U.S. DEPARTMENT OF LABOR
Employment and Training Administration
Washington, D. C. 20210

CLASSIFICATION

ES/WOTC

CORRESPONDENCE SYMBOL

TEESS

ISSUE DATE

October 2, 1997

RESCISSIONS

None

EXPIRATION DATE

Continuing

DIRECTIVE

:

EMPLOYMENT SERVICE PROGRAM LETTER NO. 02-98

 

TO

:

ALL STATE EMPLOYMENT SECURITY AGENCIES

 

FROM

:

JOHN R. BEVERLY, III
Director
U.S. States Employment Service

 

SUBJECT

:

Reauthorization and Expansion of the Work Opportunity Tax Credit Program and Authorization of the Tax Credit Program for the Welfare-to-Work Tax Credit.

  1. Purpose. To announce: a) the reauthorization of the Work Opportunity Tax Credit (WOTC) Program under the Taxpayer Relief Act of 1997 (P. L. 105-34), the Act, and provide information on the major changes in the program as a result of the new law; and, b) the new Welfare-to-Work Tax Credit authorized under the Act, which is to be administered in the same manner as the WOTC program.

  2. References. Internal Revenue Code of 1986, Sections 51 and 51A, as amended; the Small Business Job Protection Act of 1996, (P.L. 104-188); the Taxpayer Relief Act of 1997 (P.L. 105-34); ETA Handbook No. 408, First Edition, July 1997.

  3. Background. The Secretaries of Labor and of Treasury are jointly responsible under the Act, as amended, for the administration of the WOTC program. By agreement with the Secretary of Treasury, the Secretary of Labor provides guidance and oversight to the State Employment Security Agencies (SESAs), the "designated local agencies," about determination of target group eligibility, and the processing and certification of job applicants as target group members to employers. The IRS is responsible for granting the tax credit to employers and for , all enforcement activities. SESAs' WOTC certification decisions must conform to all IRS rules and regulations governing the operation of this program and to the policies and interpretations of the Department of Labor.

  4. Information. The Taxpayer Relief Act of 1997, signed into law on August 5, 1997, extends the WOTC --with changes-- for a nine-month period (P.L. 105-34 603). The Act also authorized a welfare-to-work tax credit for a 16-month period (P.L. 105-34 801). The WOTC and Welfare-to-Work credits are designed to help people facing barriers to employment move into gainful employment by encouraging employers in the private sector to hire from among nine groups of job seekers (i.e., now, eight groups for WOTC and one group for the Welfare-to-Work credit). Under the WOTC and Welfare-to-Work Tax Credit programs, private sector employers are eligible for tax credits for certified new hires.

    Under the legislation reauthorizing the WOTC, SESAs' certification and program operation responsibilities remain essentially the same as described in the first edition, July 1997, of ETA Handbook No. 408. These include procedures for determining target group eligibility and issuing certifications, for resolving policy questions and/or employer appeals, and for complying with quarterly reports' responsibility. In support of P.L. 105-34, we have developed a three-part approach for our request for clearance to OMB, under the Paperwork Reduction Act of 1995, as follows: 1) an emergency clearance modification to the ETA Form 9061 as required by the new law, 2) an emergency clearance for an Addendum to the first edition of ETA Handbook No. 408, that will contain the new provisions in the reauthorizing legislation and all the newly revised WOTC administrative and reporting forms; and, finally, 3) a regular OMB submission that will be submitted for the 60-day clearance process, that will incorporate all the necessary changes for the WOTC procedural Handbook and forms. The changes will update administrative and reporting forms and clarify other procedural or policy issues.

    ETA Form 9061, Individual Characteristics Form (ICF), has been revised to reflect the new legislative changes and target group definitions. It has been approved by the Office of Management and Budget (OMB) according to the Paperwork Reduction Act of 1995. The OMB approval number (OMB No. 1205-0371) is effective through March 31, 1998. We are providing a copy of this form so that WOTC Regional Coordinators make sure each state receives a camera ready copy the SESAs can reproduce and make available to employers and their representatives. An initial supply of this form will be shipped directly to the regional offices and the SESAs by the end of October. The form will also be available through the Internet. Also, we expect the Addendum to be ready by the end of October.

  5. Major Changes. The following is a summary of the major provisions in the reauthorizing legislation as it applies to:

    1. THE EXPANDED WOTC. The Taxpayer Relief Act:

        (1)  Extends the WOTC for a nine-month period, effective for all individuals beginning work October 1, 1997 through June 30, 1998.

        (2)  Modifies the WOTC in five ways:

        1. Changes the eligibility definition for the IV-A Recipient (AFDC/TANF) target group from receiving benefits for nine "consecutive" months within the last 18 months to "any" nine months within the last 18-months.

        2. Amends the eligibility definition of the "qualified" veteran target group to include only veterans who are members of families receiving food stamps Note. The special qualification for veterans receiving TANF has been repealed. Such veterans now must qualify as a veteran receiving food stamps, as a qualified VI-A recipient, or otherwise.

        3. Establishes a new target group: Supplemental Security Income (SSI) recipients receiving benefits for M month ending within the 60 days ending on the date of hire.

        4. Increases the amount of the tax credit for target group members employed for at least 400 hours, from 35 percent to 40 percent of qualified wages ($6,000) for a maximum credit of $2,400 for all adult target groups except for Summer Youth.

        5. Provides for a reduction of the 40 percent tax credit equal to 25 percent of qualified wages (i.e., wages up to $6,000) for target group members employed for less than 400 hours, but at least for 120 hours.

    2. The Welfare-to-Work (W-2-W) Credit.

      Before claiming the Welfare-to-Work credit, an employer must obtain certification of a worker's eligibility as a member of a family receiving Long-Term Family Assistance benefits. SESAs are the "designated local agencies" responsible for issuing the required certification: The rules for certifying a worker as a LongTerm Family Assistance Recipient are the same as the rules for certifying target group membership under the WOTC. Also, the rules governing who is ineligible under the WOTC are the same for Long-Term Family Assistance Recipients, except that these employees must work at least 400 hours or 180 days before the employer is eligible to claim the Welfare-to-Work Credit. Note. The Welfare-toWork tax credit is coordinated with the WOTC, so that, in any one taxable year an employer cannot claim both credits with respect to the same individual.

      The Secretary of Labor, through ETA, and the Secretary of Treasury, through the IRS, have the same responsibilities as under the WOTC.

      The following is a summary of the major provisions of the Welfare-to-Work credit authorized under the Act. This legislation:

        (1)  Authorizes this tax credit for a 16-month period, effective for individuals begining work January 1, 1998, through April 30, 1999.

        (2)  Defines "long-term family assistance recipient" as a member of a family:

        • that received AFDC/TANF benefits for at least 18 consecutive months ending on the date of hire, or

        • that received AFDC/TANF benefits for any 18 months beginning after August 5, 1997, for applicants hired within two years after the date the 18-month, total period is reached, or

        • whose AFDC/TANF eligibility expired under a Federal or State law after August 5, 1997, for applicants hired within two years after this eligibility expired.

        (3)  Provides that the amount of the tax credit is equal to 35 percent of "qualified wages" (i.e., wages up to $10,000) for the first year and 50 percent of "qualified wages" (i.e., wages up to $10,000) for the second year. Note: Qualified wages cannot exceed $10,000 each year.

        (4)  Defines "qualified wages" more generously than the WOTC FUTA definition, e.g., also includes tax-exempt amounts received under: accident and health plans, educational assistance programs, and dependent care assistance programs.

  6. Transition Relief. On September 20, 1997, the IRS issued a revised Form 8850 entitled, Pre-Screening Notice and Certification Request for the Work Opportunity and Welfare-to-Work Credits. The changes to the WOTC and the enactment of the Welfare-to-Work tax credit are reflected on a single form to simplify the certification process for prospective employees, employers and the SESAs.

    Employers should begin using the new IRS Form 8850 for employees whose first day of work is on or after October 1, 1997, for the WOTC or on or after January 1, 1998 for the Welfare-to-Work tax credit. Under the "transition relief" period, however, employers are allowed to continue to use the old IRS Form 8850 for individuals who are in one of the original seven WOTC target groups and who begin work before January 1, 1998. SESAs are instructed to accept all timely submitted old IRS Forms 8850, which request certification for any of the original seven target groups, and who be in work before January 1, 1998.

    Employers that submit IRS Forms 8850 to the SESAs are not entitled to the applicable credits unless the employers receive the required certifications. Before claiming the WOTC or the Welfare-to-Work tax credit with respect to an individual, the employer must receive a certification from the SESA that the individual is, in fact, a member of a targeted group or a long-term family assistance recipient, as the case may be.

  7. Funding. Both the House and the Senate bills would provide $20 million for the administration and operation of the WOTC and the Welfare-to-Work Credit for FY 1998. ETA will allocate these funds --through the Regional Offices-- in October after the enactment of an appropriation. The allocations will be based on Civilian Labor Force, welfare population, and most importantly, prior period WOTC workload.

  8. Action Required. State Employment Security Agency Administrators are requested to:

  9. Inquiries. Direct all questions to the appropriate Regional WOTC Coordinator.

  10. Attachment. Individual Characteristics Form, Work Opportunity Tax Credit and Welfare-to-Work Tax Credit, ETA Form 9061.