Many people across the US found their pay cut earlier this year due to COVID-19. Some employers have recovered more quickly than expected.

When the two of those intersect, it may result in an employer giving employees back the portion of their salaries withheld earlier in the year. This is especially common right about now, for a variety of reasons:

• For those employers who applied to the Paycheck Protection Program (PPP), the loan forgiveness deadline was originally mistakenly believed to be October 31st. These loans can be forgiven if the funds were used for eligible costs, which included payroll costs.
• It’s the time of year for employee satisfaction surveys to be coming out, and timing these with benefits restoration might improve employee satisfaction.
• December 31st is the end of the fiscal (=financial) year for most companies, and they want this year’s expenses to go with this year’s income for tax purposes.

So you’re getting some money headed your way. Some of it should have been yours to begin with, and/or you’re getting some extra.

Let’s talk about what those types of moneys may be, how they’ll arrive, likely when they’ll arrive, tax implications, and any other implications.

• __% of your pay was kept, and is being restored.
  • It will likely arrive in a separate paycheck. That makes it very easy from a bookkeeping perspective for your employer to keep track of exactly how much money it is “giving back”.
  • Special payouts are required to be tax withheld at certain tax rates, whether those are above (more common) or below your usual withholding.  In MN that’s the federal 22% plus 6.25% MN (if that’s where you’re at, other states would have their own state-specific amount).  And SS and Medicare, as usual, 7.65%.
    • Withholding is not the same as actual tax liability, that won’t be figured out until you do your 2020 taxes in Q1 2021.
  • 403b/Roth 403b (or 401k/Roth 401k) contributions will likely be made from this money, at whatever your usual contribution rate is (eg if you usually contribute 4% to get your employer’s full match, then 4% will be routed to your 403b as usual).
  • This money likely also counts towards your pension calculation!

• $___ thank you payment
  • This may also be given to you on the same paycheck as a percentage restoration (above).
  • This money will be subject to the same standardized withholding that was described above, and SS and Medicare.
  • 403b/401k contributions will likely not be made from this money.
  • This money likely doesn’t count towards your pension calculation.
    
• A missing 403b/401k match being restored.
  • Some employers don’t usually do a true-up.  However, for 2020, your employer may do a true-up calculation to restore the match you missed, assuming you’re still eligible at the end of the year.
  • This will be contributed to your 403b/401k’s, either at the end of 2010, or in Q1 2021.
  • (matches never count towards pension calculations)
    

Then there’s the question of what to do with this money. Follow your Investment Policy Statement for windfalls. Importantly, if you’ve been raiding your Emergency Fund in 2020, this is a great opportunity to help build that back up.