US Department of Labor says that FSM cannot deduct taxes from PUA benefits

By Bill Jaynes

The Kaselehlie Press


January 16, 2021

FSM—The United States Department of Labor (DOL) has said that the FSM’s assessment of a 10 percent income tax and a 15 percent deduction for Social Security contributions on Pandemic Unemployment Assistance (PUA) benefits are not an allowable expense under the grant that provided those benefits.  The grant was provided by DOL to the FSM on the basis of Section 2102 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020.

On January 11, FSM President David Panuelo sent a cover letter to the FSM Congress along with a copy of the DOL letter along with a legal opinion issued by the FSM Department of Justice. He urged Congress to seriously consider the repeal of the law that established the tax on PUA benefits. He wrote that henceforth, recipients of the PUA will receive the full amount of assistance with no tax being deducted and any funds previously withheld for that purpose will be released to the beneficiaries.

It concludes that the FSM Department of Finance and Administration (DoFA) must reimburse to PUA beneficiaries the amount of the tax it has assessed against their benefits and to cease imposing those assessments on PUA beneficiaries. DoFA must provide written assurance outlining the details about how and when the funds will be refunded to PUA beneficiaries, due the DOL National Office in Washington DC by the end of January. DOL says that if it determines that FSM does not have an adequate system in place for ensuring that PUA is paid as required by the CARES Act, it will be forced to not only terminate the agreement and also to return any funds that are not needed or that were used for other purposes such as tax assessments.

The DOL letter which was dated December 31, 2020 and transmitted by a US Diplomatic Note to the FSM government on January 4 was in response to a DoFA query asking whether FSM is permitted to make the deductions from the individual benefit payments.

The amendment to FSM law requiring the deduction of the two taxes specifically applicable to PUA benefits provided by the U.S. went into effect on July 2, 2020.  The letter says that it is DOL’s understanding that since that time the FSM has been collecting the deductions from PUA benefit checks before benefit checks are issued to recipients. DOL is also under the impression that FSM is holding those deductions in a separate trust account pending DOL’s resolution of whether such assessments are allowable under the CARES Act.

“DOL has determined that the tax assessments and Social Security deductions are not allowable costs. Payment of these assessments/deductions is not consistent with the purpose of the grant, which is to mitigate the economic effects of the COVID-19 pandemic by paying PUA benefits to covered individuals”, the letter said. “…On April 3, 2020, FSM entered into an Agreement Implementing the Relief for Workers

Affected by Coronavirus Act (Agreement) with DOL, pursuant to CARES Act Section 2102(f), in which DOL agreed to make payments of PUA to FSM, and FSM agreed that it ‘will use all money paid to the FSM pursuant to [the] agreement for the payment of benefits, and related administrative costs, for the purpose for which the money was paid to the FSM, and will return to the United States Treasury, upon request of the Department of Labor, any such money if the Department of Labor finds that the money is not needed for such purpose or that the money has been used for a purpose other than that for which it was paid.’”

That agreement was signed before Congress passed the bill requiring the tax assessments from PUA beneficiary payments.  DOL wrote that FSM’s budget request did not include taxation as a cost to the grant. Though DOL noted that under the agreement taxes that a government unit is legally required to pay, “except for self-assessed taxes that disproportionately affect Federal (meaning US) programs or changes in tax policies that disproportionately affect Federal program.”  DOL wrote that the exception applies in the FSM’s case where the FSM’s taxation law changed after the grant agreement and specifically targeted beneficiaries of PUA thereby diverting “25 percent of the grant funds to be used for purposes outside of the grant.”

DOL wrote that at the time of the agreement, FSM’s income tax provision applied only to wage and salaries earned in an employment relationship. It noted that DOL is not the employer of the beneficiaries and the payment of unemployment compensation does not constitute payment of a wage.  FSM’s tax code had not previously had provision for taxation of wages earned from an unemployment compensation program because no State in the FSM has an unemployment program.

DOL also called into question the rate of taxation aimed at PUA beneficiaries as being in excess of the tax rate that FSM assesses on the wages and salaries of employees in the FSM. Wages and salaries are taxed at the rate of 6 percent for the first $11,000 earned and 10 percent on the amount over the first $11,000. DOL asserts that some beneficiaries may not have had income levels that rose to the 10 percent taxation level. It further points out that FSM Code requires employees and employers each to contribute 7.5 percent of wages towards social security and that social security payments by self-employed individuals are voluntary. “In contrast, with respect to the CARES Act, FSM seeks to assess both the claimant’s and the employer’s contributions to the unemployment compensation paid under the CARES Act, even though DOL is not the employer and the claimant is not an employee. Again, the Federal program is disproportionately affected by the imposition of this tax,” DOL wrote.

Under instruction, the FSM’s special assistant to the President responsible for information services could not comment or provide documents related to the matter.  The Congress Public Information Officer said that she had been advised that the DOL letter to DoFA, and the FSM Department of Justice’s legal opinion on the matter were “not ours” to share. However, she was able to share President Panuelo’s cover letter.

The scanned copy of the DOL letter we referenced in our article did not come from a governmental source but from an attorney who received it from one of the clients that attorney is representing on the matter of taxes withheld from PUA benefits.

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