A View From the Hill: National PEO Week, ERTC Refunds Headline 2023 PEO Capitol Summit
The Capitol Summit is an annual NAPEO event focused on advocacy, education and lobbying initiatives for the PEO industry. The event provides a unique opportunity to hear from members of Congress and Washington insiders on issues important to Professional Employer Organizations (PEOs) and small businesses. With over 200 attendees and educational and committee sessions geared toward legal, legislative and compliance issues, the Capitol Summit is also a terrific opportunity to connect with and learn from industry leaders.
I had the privilege of attending the Capitol Summit this year in Pentagon City from May 22-25, 2023. The following are some highlights and takeaways from the conference.
Major Themes and Initiatives
National PEO Week Makes Its Debut
The National Association of Professional Employer Organizations’ tireless work toward industry visibility and recognition culminated this year in the creation of National PEO Week. The week was officially recognized on the Congressional Record on April 17, 2023, and via State Proclamations in Arizona, Hawaii, Ohio, Oklahoma, Massachusetts and New Mexico. This is a true milestone and reminder of how far the industry has come, as roughly 30 of 25,000 requests for National Calendar recognition are approved every year. Craig Babigian, executive vice president at PrismHR, shared his perspective on this milestone in the article, “The Evolution of an Industry.”
ERTC Refund Delays Are on PEOs’ and SMBs’ Minds
PEOs and small businesses continue to face significant delays in receiving Employee Retention Tax Credit (ERTC) funds, as the IRS has a mammoth backlog of refund requests via 941 and 941-X submissions. Per NAPEO, the backlog ballooned to over 1 million outstanding returns in 2023. Thanks to advocacy efforts and additional IRS resourcing, that number had been reduced to roughly 900,000 by the time of the Summit with tens of thousands of returns being processed each week. However, this figure may reflect the number of distinct Federal Employer Identification Numbers (FEINs) with submissions, and not account for multiple filings from individual employers.
This backlog severely undermines the original intent of the credit: helping small businesses pay employees and survive in the face of challenging COVID-19 era lockdowns. Moreover, PEOs, who helped these businesses navigate the pandemic and are charged with calculating and claiming the credit, now sit in the untenable “middleman” position of awaiting their client’s refunds. This delay can strain the PEO-client relationship, especially as ads for pop-up companies promising quick ERTC payouts (at a hefty fee) dominate the airwaves.
Accordingly, NAPEO has long championed quicker IRS backlog reduction, and this was the predominant focus during the week. NAPEO leadership continues to stress the backlog in any interaction with our congressional leaders, and also provided comprehensive written material for members to share with their representatives.
Repping With Reps on Capitol Hill Day
Capitol Hill Day on May 23 provided a unique opportunity to engage with members of Congress. This year, many representatives stopped by to share their distinct visions and concerns for small businesses in America. Notably, Rep. Claudia Tenney from New York’s 24th District detailed her experiences leveraging the services of a PEO to support her families’ business. The PEO’s benefits package in particular allowed her business to compete for and retain talent in upstate New York.
Rep. Erin Houchin from Indiana’s 9th District, billed as the only member of Congress to ever work for a PEO, also shared anecdotes about her experience in the industry and her passion for supporting PEOs and small businesses. Erin’s story was featured recently in PEO Insider.
I personally had the privilege of meeting my own and other local Massachusetts representatives for the first time, namely: Reps. Jim McGovern, 2nd District; Seth Moulton, 6th District; and Katherine Clark, House Minority Whip, 5th District. Rep. Clark personally sat down with me and other colleagues in the industry for over 15 minutes and conveyed a clear understanding of our concerns with the IRS backlog and the importance of small businesses to the U.S. economy.
Session and Committee Highlights
Session and committee meetings highlight important legal trends, new legislation, case law and agency positions with the aim of helping PEOs navigate a shifting landscape. Here are a few worth noting:
Retention Credit Refund Concerns
Discussions during the Federal Government Affairs Committee Meeting focused not only on the IRS 941-X backlog, but also on the IRS treatment of PEO returns. Specifically, the IRS has adopted the position that PEOs are the responsible employer of record for Form 941 returns and therefore tax credits. This position creates two specific issues:
- It results in the commingling of refunds and interest credits without any clear way to tie back to individual clients.
- Outstanding client or PEO tax liability offsetting other client refunds.
This position belies the Schedule R mandate, client-level-based credit determinations and client ownership of these credits. However, no immediate recourse is available to alter how these refunds are processed.
Employer of Record Model Gains Traction
The Employer of Record is an HRO model popularized throughout Europe that is gaining traction within the U.S. Different from the co-employment PEO model, the Employer of Record operates as the “sole” employer for its client’s workforce, with “client level” managers dictating the day-to-day operations. It has proven to be a successful international approach for companies managing employees in different countries. However, in its infancy in the U.S., it’s currently unregulated, unproven and with many potential legal hurdles to navigate.
Remote Work Still Causing Tax Challenges
The work-from-home (or anywhere else for that matter) boom continues to create challenges for employers, including how to navigate employees’ working remotely from a jurisdiction where the client or PEO is not registered. PEOs were reminded to perform a nexus test to determine if a client has any business connection to the jurisdiction, before registering, withholding and paying employment taxes to that state. Otherwise, a PEO, in attempting to “do the right thing,” could be subjecting its client to scrutiny over sales tax and other regulatory requirements within the state.
Pay Transparency Movement Continues to Spread
Pay Transparency laws are the latest trend in a broader pay equity movement through the U.S. Three states, Colorado, Washington and California, and four local jurisdictions currently require pay range disclosure in job postings, with a fourth state, New York, starting in September. Four other states and other local jurisdictions require disclosure at other points in the hiring process or upon request.
Best practices for managing these requirements include:
- Pay ranges should have some analytical foundation, with bona fide ranges ideally based on the pay rates of employees in the same or similar positions.
- Employers should preserve payroll or other data used to determine or support the rate.
- Though untested, employers should use caution in trying to skirt jurisdictional requirements by specifically excluding candidates from these jurisdictions in any job posting.
Overall, this year’s Capitol Summit inspired increased optimism and confidence in the future of the PEO industry. Despite the challenges facing PEOs and small businesses, NAPEO is well-positioned to work with its members and legislatures across all 50 states to navigate these hurdles. I’m excited for the progress we’ve seen and what’s to come as we look forward to next year’s summit.
Chris Babigian is PrismHR’s compliance strategy manager. A graduate of Boston University School of Law with a focus in taxation, Chris spent five years handling motions, appellate briefs and trial discovery for a civil litigation firm. In 2014, Chris transitioned to PrismHR, where he translates regulatory requirements into software solutions.