With the end of the year comes holiday bonuses. This article will help you stay in compliance when garnishing wages from year-end bonuses and other lump-sum payments.
If you're like many employers, you may not realize that these lump-sum payments could be subject to child support garnishment. As of September 28, 2022, nineteen states require employers to report one-time bonuses and other lump-sum payments before releasing the payments to their employees.1
Ask yourself: Am I paying a bonus to an employee who has child-support obligations? Am I operating in a state that requires me to report the bonus to a child support agency before paying it out? Whatever your answers, the guidelines below can help you avoid some of the pitfalls associated with year-end bonuses and other lump-sum payments.
Lump-sum payments and child support
As the Department of Labor (DOL) stated in its 2018 opinion letter CCPA2018-1NA, payments made for personal services are considered earnings, regardless of how often the payments are made. If an employee is delinquent in child support, you may be required to withhold all or a portion of those earnings for child support. According to the DOL, the rule applies whether the compensation is denominated as "wages, salary, commission, bonus, or otherwise," and it also includes "periodic payments pursuant to a pension or retirement program."
If you are paying bonuses at the end of the year (or any other time), keep the following in mind:
- When made in exchange for personal services, lump-sum payments are subject to the same garnishment obligations as periodic payments for personal services.
- Child support agencies can require employers to report lump-sum payments; the reports help agencies decide whether they will issue orders to withhold money from employee checks.
- Without instructions or authorization from a child support agency, an employer should not withhold money from a lump-sum payment for child support obligations.
- For garnishments unrelated to child support (i.e., tax levies, spousal support, consumer garnishments, etc.), you may not need a one-time order to withhold earnings from a lump-sum payment. Check the original withholding order and/or your state's definition for earnings subject to withholding.
- As is the case with periodic payments, garnishments taken from one-time lump-sum payments are subject to the limitations established in the Consumer Credit Protection Act (CCPA).2 They are also subject to state garnishment laws.2
When (and how) to report lump-sum payments
The first challenge for employers is knowing when to report bonuses and lump-sum payments. The earlier you report them, the more time the child support agency has to notify you of a withholding requirement. For example, Ohio state laws mandate that employers report "… no later than 45 days before the distribution is to occur or 45 days before the date the employer determines that the lump-sum payment is due, whichever is earlier."3 As best practice, unless the state law specifies, report the payments to the state at least 4-6 weeks before releasing the money.
Following one of these protocols can help you stay in compliance:
- Report directly to the individual child-support agencies that require you do so; or
- Save time by registering for the OCSE child support portal. On the portal, you can report all your bonus-eligible employees to all states at the same time and receive a response of "match" or "no match" within 24 hours. "No match" means your employee is not in arrears and that you can release the lump-sum payment. "Match" means that individual is in arrears and OCSE will share the appropriate details with the applicable child support agency. The relevant agency will then determine whether it will issue a one-time lump-sum withholding order.
How long to wait for a response
Child support agencies will respond to your report if you are required to withhold money. Normally, they do this only when they find the employee is in arrears. The timeframe in which they respond varies. The amount of time you should wait for that response can also vary. Some states require you to wait a specified number of days after the planned payout date for the agency to respond. If, at that point, you have still not received an order, you are free to provide the bonus to your employee.
How much money to withhold
If the child support agency issues you an income-withholding order, letter, spreadsheet, or other notice to withhold funds from the bonus, it will list the amount owed by the employee and specify how much you should withhold. (You'll also need to take into account CCPA or state law exemptions.)
Q: Why can't I simply withhold 50% of all the lump-sum bonuses paid to my employees who have child-support orders?
A: Child support agencies will issue withholding orders against lump-sum payments only when your employee is in arrears. That's why it's critical to report the payment to the agency and wait for the agency's response. If your employee is up-to-date, the agency will not issue an order and the employee should receive the full amount.
Q: Am I really required to report just one payment?
A: Yes, you must report all lump-sum payments if you have child-support orders from any of the 19 states that mandate reporting.
Q: What happens if I don't report or withhold money from a lump-sum payment to an employee in one of the 19 mandated-reporting states?
A: You would be out of compliance and could be held liable for the amount that should have been withheld, plus penalties.
Q: I'm processing child support orders in one of the mandated-reporting states. Why haven't I received any lump-sum payment withholding orders?
A: Orders are issued only if you report the lump-sum payout. If you don't report it, the child support agency may not know about it. Keep in mind that you could be held liable for non-compliance and would be responsible for the amount you failed to withhold, plus penalties.
Q: If I'm unable to withhold the entire amount listed on a one-time lump-sum order, can I withhold from the next payroll?
A: No. The order to withhold is a one-time order and is applicable only to that specific payout. The next time that same employee is eligible for a lump-sum payout, you'll have to report to the child support agency again, and the agency will issue a new one-time order.
Q: Is the child support agency required to use the form approved by the federal Office of Management and Budget (OMB) to garnish a lump sum?
A: No, they can issue a state form, letter, or spreadsheet.
Q: If the child support agency has not responded and it is past the timeframe for the agency to respond, should I release the payment to the employee?
A: Yes. If you've adhered to the state guidelines on withholding the payment and the agency has not responded within the mandated timeline, you can pay the bonus to the employee. However, as a best practice, you should follow up with the agency to receive a definitive answer, although that follow-up call is a courtesy, not a requirement.
Best practices: A Step-by-step guide
- Report lump-sum payments 30-45 days before the payout unless state law specifies otherwise. You can report directly to each child support agency that has mandated reporting, or you can save time by using the OCSE portal (one-time registration required).
- The child support agency may respond to your reporting with a one-time lump-sum withholding order, notice, or letter with instructions on the amount to withhold. Provide a copy to the employee.
- If the payout date is approaching and you have not heard back from an agency in a mandated-reporting state, follow up with the agency. Depending on state requirements, you may have to hold the payment for a specified amount of time after the planned payout date.
- Pay your employee, withholding a portion of the money as instructed by the agency, and abiding by the CCPA and state law limitations.
- Send the appropriate portion of the payout to the agency, as instructed in the agency response.
- Repeat the process for the next lump-sum payment.
Download the ADP SmartCompliance® guidebook to learn how ADP compliance solutions can help to alleviate your administrative burden, lower your risk of liability, and help improve compliance.
1The states that mandate reporting of lump-sum payments can be found on the Federal Office of Child Support Enforcement's (OCSE) State Lump-sum Matrix. As of September 28, 2022, the 19 mandatory reporting states are AR, CO, IL, KS, KY, LA, MA, MI, MN, MS, NE, NV, NY, ND, OH, OR, PA, TX, and WV.
2Title III of the CCPA limits the amount of earnings that may be garnished pursuant to court orders for child support or alimony. See 15 U.S.C. § 1673(b). The CCPA allows up to 50 percent of an employee's disposable earnings to be garnished for such purpose if the employee is supporting another spouse or child, or up to 60 percent if the employee is not. An additional 5 percent may be garnished for support payments more than 12 weeks in arrears. See Fact Sheet #30: The Federal Wage Garnishment Law, Consumer Credit.