Payroll Guide Newsletter, 12/07/2001, Volume 60, No. 25
Legal Order Primer
For the payroll practitioner, America's ultimate debt collector, garnishing an employee's wages is as inevitable as death and taxes. We receive some valuable support from software developers and service bureaus, which eases much of the administrative burden, yet we are ultimately responsible for compliance with the orders. That responsibility demands that we have a firm grasp of at least the basics of wage garnishment and know where to find legal advice for the more complex issues.
To start, a payroll practitioner must understand the difference between disposable earnings and take home pay . Disposable earnings are the amount left after "deductions required by law" have been withheld, which is generally limited to state and federal taxes as well as certain state-mandated retirement funds. Withholding for child support, creditor garnishments, student loan garnishments, and administrative wage garnishments is based on an employee's disposable income, so understanding that term is essential.
Contributions to §401(k) plans, direct deposit to credit unions, and UNICEF contributions are most definitely not required by law. Even a court-ordered garnishment is not a "deduction required by law." In contrast, a federal tax levy is based on an employee's take home pay (net income) — the amount left after all deductions have been made. Bankruptcy orders are not subject to any limit, and usually require an employer to withhold a fixed amount each pay period. Variety is the name of the game when it comes to complying with wage garnishments. Different types of orders are subject to different wage deduction limitations, and the formulas for discovering those limits vary as well. Compliance is rooted in the Five Rs:
Read the Orders
Anyone frustrated by the lack of conformity among wage garnishments should take comfort in the fact that the withholding requirements are usually (though not always) written on the orders themselves. Reading the orders is particularly important for multistate employers given the fact that the states are able to set their own withholding limits, remittance deadlines, etc. Often the orders include a point of contact in case the employer has questions regarding the garnishment.
Research the Employee's Pay
Upon receipt of a withholding order, payroll needs to determine whether the employee is already subject to a withholding order. If so, priority among the orders must be established and payroll must decide whether to withhold for both orders, stop the existing order in favor of the latest order, or continue with the existing order.
In general, bankruptcy orders have priority over any other withholding. After that, federal tax levies and child support orders have priority, generally depending on which is served first. Then creditor garnishments, student loan garnishments, and administrative wage garnishments compete based on the order in which they are served.
Resolve Questions With the Issuer
Although all of the necessary information should be included on the order itself, the payroll department may still have questions for whoever issued the order. Because each of these orders has a remittance deadline, it is important to resolve any problems as soon as possible so that the payment is not delayed.
Notice above that bankruptcy generally has priority, and that the priority between a levy and a support order is generally dependent upon which arrives first. Often, child support is given priority regardless, but the employer must be sure to verify that in advance. Also, since a federal tax levy is based on take-home pay, any existing orders are already factored in, allowing them de facto priority. If you don't have questions regarding these garnishments, you may simply not know what to ask.
Reduce Risk Through Internal Controls
At the very least, a payroll department should have someone who is able to review withholding orders to verify their authenticity and spot potential problems. Payroll departments should also develop spreadsheets to help keep track of the withholdings and check calculations. Over withholding on a garnishment can be as bad as under withholding, so the department needs to know how long the withholding is expected to run.
Respond in a Timely Manner
Every order will have a remittance deadline, and employers may be penalized for failing to remit payments on time (or for failing to respond that payment cannot be made). But payroll practitioners should also be aware that many states require employers to answer questions regarding a worker's employment status, salary, and health benefits prior to issuing a withholding order. Failing to respond to these may also result in a civil fine.
Federal tax levies include a worksheet that the employee must fill out to determine the amount that will be exempt from the levy. If the employee doesn't return it to the employer within three days, the exempt amount is based on a default filing status that results in the lowest possible exemption. Letting the employee know how their pay will be impacted may speed up the process.
The most complicated response likely comes in the new medical support orders, which include a section that must be forwarded to the employer's benefits administrator, who must determine whether the underlying order meets with ERISA obligations before payroll can begin withholding insurance premiums. Once the order is delivered, the employer is not expected to begin withholding for about 40 days, which may be just enough time to forget about it if those internal controls aren't in place.
