Hello Clients and Friends,

Welcome to the Spring Edition of The Essential!

In this issue, we cover some best practices addressing topics from new Form I-9 violations to purging information in personnel records past their retention dates.  While we typically report on any mid-year legislative changes in California (and thankfully, there are none!), readers in other states may have legislative changes that are set to take effect in the coming months that are not covered here.

Enjoy the Spring blooms and we’ll be back with our next newsletter in the Summer!

Enjoy and be well,

Sonya L. Kemp-Willson
Founder and President

At first glance, the new “Trump Account” (via the One Big Beautiful Bill Act) looks like a slam dunk: you get to help your employees save for their kids’ futures with a $2,500 tax-free contribution, and the government even chips in a $1,000 pilot seed. Contributions start July 4, 2026. It’s great PR and a solid benefit.
But before you start the July 4th fireworks, there is some serious fine print that Finance, HR, and Payroll need to hash out. Here’s the “real talk” on why this isn’t as simple as it looks.

The “Waiting Game” on Rules
The IRS recently put out some regs, but they basically only told us how to open the accounts. They totally skipped the stuff employers actually need to know, like:

• How do we coordinate this with our existing cafeteria plans?
• Who is responsible for double-checking if a kid is actually eligible?
• What happens if we make a mistake?

Right now, HR is essentially designing a program with half the rulebook missing.

The Nondiscrimination Trap
This is the big one. These accounts follow the same “nondiscrimination” rules as Dependent Care FSAs. Essentially, if your executives and high-earners love the plan but your hourly staff doesn’t sign up, the plan fails.

If you fail that test:

1. The tax-free status for high-earners vanishes.
2. Those contributions turn into taxable wages.
3. The company gets hit with a surprise payroll tax bill that wasn’t in the budget.

In a workforce where lower-wage earners are already stretched thin, getting them to participate is the biggest hurdle to keeping the plan legal.

The “To-Do” List for Your Teams

• Finance: You need to run the “what-if” numbers. What does the budget look like if participation is lopsided? Don’t just model the best-case scenario.
• HR: You’re on deck to design the plan. You might have to consider capping what higher-paid employees can put in just to make sure the plan passes the IRS tests.
• Payroll: Brace yourselves. If the plan fails testing, you’ll be the ones fixing W-2s and manually reclassifying wages. You need a system to track these contributions separately now.

The Bottom Line
July 4, 2026, will be here before you know it. Don’t wait for the IRS to finish their homework before you start yours. Get Finance, HR, and Payroll in a room now to stress-test this benefit before you commit to it.

Source courtesy of HR Morning

As we reported in our August 2025 edition of “The Essential,” starting with the 2025 tax year, workers in 71 qualifying jobs can deduct up to $25,000 in tips from their taxable income — no matter whether they itemize or not. The IRS and Treasury finalized this rule on April 10, 2026 as part of the “One Big Beautiful Bill Act,” and it runs through the 2028 tax year.

Key Requirements for “Qualified Tips”
To qualify for the deduction, tips must meet the following criteria:

• Voluntary: Payments must be determined solely by the customer. The customer must have the option to leave zero (e.g., a “no tip” button on a POS device) or they don’t qualify.
• Exclusions: Automatic gratuities (like an 18% charge for large parties) and tips from illegal activities do not qualify.
• Form of Payment: “Cash tips” include physical currency (including foreign), checks, debit/credit cards, and casino chips. Digital assets like stablecoins are currently excluded pending future regulations.

Eligibility and Restrictions

• Occupations: Only workers in the 71 designated occupations that “customarily and regularly” receive tips are eligible.
• Managers: Tips from shared pools are ineligible for managers. However, managers may claim tips received directly for services they personally performed.
• Anti-Abuse: To prevent wage-shifting, tips paid by an employer to an employee or tips received by a business owner are not deductible.

Employer Impact
The deduction applies only to individual income tax. Employers must still follow standard payroll tax withholding and reporting requirements. Both employers and employees are responsible for verifying that their specific occupation is included on the official IRS eligibility list.

For the list of occupations, please refer to this source article courtesy of Ogletree Deakins.
 

Automatic termination policies for employees who don’t return after medical leave — typically after 12 weeks or when Family & Medical Leave Act ends — may seem straightforward, but they often run afoul of the Equal Employment Opportunity Commission.

The Americans with Disabilities Act (ADA) requires employers to evaluate each situation individually before terminating an employee with a qualifying disability. That means considering reasonable accommodations, including brief leave extensions, rather than applying a blanket rule.

Work-related injuries add another layer: state workers’ compensation laws may restrict termination following a claim, and rigid policies can invite retaliation allegations.

The bottom line — clear policies are convenient, but limiting legal exposure requires case-by-case evaluation across all applicable laws.

Source courtesy of Parker Poe Adams & Bernstein LLP
 

Spring is the ideal time for employers to “declutter” personnel records. Transforming an unorganized historical archive into a structured system isn’t just about housekeeping—it is a vital risk management strategy.

1. The Strategy of Separation
One of the most common mistakes is keeping all employee data in a single folder. To ensure legal compliance and confidentiality, records should be categorized into distinct files:

• Traditional Personnel File: Professional history (hiring, performance reviews, promotions, and disciplinary actions).
• Medical File: Confidential documents regarding health conditions, disability accommodations, and leave certifications (Required by the ADA).
• I-9 File: Employment eligibility forms. Keeping these separate prevents government auditors from accessing unrelated sensitive data.
• Background Checks: Reports governed by the Fair Credit Reporting Act (FCRA) must be handled with specific confidentiality.

2. The Importance of Consistency
Uniformity is your best defense. If performance evaluations or warnings are documented sporadically, it suggests bias or selective recordkeeping.

Key Point: In litigation, a “gap” in a file (e.g., claiming poor performance without written proof) is often as damaging as bad documentation.

3. Knowing What to Keep (and When to Toss)
Adhering to federal and state retention laws is non-negotiable. While you shouldn’t hoard data forever, you must follow specific timelines:

• Payroll Records: Generally 3 years (FLSA).
• Personnel Records: At least 1 year or longer if a discrimination charge has been filed (EEOC).
• I-9s: Specific periods based on hire and termination dates.
• Workers’ Comp, Benefit Plan, and Tax Records:  Each has their own retention requirements.

4. Avoiding “Cleaning” Pitfalls

• Legal Holds: If a dispute or investigation arises, you have a legal obligation to preserve all relevant records. Destroying documents during a known conflict—even if following a policy—can lead to charges of evidence destruction.
• Digital Data: Apply the same retention rules to emails, messaging apps, and HR platforms as you do to physical paper.
• Avoid Hoarding: Keeping everything forever increases the “surface area” for discovery during lawsuits.

An orderly recordkeeping system eliminates unpleasant surprises during audits or litigation. By shifting from hoarding to intentional curation, employers protect sensitive information and ensure they can respond to legal challenges with confidence.

Source courtesy of Offit Kurman
 

• Tuesday, May 5 – Cinco de Mayo
• Sunday, May 10 – Mother’s Day
• Saturday, May 16 – Armed Forces Day
• Monday, May 25 – Memorial Day
• Friday, June 19 – Juneteenth
• Sunday, June 21 – Father’s Day | First Day of Summer
• Saturday, July 4 – Independence Day