Payroll Bulletin No. 2009-001

Payroll Bulletin

January 20, 2009

Heroes Earnings Assistance and Relief Tax Act of 2008 Enacted

On June 17, 2008, President Bush signed H.R. 6081, the Heroes Earnings Assistance and Relief Tax Act of 2008 (Heroes Act). The new law contains several employment tax provisions relating to (1) payments made by civilian employers to active military personnel and (2) employers subject to tax liability and withholding under the Federal Insurance Contributions Act (FICA).

Differential Pay Treated as Wages for Income Tax Withholding

When employees are called away from civilian employment to active military duty and their active-duty military wages are less than the wages from their civilian job, King County voluntarily pays the difference in compensation—an amount known as “differential pay.” Until December 31, 2008 differential pay was not treated as wages for federal income tax withholding purposes. The Heroes Act amends the definition of wages to include differential pay in income subject to federal income tax withholding for amounts paid by employers after December 31, 2008.

- What this means for King County employees in active service receiving supplemental pay (“differential pay”) is that the payments are now considered wages subject to income tax withholdings and will be reported on the W-2 Wage and Tax Statement Form. Therefore income taxes will be withheld at the current tax tables rates and employees’ W-4 certificate on file and in the payroll system.

Retirement Implications of the Heart Act

Beginning in January 2009, the differential wage payments (differential military pay) that individuals serving on active duty in the uniformed services for more than 30 days receive, will be reportable compensation for retirement purposes.  King County will deduct retirement contributions from the paychecks of employees who participate in the PERS, PSERS, and LEOFF retirement systems. 

Because the hourly rate of pay for the differential wage payments is different from the employee’s normal rate of pay, the Department of Retirement Systems has requested that the county calculate the associated hours by dividing the differential wage payment by the normal hourly rate of pay.

For example, if an employee’s normal salary is $4,000 per month and he normally works 160 hours per month, his normal rate of pay would be $25 per hour.   If the differential wage payment for a particular month was $1,000, we would divide the $1,000 by the hourly rate of $25 to get 40 hours.  We would report $1,000 in compensation and 40 hours to DRS for the employee. 

If the employee is a member of PERS 2 or 3, PSERS 2, or LEOFF 2 and the reported hours for a month are below 90, the member will get a partial service credit.  The member should contact the Department of Retirement Systems at 1-800-547-6657 for information about purchasing additional service credit for the period of interruptive military service.   

Flexible Spending Account Implications of the Heart Act

Beginning in January 2009, individuals serving on active duty in the uniformed services for more than 180 days will be given the opportunity to request a cash out of the unused portion of their medical flexible spending account (FSA). 

Any qualified reservist distribution that is made is subject to taxes and will be included in the gross income and wages of the employee.  Distributions will be reported on the employee’s W-2 form for the year in which the distribution is paid.

Requests must be sent to the Benefits and Retirement Operations office at 401, 5th Ave suite #240, Seattle, WA 98104.  Requests may also be sent by email to kc.benefits@kingcounty.gov.

For more information on the (HEART) Act of 2008 please visit:

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ245.110.pdf