PEOS MUST PROCEED WITH CAUTION WITH EMPLOYEE RETENTION CREDIT

As a result of the COVID-19 pandemic, Congress enacted the Employee Retention Credit (ERC), to help taxpayer businesses weather the storm. But despite the genuine benefit that ERC provides to qualifying businesses, the IRS has been faced with many fraudulent and questionable claims.

As a result, the Service has initiated aggressive enforcement actions centered on this credit.

The wave of IRS audits, inquiries and assessments has spurred concern for taxpayers across the country and has even resulted in firms selling ERC insurance. Importantly, several Professional Employer Organizations (PEOs) have found themselves in a precarious situation (beyond ERC processing times) as IRS audits have started to hit their clients.

PEOs file ERC on behalf of their clients. Typically, these PEOs file Form 941s in aggregate under its own Employee Identification Number (EIN). These filings should include a Schedule R that describes aggregated wages and credits claimed for each of the PEOs clients.

As PEOs claimed ERC on behalf of their pool of clients, several issues of liability began to come into question. For example, the IRS stated in 2023 that it has the authority to satisfy a PEO’s tax liability with amounts of the PEO clients’ ERC claims.

Now, another concern has come into play. This issue rears its head when the IRS audits a PEO’s client (or client base) and finds ineligible ERCs. In this case, the IRS has made its stance clear: the PEO is jointly on the hook with its clients’ for ERC liabilities.

Although there is disagreement in terms of whether or not PEOs are liable for their clients’ claims, and the issue likely will continue to play out before the agency and in the courts, the IRS made its position clear in Chief Counsel Memorandum 2024-001.

According to the Service, when “improperly claimed credits are claimed by a PEO for its client, and the credit claim is based on the wages paid by the PEO to the client’s employees and reported on the PEO’s employment tax return, both the PEO and its client are liable for any underpayment of tax resulting from the improperly claimed credits.”

This burden has put certain PEOs, who simply cannot afford the liability for their client base in total, in a quandary.

The truth is that, for PEOs who already find themselves on the hook for an ERC liability, options might be limited. The IRS opened a supplemental claim process, offering a way for PEOs to exclude improper client claims or correct miscalculated claims, and the deadline for filing this supplemental closed on December 31, 2024.

PEOs who find themselves faced with an ERC audit should immediately seek out tax counsel to help navigate their path forward.

The reality now is that the IRS has begun to roll out ERC audits in full force as the agency has issued several rounds of tax credit denials while identifying more and more areas of high risk.

However, for those PEOs who have submitted ERC claims on behalf of their clients and are not in the midst of an IRS audit, the path forward should be tread lightly.

First, if a PEO has not yet submitted what would at this point be an amended ERC claim, it is imperative that the firm have their CPA, or a reputable firm specializing in the credit, review the underlying ERC claims for accuracy. There is still a short but open window to file a supplemental claim and correct the ERC errors.

This review should verify that the ERC claims have each been calculated correctly and that they can be substantiated should the IRS initiate an audit. Doing this sort of analysis will inevitably minimize the time and expense of dealing with a potential IRS audit down the line.

However, if a PEO firm has already claimed the ERC on behalf of its clients, it should without a doubt still conduct an extensive review of the claims before paying out credit monies received to its clients.

The statute of limitations for the final eligibility quarters for ERC, Q3 and Q4 of 2021, isn’t until April 15, 2027. The tax credit is incredibly valuable and PEOs shouldn’t shy away from claiming it. But they must do so with a critical eye and evaluate positions taken

The IRS has made clear that the number of its ERC audits will continue to grow. And again, PEO firms could very well be liable should these audits impact their clients. PEOs should take this notion to heart and conduct a thorough risk assessment to ensure they are compliant with ERC requirements.

Organizations such as NAPEO continue to work diligently on behalf of the industry when it comes to challenges surrounding ERC, and while these issues continue to play out PEOs should proactively assess their tax situation. If imposed, the ERC liability at issue will not go away. And failing to address the situation head on could be costly.

 

This article is designed to give general and timely information about the subjects covered. It is not intended as legal advice or assistance with individual problems. Readers should consult competent counsel of their own choosing about how the matters relate to their own affairs. Want to learn more about the ERTC and view NAPEO resources on the issue? Visit this page

DEVELOPING A TRAINING PLAN FOR HR COMPLIANCE

An effective HR compliance training plan is essential for any organization committed to fostering a safe, fair, and legally compliant workplace. With ever-evolving federal and state regulations, businesses face the constant challenge of staying up to date while ensuring their workforce is properly trained on key compliance issues.

HR compliance isn’t just about meeting legal requirements—it’s an opportunity to engage employees, foster trust, and build a thriving workplace culture. For professional employer organizations (PEOs), delivering engaging and effective HR compliance training can set the tone for their clients’ organizational success. When done right, compliance training becomes a tool for empowerment, connection, and shared responsibility.

WHY ENGAGING HR COMPLIANCE TRAINING MATTERS

Think of HR compliance training as a strong foundation for a building—without it, the entire structure is at risk. Businesses that fail to prioritize it expose themselves to costly lawsuits, reputational damage, and even regulatory penalties.

While it can sometimes be seen as a dry necessity, HR compliance training has the potential to drive meaningful engagement. It helps employees:

  • Understand their roles: Clear expectations create confidence and clarity.
  • Feel valued: Training reflects an organization’s commitment to their well-being and professional growth.
  • Contribute to culture: Engaged employees actively support a fair, inclusive, and compliant workplace.

A 2023 survey by the Society for Human Resource Management (SHRM) revealed that 81% of HR professionals identified maintaining employee morale and engagement as a top priority for their organizations. Compliance training that engages employees also helps build trust, boosts morale, and strengthens workplace relationships.

KEY AREAS OF HR COMPLIANCE TRAINING

Sexual Harassment Prevention

Preventing sexual harassment is about more than following regulations—it’s about creating a safe and respectful workplace. Engaging employees in this effort requires more than a traditional lecture format.

Engagement strategies:

  • Use real-world scenarios and role-playing exercises to illustrate concepts.
  • Incorporate interactive elements like polls or group discussions.
  • Offer clear and relatable examples of acceptable and unacceptable behaviors.

Training objectives include: Define sexual harassment and legal standards, explain how everyone plays a role in creating a safe workplace, and Emphasize the importance of immediate reporting and support mechanisms.

Key laws: Title VII of the Civil Rights Act, the Age Discrimination in Employment Act (ADEA), and the Americans with Disabilities Act (ADA).

Anti-Discrimination Policies

Anti-discrimination training fosters a sense of belonging and inclusion when employees see it as a shared commitment rather than a mandated requirement.

Engagement strategies:

  • Use storytelling to highlight the impact of discrimination and the benefits of inclusion.
  • Facilitate open dialogues to encourage employee participation.
  • Highlight success stories of diverse and inclusive workplaces.

Training objectives include: Identify protected classes under federal and state laws, recognize and prevent discriminatory practices, and promote equity and inclusivity in day-to-day operations.

Key areas to address: Recruitment, promotions, performance reviews, and workplace culture.

Key laws: Civil Rights Act of 1991, Pregnancy Discrimination Act, and Uniformed Services Employment and Reemployment Rights Act (USERRA).

Substance Abuse Awareness

Addressing substance abuse is vital for maintaining a safe and productive work environment. Engaging employees in this area requires sensitivity and support.

Engagement strategies:

  • Provide interactive resources such as self-assessment tools.
  • Highlight available support programs, such as Employee Assistance Programs (EAPs).
  • Use multimedia content to illustrate the impact of substance abuse on individuals and teams.

Training objectives include: recognize signs and symptoms of substance abuse, understand the company’s substance abuse policy, and promote resources for seeking help.

Key laws: Drug-Free Workplace Act (DFWA), Occupational Safety and Health Act (OSHA), and the Family and Medical Leave Act (FMLA).

Wage And Hour Compliance

Ensuring fair compensation is essential for employee trust and satisfaction. Engaging employees in wage and hour compliance training can create transparency and understanding.

Engagement strategies:

  • Create engaging visual aids, such as charts or infographics, to explain wage computations and make the process easier to understand.
  • Conduct Q&A sessions to address common concerns.
  • Incorporate interactive elements to reinforce key concepts.

Training objectives include: clarify employee rights and responsibilities regarding wages, address key wage and hour laws, including the Fair Labor Standards Act (FLSA), and promote transparency in compensation policies.

Best practices to keep in mind: regularly audit payroll practices to ensure accuracy and fairness, maintain clear communication about wage policies and updates, and encourage employees to ask questions and provide feedback on policies.

STEPS TO CREATE ENGAGING COMPLIANCE TRAINING

Transforming compliance training into an engaging experience requires creativity and focus. Here’s how PEOs can make training more impactful:

  1. Tailor training to your audience. Understand the unique needs of your client’s workforce. Customize training content to reflect their industry, workforce demographics, and organizational culture.
  2. Use interactive technology. Leverage tools like Learning Management Systems (LMS) to deliver dynamic and engaging training experiences.
  3. Make it relatable. Use real-world examples and relatable scenarios to connect with employees. Tailor training to address common challenges and experiences within their roles.
  4. Incorporate feedback. Regularly collect feedback from participants to understand what works and what doesn’t. Use this data to continuously refine and improve your training program.
  5. Celebrate the wins. Recognize employees who actively participate in and support compliance initiatives. Celebrate milestones to reinforce the importance of ongoing engagement.

MEASURING THE IMPACT OF ENGAGEMENT

To ensure ongoing improvement, it’s critical to measure the success of your compliance training efforts. PEOs can:

  • Track participation rates: High attendance is a good indicator of interest and buy-in.
  • Assess knowledge retention: Use quizzes and follow-up surveys to test understanding.
  • Gather employee feedback: Identify strengths and areas for improvement through anonymous evaluations.
  • Monitor compliance metrics: Look for reductions in compliance violations or related complaints.

THE ROLE OF ENGAGEMENT IN LONG-TERM COMPLIANCE

Engaging compliance training is not just about ticking a box; it’s about creating a culture of accountability and respect. When employees feel connected to the mission of compliance, they are more likely to: Retain information and apply it in their daily roles; report issues promptly and responsibly; and contribute to a positive and inclusive workplace environment.

For PEOs, developing a robust HR compliance training plan is more than a service offering; it’s a strategic advantage. By proactively addressing compliance risks and fostering a culture of accountability, PEOs can empower their clients to thrive in an increasingly complex regulatory environment.

Investing in comprehensive, ongoing training isn’t just about avoiding penalties—it’s about building a workplace where employees feel valued, respected, and safe. With the right tools and strategies, PEOs can lead the charge in creating compliant, productive, and inclusive workplaces for their clients.

2025 PREDICTIONS: 5 BIGGEST TRENDS PEOS CAN EXPECT IN THE NEW YEAR

Even though D.C. might be friendly confines for the PEO community in the new year, that doesn’t mean 2025 will be a cakewalk for businesses. State lawmakers and regulators will pick up the slack. They’ll continue to create a patchwork of legal compliance measures – and PEOs will be caught in the middle.

NAVIGATING POLITICAL AND REGULATORY SHIFTS IN THE PEO INDUSTRY

Political and regulatory shifts inevitably influence how we operate and advise our clients.  In our role as strategic advisors, we must plan for all scenarios. Whether regulations tighten or loosen, businesses will need our guidance to implement sustainable workforce strategies that work within the regulatory framework.

3 WAYS TO SAVE UP TO 85% ON CA LITIGATION COSTS THANKS TO PAGA REFORM

There are three actions PEOs and their customers can take to save up to 85% in California litigation costs thanks to a recent legislative compromise. Anyone doing business in California is no doubt familiar with the Private Attorneys’ General Act – or PAGA, the scariest four-letter word in the state for employers.

PREGNANT WORKERS FAIRNESS ACT: EEOC’S FINAL RULE AND TIPS FOR PEOS

The Pregnant Workers Fairness Act (the “PWFA”) requires covered employers to make reasonable accommodations to qualified employees or applicants known limitations related to, affected by, or arising out of pregnancy, childbirth, or related medical conditions unless doing so would cause undue hardship on business operations.

MANAGING COMPLIANCE WITH A HYBRID WORKFORCE 

In recent years employers have been left to deal with an unprecedented business environment. There are currently more hybrid and remote employees than ever, yet the implications of employee migration across state lines are not well understood by many employers.

KEEP AN EYE OUT: NEW DATA PRIVACY RULES

The bottom line – if you have not updated your CCPA notices since 2022 or earlier – or if you have never provided such notices – you should act quickly to implement new notices and stay compliant with the ever-changing law.

PAY TRANSPARENCY CONTINUES TO GAIN MOMENTUM IN 2024

Focus on pay transparency is showing no signs of slowing down. The pay transparency movement, which started with a couple of states, continues to steadily spread across the country and is now a focus at the federal level. PEOs and their clients must remain vigilant of current and proposed laws and developing trends.

WHEN IT RAINES IT POURS

The California Supreme Court’s recent decision in Raines v. U.S. Healthworks Medical Group could create additional exposure for PEOs under California’s employment discrimination laws.

SECURE 2.0 ACT UNPACKED: EXPLANATION OF PROVISIONS FOR 2023 AND BEYOND

The SECURE 2.0 Act was passed as part of the larger Consolidated Appropriations Act of 2023. The SECURE Act itself was over 350 pages containing a myriad of retirement-focused provisions. The 2.0 Act impacts all of the most commonly used retirement vehicles (think 401K, 403b, 457 and IRAs) and does so with provisions correcting the previously passed SECURE Act, some taking effect immediately in 2023, others in 2024 and 2025 and still others as late as 2033.  Not every provision will apply toward PEOs or even your clients, but many of them can have far-reaching changes that will require PEOs and the plan sponsors to be informed. 

 

2023 PROVISIONS 

The most publicized change for 2023 was to the required beginning date for required minimum distributions (RMDs) from qualified retirement plans and IRAs. Prior to the passage of both SECURE Acts, the date had been April 1st of the year after someone attained the age of 70½. This half-year “rule” caused much confusion and headaches for individuals and plan administrators. The first SECURE Act changed this to age 72 and now the SECURE 2.0 Act has moved it further to age 73. This will go even further in 2033, to age 75. 

The SECURE 2.0 Act has come to be known as the “Rothification” Act. Many retirement funding options have now been opened to being done on a post-tax basis (similar to Roth IRA contributions).  Beginning in 2023, Roth contributions can now be made to SEP and SIMPLE IRA accounts as well as being available for employers to make Roth matching contributions for 401(k), 403(b) and 457(b) plans. The overall goal was to provide a short-term influx of tax dollars to the government due to post-tax treatment and to provide tax-free growth and distributions in the future for individuals. While a welcome change to many, the IRS will need to issue further guidance so employers, employees and individuals will know how to report these contributions.   

Tax credits available to small employers to cover start-up expenses for a new plan were enhanced under the SECURE 2.0 Act. The credit percentage increases to 100% for employers with less than 50 employees for the first three years of a new plan. SECURE 2.0 also implemented a new credit available for employer contributions to a new small employer pension (SEP) plan. The credit is the employer contribution amount, up to $1,000 per employee, for a five-year period. The full credit applies to employers with 50 or fewer employees and prorated up to 100 employees.  The credit also reduces each year going from 100% in the first two years to 75% in year three, 50% in year four and finally 25% in  year five. This small employer pension credit was also made applicable to an employer joining a multiemployer plan (MEP).  SECURE 2.0 corrects wording from the first SECURE Act allowing an employer to retroactively apply this credit back to 2020 (an amended tax filing will be required). 

 

2024 PROVISIONS  

Beginning in 2024, catch-up contributions made to eligible employees who had compensation exceeding $145,000 in the prior year will need to be made on a Roth (post-tax) basis. The IRS pumped the brakes on this provision on August 25, 2023, to provide a two-year transition period for employers to make this switch. The IRS also clarified that high-paid self-employed persons (i.e., partners in a partnership) won’t be required to make catch-up contributions on a Roth basis even if they exceed the income threshold. The IRS also indicated that further guidance will be forthcoming once public comment has been received and reviewed. 

Employers will have the option to adopt a plan provision to allow for employer matching contributions to be made for employees who are making student loan payments. The employer effectively treats those payments as the employee’s “deferral” and makes corresponding match contributions. Similar to some of the other provisions, further guidance will be needed from the IRS to determine what levels are to be used and how the amounts are referenced/supported. 

Starter 401(k) plans can be offered by employers who wish to provide the ability for employees to defer a part of their wages without having all the added administrative testing requirements applicable to traditional 401(k) plans.  These plans would only allow for employee deferrals at a level between 3-15% of compensation. 

Roth 401(k) accounts will no longer be subject to RMD rules. Prior to SECURE 2.0 Act, Roth 401(k) balances were included in RMD computations for those employees who were taking or were required to take RMDs from their qualified retirement plans. Whereas Roth IRA accounts were not subject to RMD rules, their 401(k) brethren are now treated the same way. 

 

FUTURE PROVISIONS TO KEEP ON YOUR RADAR 

In 2025, all 401(k) and 403(b) plans will be required to adopt automatic enrollment features that start initial deferral elections at 3% for employees becoming eligible to participate in the plan. The employee can elect out and/or request a refund of any deferrals within 90 days of eligibility. Exclusions will be allowed for employers with 10 or fewer employees. 

Catch-up contributions will increase to $10,000 (or 50% more than the level computed for 2024) for employees who are at least 60 years old. They will also be indexed for inflation going forward (for those age 50 or older as well). 

Part-time workers (those with at least 500 hours per year) will be allowed to participate in a 401(k) plan one year earlier than what was passed under the original SECURE Act. If an employee meets the 500-hour rule for two consecutive years, they can be eligible to participate in the plan (assuming they meet the other eligibility rules – age). Any employer contributions made can be placed on a vesting schedule. 

There are numerous other provisions of the SECURE 2.0 Act that may impact PEOs and their clients. This article outlines several of the likely provisions that will impact most PEO plans. But as with most bills passed by Congress, there are still many rules that will require further guidance from the IRS and substantial updates to be made by plan administrators. Additionally, new language will need to be worked on to allow employers to adopt the necessary plan amendments imposed by the SECURE 2.0 Act. 

This article is designed to give general and timely information about the subjects covered. It is not intended as legal advice or assistance with individual problems. Readers should consult competent counsel of their own choosing about how the matters relate to their own affairs.