Retention Date: Dec 24, 2024
A. Purpose
This Emergency Message (EM) provides temporary instructions for calculating cafeteria plan deductions for wages paid from September 1, 2020 through December 31, 2020. Technicians must screen for COVID-related changes to employee benefit plans and take additional steps to verify cafeteria plans for employers participating in the OASDI FICA tax deferral.
B. Background
Authorized under Section 125 of the Internal Revenue Code, cafeteria plans are a type of employee benefit plan in which employees can choose cafeteria-style from a menu of one or more pre-tax benefits, or opt for regular wage payments. Because of the COVID public health emergency in 2020, the Internal Revenue Service (IRS) allowed certain employee benefit plan changes, some of which may result in changes to workers’ cafeteria plan deductions. Qualifying changes must be made by December 31, 2020, and may be retroactive.
Cafeteria plan considerations may also be affected by the August 8, 2020 Presidential Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. This memorandum allowed employers the option to defer withholding, deposit, and payment of the employees’ share (6.2%) of Social Security tax for wages paid from September 1, 2020 through December 31, 2020. This applied only to eligible employees who earned less than $4,000 per bi-weekly pay period (or an equivalent amount on an alternative pay structure). Note that the deferral did not affect the 1.45% Medicare tax.
The deferred OASDI FICA taxes must be paid in 2021, as the memorandum does not forgive the taxes. The Consolidated Appropriations Act, 2021 (CAA) extended the timeframe in which the deferred OASDI FICA taxes must be paid to December 31, 2021.
Some employers in both the public and private sectors opted to participate in the payroll tax holiday. Technicians must take additional steps to process affected wages with cafeteria plan deductions paid from September 1, 2020 through December 31, 2020.
C. Policy
We exclude cafeteria plan deductions from gross wages when making SSI earned income determinations. Technicians verify cafeteria plan deductions using cafeteria plan precedents or by calculating countable wages using pay slip information.
Given the COVID-related IRS flexibilities on cafeteria plan changes, technicians must take extra care when processing wage evidence involving cafeteria plan precedents and screen for plan changes.
For wages paid during the September-December 2020 payroll tax holiday, the worksheet in SI 00820.102G will not yield an accurate countable wage if the employer deferred OASDI FICA taxes. Technicians must follow the temporary instructions below and use a modified worksheet to determine cafeteria plan deductions for affected individuals.
D. Temporary Instructions
1. 2020 IRS flexibilities for cafeteria plans
Take extra care when handling 2020 wage reports and verifications. Screen for potential changes to workers’ cafeteria plans. When discussing cafeteria plans during initial claims and post entitlement events, ask workers if they made any COVID-related changes to their employee benefit plans. The most common changes involve employer-sponsored health coverage or flexible spending accounts.
Take extra care when using existing cafeteria plan precedents per SI 00820.102D. If it appears the precedent is no longer accurate due to COVID-related plan changes and an updated precedent is needed to verify cafeteria plans, follow instructions in SI 00820.102D to update the precedent.
When using pay slips to verify cafeteria plan deductions, process COVID-related changes in cafeteria plans according to the following:
Situation | Required Action |
Wages with cafeteria plan deductions that are not subject to the payroll tax holiday:
· wage payments made prior to September 1, 2020; and
· wage payments made on or after September 1, 2020 in which the employer was still deducting Social Security taxes.
|
· Follow normal policy in SI 00820.102 and SI 00820.130 to document cafeteria plan and wage evidence.
· Use the worksheet in SI 00820.102G when calculating countable income using pay slip evidence.
|
Wages with cafeteria plan deductions that are subject to the payroll tax holiday:
· wages paid from September 1, 2020 through December 31, 2020;
· Social Security OASDI tax withholding is $0.00; and
· Medicare tax withholding continues.
| Follow the instructions below in section D.2 of this EM to calculate countable income and document the claim file. |
2. Payroll Tax Holiday Procedures: Wages paid from September 1, 2020 through December 31, 2020
Follow the steps below if available evidence indicates the presence of a cafeteria plan. These instructions apply to existing cafeteria plans and plans that changed due to COVID. Common indicators of cafeteria plans include:
- items in deductions field of pay slips labeled “Sec 125,” “FLEX,” “CHOICES,” or “Cafe plan;”
- pre-tax deductions shown on the pay slips;
- pre-tax or cafeteria plan participation shown on a wage verification company report; and
- SSI Monthly Wage Verification system or SSI Claims system Wages page shows an entry in the “Other Deductions Amount” field.
STEP | ACTION |
| Step 1 | Determine whether the individual elected to make any changes to cafeteria plan deductions, given the pandemic-related IRS flexibilities.
Develop changes according to Section D.1 of this EM.
Example: Some employers allowed employees to add or change their health coverage, or make changes to their flexible spending account (FSA) allotments. |
| Step 2 | For wages paid from September 1, 2020 through December 31, 2020, when using pay slips that contain FICA tax information and list cafeteria plan deductions:
Determine whether BOTH Social Security (6.2%) and Medicare (1.45%) taxes were deducted. The Social Security tax may appear on wage evidence as OASDI, FICA, Social Security, etc. Medicare taxes are usually accounted for separately, and may appear as “FICA Med” or “Medicare.”
If BOTH taxes continue to be deducted during the September through December 2020 period, follow normal policy in SI 00820.102 and SI 00820.130 to calculate cafeteria plan deductions and document wage evidence. Even if plan changes occurred due to COVID, the worksheet in SI 00820.102G will still calculate the countable wage as long as both FICA taxes continue to be deducted.
STOP
If the Social Security OASDI portion of the FICA tax is not being withheld and only Medicare tax is deducted,
Proceed to step 3. |
| Step 3 | Use the modified cafeteria plan deduction worksheet attached below to calculate countable wages for any pay slip showing zero Social Security tax deductions.
IMPORTANT: The modified worksheet includes different figures for the tax amounts and multiplier. It is only to be used for wages affected by the September through December 2020 payroll tax holiday. Do not use the modified worksheet to calculate unaffected wages, (i.e., if someone’s employer has decided not to participate in the OASDI FICA deferral, follow normal policy in SI 00820.102 and SI 00820.130).
Post the countable wage amounts and deductions in the SSI Monthly Wage Verification system or to the applicable Wages page in the SSI Claims system, document wage evidence according to SI 00820.130, and issue a wage report receipt.
STOP
If you are not able to calculate countable wages using the modified worksheet,
Proceed to step 4. |
| Step 4 | Contact the employer to verify cafeteria plan deductions by phone or via the SSA-L4201. Note: Existing cafeteria plan precedents may no longer be accurate due to COVID-related plan changes. See instructions in SI 00820.102D for developing and updating precedents.
If employer contact is successful, document the file and retain associated evidence.
STOP
If employer contact is not successful, Proceed to step 5. |
| Step 5 | Accept the individual’s allegation on a signed person statement or DROC and assess, calculate, and post cafeteria plan deductions. Record your determination on the file documentation notes section of the Wages page or on DROC.
STOP |
3. Example Calculation: Change to Cafeteria Plan Deductions
Ms. Brown has been working for her employer for several years and recently submitted pay slips to SSA for August and September 2020. When inputting the paystubs into the SSI Monthly Wage Verification system, the Claims Specialist (CS) notices that we that we have deducted cafeteria plan benefits based on Ms. Brown’s pay slips in the past. In reviewing Ms. Brown’s pay slips, the CS notices some recent changes to the deduction amounts and confirms with Ms. Brown that she made a mid-year COVID-related change to her insurance coverage and flexible spending account election. The CS then considers whether the cafeteria plan deductions have changed.
Relevant information from the August pay slip showing changed deductions:
Pay date 8/7/2020 |
| Gross Pay | 1089.59 |
| Pre-tax Deductions |  |
| *CarePlus PPO Basic | 54.74 |
| *CarePlus Dental Low | 5.73 |
| *Vista Vision | 3.77 |
| Ret Comp | 76.27 |
| SS Taxes | |
| Fed OASDI EE | 63.57 |
| Fed Med EE | 14.87 |
Using the worksheet in SI 00820.102G, the CS performs the following calculations to determine countable wages after cafeteria plan deductions:
- Gross wages of $1089.59 x SS/Medicare tax of 0.0765= expected SS/Medicare tax of $83.35.
- Adding the Fed OASDI EE and Fed Med EE fields on the pay slip shows the actual SS/Medicare tax withheld as $78.44.
- Since the SS/Medicare tax actually withheld is less than the expected amount of $83.35, and the CS is not aware of any other reason for the discrepancy, the CS concludes that a cafeteria plan is still involved.
- The actual SS/Medicare tax withheld of $78.44 x worksheet multiplier of 13.071 is $1025.29. Because the pay slip reflects a different figure, $1089.59, we consider which deductions may be cafeteria plan benefits.
- NOTE: Due to rounding in the calculation, this numbers may be off by a few cents.
- To identify which deductions are qualifying cafeteria plan benefits, the CS calculates the difference between the gross and countable wage ($1089.59-$1025.29), here $64.30. Then, the CS considers which deductions would account for that difference. Here, they are *CarePlus PPO Basic ($54.74), *CarePlus Dental Low ($5.73), and *Vista Vision ($3.77). The Ret Comp deduction of $76.27 is NOT included in the cafeteria plan.
- Since the CS is most accurately able to post the cafeteria plan using pay slip information, she posts a cafeteria plan deduction of $64.24 ($54.74 + $5.73 + $3.77) to the SSI Monthly Wage Verification program, resulting in a countable wage of $1025.35 for this pay slip.
4. Example Calculation: FICA Deferral Involved: Special Processing Applies
Continued review of Ms. Brown’s pay slips show additional changes beginning on the second paystub in September 2020. The CS notes an additional deduction and notices a zero amount in the Fed OASDI EE field. Ms. Brown confirms her employer participated in the payroll tax holiday. Because there is new deduction on the pay slip, the CS must determine whether the cafeteria plan deductions have changed.
Relevant information from the pay slip showing changed deductions and changed FICA:
Pay date 9/18/2020 |
| Gross Pay | 1089.59 |
| Pre-tax Deductions | |
| *CarePlus PPO Fam | 54.74 |
| *CarePlus Dental Low | 5.73 |
| *Vista Vision | 3.77 |
| Ret Comp | 76.27 |
| SS Taxes | |
| Fed OASDI EE | 0.00 |
| Fed Med EE | 14.37 |
The lack of Social Security taxes withheld on the pay slip indicates that this employer is participating in the payroll tax holiday and that we must use the special processing instructions in this EM when calculating cafeteria plan deductions.
Using the revised worksheet provided in step 3 of section D.1 of this EM, the CS performs the following calculations to determine countable wages after cafeteria plan deductions:
- Gross wages of $1089.59 x Medicare tax of 0.0145 expected SS/Medicare tax of $15.79.
- The Fed Med EE field on the pay slip shows the actual Medicare tax withheld as $14.37.
- Because the Medicare tax actually withheld is less than what we expected, and the CS is not aware of any other reason for the discrepancy, the CS determines that a cafeteria plan is still involved.
- The actual Medicare tax withheld of $14.37 x worksheet multiplier of 68.9655 is $991.03, which is the calculated countable wages for this pay slip.
- NOTE: Due to rounding in the calculation, this numbers may be off by a few cents.
- To identify which deductions are qualifying cafeteria plan benefits, the CS calculates the difference between the gross and countable wage ($1089.59 - $991.03) to get $98.56. Then, the CS considers which deductions would account for that difference. Here, they are CarePlus PPO Basic ($54.74), *CarePlus Dental Low ($5.73), and *Vista Vision ($3.77) and *FSA Cont ($34.38). The Ret Comp deduction of $76.27 is NOT included in the cafeteria plan.
- Since the CS is most accurately able to post the cafeteria plan using pay slip information, she posts a cafeteria plan deduction of $98.62 ($54.74 + $5.73 + $3.77 + $34.38) to the SSI Monthly Wage Verification program, yielding a countable wage of $990.97 for this pay slip.
5. Payroll Tax Holiday Procedures: Wages paid between January 1, 2021 and December 31, 2021
Employers who participated in the payroll tax holiday must withhold and pay the deferred taxes from January 1, 2021 through December 31, 2021. (As part of the CAA, Congress extended the period in which the deferred 2020 FICA taxes must be paid to December 31, 2021, to reduce the short-term impact on workers’ wages amid the pandemic.)
When using pay slips to calculate countable wages:
- To calculate cafeteria plans and document wage evidence for 2021 wages that were subject to the 2020 OASDI FICA deferral, follow normal policy in SI 00820.102 and SI 00820.130.
- IMPORTANT: 2021 pay slips affected by the deferral may account for FICA tax recovery in different ways. Some pay slips may include a field showing payment of deferred taxes, others may not. Do not include payments of deferred FICA taxes when calculating countable wages.
- If the pay slip does not differentiate regular FICA withholding from the extra tax deducted to pay the 2020 deferred taxes, or you are not otherwise able to calculate the countable wage, develop other evidence to document the cafeteria plan following SI 00820.102D.
Direct all program–related and technical questions to your RO support staff. RO support staff may refer questions or problems to their Central Office contacts.
E. References
MS 08114.027 Wages
SI 00820.102 Cafeteria Benefit Plans
SI 00820.130 Evidence of Wages or Termination of Wages