New Employer Tax Rate for Participant-Directed Personal Support Services

Purpose:

The purpose of this Information Bulletin is to notify Division of Developmental Disabilities stakeholders participating in Home-Based Services program of the decrease of the employer tax rate to 9.5%. The decrease in the employer tax rate will be effective January 1, 2019.

Background:

Participant-directed services of Medicaid services began in the 1970s and expanded throughout the 1980s and 1990s. Up until the 1990s, most of these participant-directed programs considered workers employed by participants as self-employed independent contractors and States did not provide provisions for the filing and depositing of federal, state, and local income tax withholding and employment taxes. Many workers did not pay the applicable self-employment taxes which potentially made States and the participants of the program liable for unpaid taxes. Consequently, the IRS and several state unemployment insurance agencies took enforcement action against states who classified these workers as independent contractors.

To address the increased fiduciary responsibilities for participant-directed services, the Centers for Medicare and Medicaid Services (CMS) requires states to furnish Financial Management Services. Financial Management Services includes verifying workers eligibility based on federal state and program requirements, processing payroll, withholding Social Security, Medicare, state and federal income taxes from applicable worker's wages and filing and depositing the employers portion of Social Security, Medicare, federal and state unemployment taxes.

Process:

The Division contracts with ACES$ Financial Management Services, a Fiscal/Employer Agent vendor that services as the employer's agent under a specific section of the Internal Revenue Code and takes on joint tax liability with the Employer of Record. The Division pays ACES$ a monthly administrative fee for each participant. This administrative fee is not charged to the individual Home-Based Services budget.

Annually, ACES$ determines the tax obligations for all employers and adjusts the employer tax rate to ensure that the appropriate amount of funds are available to file and deposit the employers portion of the Social Security, Medicare, federal and state unemployment taxes. The employer's tax obligation is withheld from the participant's HBS funding and is added on to the personal support services rate. The employer tax rate for 2018 was 10% and effective January 1, 2019 the rate will decrease to 9.5%. The employer tax rate is only used to pay the employers tax obligations and any overpayments are paid back to the HBS program by offsetting the employer tax rate for the next calendar year.

The employer tax rate is calculated based on the overall tax obligations for the employer. Based on IRS tax codes, some employers may be "exempt" based on the worker's relationship to the employer. The employer of record may request that ACES$ evaluate their exemption status. If the employer is determined to be exempt, ACES$ will reduce those taxes and eliminate the portion of the employer tax rate in which the employer is exempt. To be exempt, ALL employees must be exempt. The exemption status will be at reviewed annually or anytime changes are made that result in the employer being responsible for paying taxes for their employees. Families that wish to avoid such taxes have the option of only employing personal support workers that meet the exemption status.

For questions regarding the employer tax rate, please contact ACES$ at 1-877-223-7781

Reference Materials:

2010 Edition, Understanding Medicaid Home and Community Services: A Primer: https://aspe.hhs.gov/system/files/pdf/76201/primer10.pdf

DEVELOPING AND IMPLEMENTING SELF-DIRECTION PROGRAMS AND POLICIES: A HANDBOOK  https://www.bc.edu/content/dam/files/schools/gssw_sites/nrcpds/cc-07.pdf

Effective Date:

January 1, 2019.

Comments, suggestions and/or recommendations to: DHS.DDDComments@illinois.gov