The Paychex Top 13 in ’13: Potential Regulatory Changes Every Small Business Needs to Know About in the New Year

Fiscal Cliff - The unprecedented convergence of several major events at the year-end — known by the term “fiscal cliff” – will impact virtually all businesses and have broader economic implications for the nation unless an agreement is reached. The current payroll tax holiday would expire, as would the lower “Bush-era” federal income tax rates (a particularly difficult scenario for the many small businesses set up as “pass-through” entities, wherein business income is taxed at their owner’s personal rate). Mandated federal spending cuts will also have direct or indirect effects on many companies. Capital gains and estate tax rates will increase, dividends will be taxed as ordinary income, and several popular current tax credits will end.

Tax Gap - The IRS continues to aggressively look at ways to close the estimated $450 billion gap that exists between taxes expected to be collected and the actual tax owed — the large majority of which is believed to come from underreporting, which includes understating income and overstating deductions. IRS examiners are focusing their enforcement resources in those areas thought to have the highest degree of non-compliance, including affluent individuals and small businesses, and are making greater use of technology to more efficiently identify audit targets.

Health Care Reform - After the Supreme Court ruling and the presidential election this year, health care reform remains essentially intact. In 2013, Medical Loss Ratio (MLR) standards will continue, meaning that insurance carriers that don't spend the prescribed percentage of premium dollars collected on actual medical care will be required to provide rebates to policyholders. Large employers (those that filed 250 or more Forms W-2 in the prior tax year) will be required to report the cost of employer-sponsored health coverage on their employees’ 2013 Forms W-2. New in 2013 is the $2,500 limit on an employee’s contribution to a medical flexible spending account (FSA) as well as the employer’s obligations to withhold and report relative to the additional Medicare tax.

Worker Misclassification - More active enforcement efforts are expected from the IRS and the US Department of Labor (DOL) in 2013 with regard to the misclassification of workers as independent contractors. Pending legislation at the state and federal levels, as well as executive orders at the state level establishing dedicated task forces to look at this issue, continued throughout 2012. Legislative reform as part of the resolution for the fiscal cliff is also expected to include provisions that would impose harsher financial penalties on employers who misclassify their workers. Further national and regional enforcement efforts/initiatives specific to industries in lower wage sectors, such as hospitality and construction, are also anticipated in 2013.

Tax Reform - As the country’s budget deficit grows, a topic sure to garner much legislative discussion during 2013 is the possibility of sweeping tax reform. Among the tax benefits which could get consideration, especially for high earners, are in such traditionally popular areas as the employer contribution to health care premiums, employer and employee retirement plan contributions, mortgage interest deduction, and charitable contributions. Additionally, the current tax advantages of structures such as S-corps could also be under assessment.

Retirement Savings - Employers should be aware of several developments in the retirement arena. The limits for contributions to retirement plans such as 401(k)s will increase in 2013. Legislation may also be introduced to manage the effects of 401(k) “leakage” resulting when employees draw down retirement savings by taking loans and withdrawals from their plans. Separately, we expect that federal policymakers, as well as those in some key states, may consider legislation to address the growing view that many workers are not saving enough for retirement. This could possibly include a mandate that certain employers that do not currently sponsor a retirement plan for their employees withhold a modest amount of a worker’s pay for deposit into a basic, automatically enrolled retirement investment.

National Labor Relations Board Activity - In the wake of President Obama’s re-election, a continued pro-labor focus is expected from this very active enforcement agency. While broad pro-union legislation is unlikely to pass in the next Congress, we expect the NLRB to seek to adopt rules to expedite the election process and/or further assist unions in their efforts to organize employees. To this end, the Board is likely to continue to scrutinize employer protocols even at non-unionized companies, including social media policies, employment-at-will disclaimers, and harassment investigation procedures. All employers should be closely watching the NLRB agenda and be ready to consider changes to their internal practices and policies as needed.

US DOL Agenda - The DOL Wage and Hour Division is expected to pursue an active regulatory agenda with the anticipated release of final regulations for the expanded military family leave under the Federal Family and Medical Leave Act, and a final rule to substantially restrict current minimum wage and overtime exemptions for companionship services and live-in domestics. The DOL may also revive the rule process for “Right to Know” regulations which could require employers to provide written notification of a worker’s status and to deliver required wage statements. The agency is also expected to continue its assertive wage and hour enforcement program, especially in the hospitality industry and others where many employees have tips as part of their compensation.

Immigration - Immigration reform is expected to be a top focus in the president’s second term, including efforts by Congress to pass legislation to preempt recent state and local laws. The trend of increased enforcement in the area of Form I-9 audits is likely to continue after a record number of worksite inspections in 2012. The release of a revised Form I-9 is expected in early 2013. The pilot program for E-Verify, the federal government’s Internet-based employment verification tool, was extended for another three years in late 2012. While its use remains voluntary for most of the country, some states have made it mandatory for some or all employers, and other employers may be required to utilize E-Verify under federal regulations. More comprehensive requirements could be implemented at the federal level as part of an overall immigration strategy.

Consumer Financial Protection Bureau - With President Obama’s re-election, the Consumer Financial Protection Bureau (CFPB) is likely to play an even more prominent role in overseeing banks and credit unions as well as “non-bank financial institutions” such as mortgage companies, payday lenders, and debt collectors. As these expanded activities evolve, small businesses could see direct or indirect effects on how they interact with their customers and employees, as well as potential changes in their relationships with banks and lenders.

Cyber Fraud - The steady increase in cyber fraud, especially against small businesses that may lack the resources to implement sophisticated security methods, will likely continue to be front of mind in 2013. Federal anti-cyber fraud legislation is a distinct possibility to better protect the nation’s critical infrastructure against hackers and other criminals. Many states are also likely to further expand/strengthen regulations requiring businesses to employ adequate security over confidential personal and medical information.

Business Continuity - Hurricane Sandy vividly reinforced the importance of a sound business recovery and continuity program. Even small businesses should ensure their key vendors have adequate processes to ensure uninterrupted service in the event of extreme weather or other unforeseen circumstances, and have crucial documents maintained at an alternative location for protection and adherence to retention guidelines for materials such as tax returns, business filings, and other financial documents.

FDIC Insurance - Without Congressional action, the current unlimited Federal Deposit Insurance Corp (FDIC) coverage for noninterest-bearing checking accounts will expire in 2013, reverting back to the normal $250,000 per account. The discontinuation of this unlimited federal insurance, enacted as part of the original Dodd-Frank legislation, has led many small businesses – who often use smaller, community banks – to consider shifting their operating funds to the perceived greater safety of larger banks or spreading balances out among multiple institutions, keeping deposits under the $250,000 cap in each.