For the third year in a row, the Treasury Department’s annual revenue proposals include clarifying the tax treatment of on-demand pay arrangements by amending the Internal Revenue Code to require weekly payroll periods for earned wage access (EWA) arrangements. Since a similar proposal has been trotted out in the Department’s annual “Green Book” for the past couple of years, it is not likely that any federal legislative action on it will occur in the near future.
However, because Congress is currently mulling over a consumer protection bill that involves EWA, and several states have either proposed or enacted legislation surrounding the topic, keeping up to date with on-demand pay is important for businesses and practitioners alike. Checkpoint Payroll Update recently spoke with Heather Heebner, Vice President of Compliance at Instant Financial, about the current and changing landscape of EWA.
Popularity of EWA and benefits
EWA programs began in the 2010s and grew in popularity throughout that decade. Heebner explains that these wage arrangements are “a solution that allows workers to access their pay when they want, rather than according to a traditional schedule determined by their employer – such as biweekly or monthly.” On-demand pay programs became even more popular during the COVID-19 pandemic, as the reasons for employees needing wages sooner than a typical payday increased throughout the health emergency.
This interest in EWA as a financial wellness offering continues to be of significant interest to employees as illustrated by a 2022 “Wages and Wellbeing Study” from Instant Financial that showed 79% of workers would be more interested in applying for a job that pays them the same day they work. “Employees want to work for employers that offer them access to their pay each day,” Heebner said.
There are also benefits for employers offering EWA as a benefit. Heebner explains that “EWA can help businesses deliver better employee experiences and improve employee engagement and retention.” A 2023 paper from the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government explained that companies with large workforces like Target, McDonald’s, Walmart, and Uber offer EWA to their employees for the purpose of improving talent recruitment, employee retention, and productivity.
Areas of concern
But, the paper did note the existence of a “legal gray space” regarding on-demand pay transactions after a 2020 Consumer Financial Protection Bureau (CFPB) advisory opinion said that certain EWA programs do not meet the definition of “credit” under Regulation Z, which implements the Truth in Lending Act (TILA). Heebner said that “for products that were credit, the regulations provided an exemption if the advance is made against earned wages, assesses no fee, has no contractual remedy against the consumer, and does not engage in debt collection activities for failure to repay.”
Another area that may be of concern for on-demand pay arrangements was highlighted in a recent PayrollOrg post on the subject that explains “the concept of EWA raises many questions for employers, including when the actual date of payment occurs for employment tax withholding, depositing, and reporting purposes.”
Treasury’s tax clarification proposal
Regarding tax withholding, depositing, and reporting, the Treasury’s fiscal year (FY) 2025 proposal aims to address potential issues around EWA and “constructive receipt,” which Heebner explains “is a tax and accounting concept that states income is taxable to a person when they have ‘constructively received’ the funds” under 26 C.F.R. § 1.451-2.
The proposal would amend Code Sec. 7701 to provide a definition of an on-demand pay arrangement and also Code Sec. 3401(b) to provide that the payroll period for EWA is treated as a weekly payroll period, even if employees have access to their wages during the week. It would also clarify that on-demand pay arrangements are not loans for federal tax purposes and amend Code Sec. 6302 to provide special payroll deposit rules for EWA.
Despite the absence of any federal legislation to address the Treasury’s concern on EWA and constructive receipt, some tax professionals believe the proposal should be adhered to as if it was the required process. In a 2023 Payroll Update article , Tim Daum, a managing director at Crowe LLP’s National Tax Services, said that the proposal “should put employers on notice that that’s the way the IRS views things.”
Other federal and state EWA proposals
On the consumer front, the House Financial Committee advanced a bill that would create a transparent regulatory framework for EWA products that ensures consumers are not assessed mandatory or hidden fees while also mandating numerous disclosures. The “Earned Wage Access Consumer Protection Act (H.R. 7428) would also set requirements for EWA providers to establish dispute resolution procedures and certain notification requirements.
Without any current federal oversight on EWA, several states are either considering or have already taken action on the topic. “Other states may be waiting to see what, if anything, happens at a federal level or may be looking to see what California publishes before proposing additional bills in the respective states’ House or Senate,” Heebner noted.
California’s Department of Financial Protection and Innovation (DFPI) proposed new regulations last year that would update the definition of loan to include “income-based advances” or EWA. The DFPI modified the proposed regulations in November 2023 and the Consumer Financial Protection Bureau (CFPB) submitted a comment letter later than month agreeing with the idea of classifying EWA as loans and requiring on-demand pay providers to register with the state.
Although other states are considering similar measures, Heebner believes “California’s decision will likely shape how other states approach the issue.” She also anticipates increased activity in legislative and regulatory areas. “Regulation is imperative in the fintech industry as a whole in order to protect consumers, however, it must be done in a way that leaves room for innovation,” Heebner added.
She advises employers and providers to stay updated on state legislation regarding EWA as it may vary from state to state, similar to minimum wage laws. So far, passed EWA legislation has only imposed requirements on providers, not employers. “However, employers should still be knowledgeable of what can and cannot be provided within the state,” Heebner concluded.
To learn more about how Checkpoint’s payroll solution can help your business, visit https://store.tax.thomsonreuters.com/accounting/Practice-Area/Payroll/c/2400.