Purpose

To provide agencies with the new Additional Pay earnings codes used to collect overpayments and to explain the new procedures associated with these codes.

Affected Employees

All employees

Effective Date(s)

Effective immediately

Background

According to Internal Revenue Code Section 1341 and Internal Revenue Service Publication 525, the recovery of wages in the current year for an overpayment occurring in a previous year cannot reduce the employee’s tax liability for the current year.  In order to comply with this regulation, the Office of the State Comptroller (OSC) has created new Additional Pay earnings codes to replace the existing earnings codes used to collect overpayments.

For further information regarding the withholding and reporting of taxes for recovered overpayments, refer to Payroll Bulletin No. 1037.

OSC Actions

New Overpayment Earnings Codes

OSC has created the following Additional Pay earnings codes to replace the existing overpayment earnings codes (OVP, X29, Y29, Z29).

Note: New Additional Pay earnings codes for the recovery of overpayments will be created at the beginning of each year for overpayments occurring in that year.

Conversion of Existing Unsatisfied Overpayment Records for Inactive Employees

In order to reduce the number of records requiring agency review, OSC will automatically end date existing unsatisfied overpayment records and create new overpayment records for employees with an employee status of Terminated, Retired or Deceased. Since it is unlikely that these overpayments will be recovered, the new record will be populated with the 2006 overpayment earnings code. If the actual overpayment occurred in a year other than 2006, agencies must correct the earnings code if additional monies will be collected.

New Control-D Report to Identify Active Employees with an Unsatisfied Overpayment Record

A new Control-D report (NHRPTMP33 – Outstanding Overpayments That Must be Converted Report) will be available to agencies on 11/24/2010 to identify employees with an employee status of Active, Leave of Absence or Leave With Pay who have an unsatisfied overpayment record. The report will include the number of pay periods necessary to satisfy the overpayment using the current Earnings amount, Goal Amount and Goal Balance.  This information will assist agencies in determining whether the overpayment will be satisfied in the final 2010 paycheck. Please see instructions in the Agency Actions section.

After processing is complete for the final 2010 paycheck (Administration checks dated 12/22/2010, Institution checks dated 12/30/2010), OSC will verify that all unsatisfied overpayment records have been converted.

Agency Actions

Conversion of Existing Unsatisfied Overpayment Records for Active Employees – Must be Completed by Administration Cutoff 12/08/2010, Institution Cutoff 12/15/2010

Agencies should take the following steps to convert existing unsatisfied overpayment records for employees with an employee status of Active, Leave of Absence or Leave with Pay.

1. Using Control-D report NHRPTMP33, identify employees whose overpayment will unlikely be satisfied in the final 2010 paycheck.
2. Determine when the original overpayment occurred based on the check date, not the earnings begin date. The overpayment may have occurred in a single year or over multiple years.

Single Year Overpayments

1. End the original overpayment record by inserting a row at the Effective Date section.  Use the last day of the preceding pay period in the Effective Date field and the End Date field.
2. Create a new overpayment record by inserting a row at the Additional Pay section.  Use the appropriate new overpayment earnings code based on the year the overpayment occurred.
3. Begin the new overpayment record by entering the first day of the pay period in the Effective Date field.
4. Transfer the values in the Earnings, Goal Amount and Goal Balance fields from the original overpayment record to the new overpayment record.

Multiple Year Overpayments

1. End the original overpayment record by inserting a row at the Effective Date section. Use the last day of the preceding pay period in the Effective Date field and the End Date field.
2. Create a new overpayment record for each year an overpayment occurred by inserting rows at the Additional Pay section. Use the appropriate new overpayment earnings codes.
3. Begin each new overpayment record by entering the first day of the pay period in the Effective Date field.
4. Determine the original overpayment amount for each year.
5. The Goal Amount field on each new overpayment record should reflect the total overpayment amount for the year corresponding to the record’s overpayment earnings code.
6. The Goal Balance field from the original overpayment record may be transferred to the Goal Balance field of a single new overpayment record or divided between multiple new overpayment records. The employee receives the greatest benefit if the total Goal Balance is transferred to the oldest overpayment record.
   Caution:Do not apply a Goal Balance that is more than the Goal Amount on that particular overpayment record.
7. Determine the total Earnings amount to be collected each pay period (usually 10% of gross).
   1. The Earnings amount may be applied to a single new overpayment record or divided between multiple new overpayment records. Agencies should make this determination in a manner that allows the State to maximize Social Security and Medicare tax refunds. Based on the statute of limitations (refer to Internal Revenue Code Section 6501), the State is allowed to request a refund of Social Security and Medicare taxes up to three years, three months, fifteen days after the end of the tax year. Applying the Earnings amount as follows provides the employee and the State the greatest benefit because of the favorable tax calculation.
      1. If the employee has an overpayment record for the current year, apply the total Earnings amount to that record first.
      2. If the employee also has an overpayment record(s) for a prior year(s), the Earnings amount should next be applied to the overpayment record for the oldest year that falls within the statute of limitations.
      3. If the employee only has overpayment records for prior years, the Earnings amount should first be applied to the overpayment record for the oldest year that falls within the statute of limitations. Example: An overpayment for the current year (Q10) should be collected first, then Q07, Q08, Q09 and Q06. The overpayment record for Q06 is collected last because it is beyond the time frame that a refund can be collected.
   2. Once an overpayment record has been satisfied, the Earnings amount must be transferred to another overpayment record(s). To assist agencies, a new Control-D report (NHRP701) will be created and available on Fridays to identify employees with multiple unsatisfied overpayment records.
      Note: The system has been modified to allow agencies to enter zero (0) in the Earnings field.

Establishing New Overpayment Records

1. Create an overpayment record(s) by inserting a row(s) at the Additional Pay section. Use the appropriate new overpayment earnings code(s) based on the year(s) the overpayment occurred.
2. Enter the first day of the pay period in the Effective Date field.
3. Enter the total overpayment amount for the year corresponding to the record’s overpayment earnings code in the Goal Amount field.
4. Determine the total Earnings amount to be collected each pay period (usually 10% of gross).

   Example:  An overpayment for the current year (Q10) should be collected first, then Q07, Q08, Q09 and Q06. The overpayment record using Q06 is collected last because it is beyond the time frame that a refund can be collected.

   1. If the employee has no other unsatisfied overpayment record and this overpayment occurred in a single year, the Earnings amount should reflect the total amount to be collected each pay period.
   2. If the employee has no other unsatisfied overpayment record and this overpayment occurred over multiple years OR if the employee has another unsatisfied overpayment record(s), the Earnings amount may be applied to a single overpayment record or divided between multiple overpayment records.  Agencies should make this determination in a manner that allows the State to maximize Social Security and Medicare tax refunds.  Based on the statute of limitations (refer to Internal Revenue Code Section 6501), the State is allowed to request a refund of Social Security and Medicare taxes up to three years, three months, fifteen days after the end of the tax year.  Applying the Earnings amount as follows provides the employee and the State the greatest benefit because of the favorable tax calculation.
      1. If the employee has an overpayment record for the current year, apply the total Earnings amount to that record first. If the employee has an existing unsatisfied overpayment record for a prior year, the Earnings amount on the existing unsatisfied overpayment record can be changed to zero and the Earnings amount on the current year’s overpayment can be populated with the total Earnings amount.
      2. If the employee also has an overpayment record(s) for a prior year(s), the Earnings amount should next be applied to the overpayment record for the oldest year that falls within the statute of limitations.
      3. If the employee only has overpayment records for prior years, the Earnings amount should first be applied to the overpayment record for the oldest year that falls within the statute of limitations.
   3. If the employee has multiple unsatisfied overpayment records, once an overpayment record has been satisfied, the Earnings amount must be transferred to another overpayment record(s). To assist agencies, a new Control-D report (NHRP701) will be provided to identify employees with multiple unsatisfied overpayment records.

Rehires, Concurrent Hires and Transfers

When rehiring, concurrently hiring or transferring an employee, agencies should determine if the employee has a previous unsatisfied overpayment.

Questions

Questions may be directed to the Executive or Non-Executive Payroll Audit mailbox.