Dispute Over Reservist Pay Between DOL and IRS
An article in my BNA Bulletin to Management subscription (sorry, no link) identified an interesting, yet unfortunate issue relating to pay that military reservists receive from their companies. Seems that when companies make supplemental payments to reservists to makeup the difference between their reservist pay and full salary, problems occur. Here's the rub - the IRS wants the supplemental pay reported on a 1099, treating the employees as terminated for tax purposes. The Uniformed Services Employment and Reemployment Rights Act (USERRA), administered by the Department of Labor, essentially operates in a way to treat the employee as though he/she is "on a furlough or leave of absence." So, the problem from an employer perspective obviously goes beyond the issue of which form and whether to withhold tax. According to the article, by treating the employee as terminated, the supplemental pay is not pensionable earnings. An employer who continues to make 401k or pension contributions pursuant to USERRA's benefits protection provisions runs the risk of disqualifying their plans. This is definitely one of those instances where you should call a qualified benefits attorney....
The article provides this link to the IRS Website which provides guidance on how to handle monies paid to the reservists. Essentially, they say that FICA and income taxes should not be withheld and that the payments are not subject to FUTA. Here's the link.
