation period.