Employers and Child Support: We've Come a Long Way, But Challenges Still Remain
Part of a series | Wage Garnishment Insights
Copyright National Child Support Engagement Association. Reprinted with permission.
Employers are pivotal in the child support collection process across the United States. The federal Office of Child Support Services (OCSS) reports that in FY2023, the child support program collected a staggering $29.6 billion in support payments, with 73% of this amount collected via employers withholding income from an employee's paycheck. This statistic underscores employers' significant contribution to ensuring families' financial stability.
Given the substantial number of child support payments remitted by employers, it's evident that the employer community plays a crucial role in supporting families. However, this role comes with its fair share of challenges. Apart from sending payments, employers are also tasked with numerous other responsibilities to comply with state child support regulations. These include new hire reporting, medical support processing and "lump sum" reporting, which can be daunting for payroll professionals who are already juggling other payroll obligations.
New hire reporting – taking it to the next level
Due to The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996, an employer's obligation to report newly hired employees is a standard process, and frequently, it may be automated within an employer payroll system. However, many states now require additional data beyond the standard W-4 details, requiring employers to design their systems to adhere to specific state requirements. Each data element needed within new-hire reporting requires employers to do additional programming to comply. This can be a challenge, especially if an employer reports new hires in many states. To help keep the process streamlined, employers encourage states to stick with the basic data elements if possible.
Also, new hire reporting no longer applies only to W-2 employees. In the past few years, the focus has been locating non-employees working as independent contractors for companies. Nineteen states have passed legislation requiring companies to report newly hired independent contractors based on state guidelines, thresholds or contract classifications.
An independent contractor's information can be in the employer's accounts payable or vendor-payment systems, not stored in the payroll systems. Since an accounts payable system generally does not interact with a payroll system, employers often need to merge the individual's information from these systems or report each separately. As a result, the reporting of independent contractors may be a manual process for the company.
To help create standardization for reporting newly hired independent contractors, the National Council of Child Support Directors (NCCSD) Employer Collaboration Committee developed the Model Act on Independent Contractor Reporting, which states can leverage if they decide to pursue legislation.
The Model Act creates standardization for payors and states, resulting in the location and reporting of a larger number of child support obligors and the issuance of outstanding child support income withholding orders (IWO). States interested in leveraging the model legislation can access the Model Act on the NCCSD website.
Income withholding – we like electronic
States and the OCSS have created efficiencies to help with child support order processing. Specifically, electronic income withholding (e-IWO) allows employers to receive child support orders electronically in several formats. Employers can choose to receive e-IWOs via XML (which generally requires a more extensive development project), spreadsheet or PDF. Recently, OCSS created an option for an employer to sign in to their portal and download the IWO.
No matter how the employer elects to receive orders, the goal is to provide options that meet the employer's needs and capabilities. In most states, only orders issued directly from the state child support agency can be sent via the e-IWO process. The electronic process does not include support orders issued by a court, attorney or private individual. The orders issued by these senders often have missing information, do not instruct payments to go to the State Disbursement Unit (SDU), or include additional instructions that require the employer to follow up with the issuer. These variances or missing details are challenging for employers since they require extra steps and outreach, potentially delaying the processing.
Orders issued for an independent contractor doing business with a company can also pose challenges. OCSS has been clear about the treatment of independent contractors, saying, "If you receive an IWO for a non-employee, and you make payments to that person, you must withhold child support from those payments." This requires the employer to check their accounts payable or vendor-payment systems, so they do not incorrectly return the IWO based on their belief that they do not employ the person.
If the order doesn't identify that it's for an independent contractor, the employer may incorrectly return the order, indicating that the person listed is not an employee. Including an indicator on the IWO that the person is an independent contractor/non-employee would help to ensure proper and timely processing. Employers have suggested this as a future enhancement to the IWO form for the next revision cycle.
Also, since the Consumer Protection Act applies to employees, each state is responsible for its requirements and limits related to child support withholding for independent contractors. It is helpful when the state clearly specifies or publishes the amount to withhold for any nonemployee or independent contractor. Otherwise, the employer must contact the issuing agency each time an order is received for a nonemployee to determine the withholding amount, limits and processing guidelines.
Medical support
Most employers understand that medical support is a form of child support that provides either cash medical support or health insurance. When medical support is ordered as part of an IWO, the employer withholds cash medical support and the support payment during the regular payroll cycle.
However, when an agency sends an employer a that orders health insurance coverage for an employee's child(ren), the employer may have to involve departments, other than or in addition to the payroll department, to properly process the NMSM and enroll the child(ren) in health benefits. NMSNs require different actions than a typical IWO, and the employer needs to properly prioritize and calculate the medical support premium within the applicable state law's prioritization and maximum withholding regulations.
Also, while the NMSN is issued on a standard form, some states require additional forms and details to be completed and returned, requiring extra effort on the employer's part.
Additionally, employers must notify the applicable child support agency when an employee terminates employment, and there is an IWO in place. The employer must similarly report the termination for the medical support order. The terminations for the IWO and the NMSN are considered separate, resulting in employers having to send two separate notices to the same issuing agency.
To improve medical support efficiency, employers would like to see more state agencies leverage electronic medical support orders. Currently, only a few states currently support this. Since e-IWO has proven to be a successful and efficient way to receive orders, employers encourage states to implement electronic medical support orders, eliminating the need for paper containing personal and confidential details.
Lump sum reporting
"One-time lump sum" (i.e., bonus, commission, severance, cash service award, etc.) reporting continues to be an area where state requirements and short turnarounds on processing lump sum payrolls may add to employers' challenges. Earlier reporting of potential lump sum payouts allows the child support agency more time to notify the employer about a withholding requirement. As best practice, employers are encouraged to report the payments to state agencies as early as possible and employers appreciate timely responses back from states.
The timeframe in which agencies respond varies by state, and the statutorily required timeframe that an employer must wait for a response also varies. Some states require employers to wait a specified number of days after the planned payout date for the agency to respond. This holding timeframe adds to the complexity of the process for employers. Employers are required to understand each state's requirements and ensure compliance based on that state's regulations.
States looking to pass lump sum mandates can leverage "Model Legislation on Managing Lump-Sum Payments for Child Support," created through the NCCSD Employer Collaboration Committee. Similar to the Model Act on Independent Contractor Reporting, this Model Legislation offers best practices and efficiencies for states looking to implement legislation related to the lump-sum process. The model legislation addresses consistency in employer reporting, state response times and more, based on state and employer feedback.
Knowledge and awareness are key
Benjamin Franklin stated, "An investment in knowledge pays the best interest." State child support agencies partnering with employers to bring awareness and education to these processes will help employers stay compliant, enable the agency to receive successful information, and ultimately ensure that the families receive the support they need.
Employers often are unaware of the specific requirements necessary to complete some of the tasks above. While it is understood that this is the employer's responsibility, awareness and education can help employers and payroll professionals responsible for executing the tasks. The goal is compliance with processes, avoiding liabilities, and ultimately positively contributing to child support being sent to the families.
Employer webinars, conferences and easy-to-follow instructions on websites help employers better understand the processes. Additionally, the model legislation created by the NCCSD Employer Collaboration Workgroup for Independent Contractor Reporting and Lump Sum Reporting is a great example of a group coming together to develop best practices and standardization to help all parties involved.
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