Update on 3% Contribution to Education Retiree Healthcare Fund
Action required if your district filed claims with the IRS regarding Michigan Public Act 300 of 2012
At the end of December, the Office of Retirement Services (ORS) sent notification that the Internal Revenue Service (IRS) will soon issue determinations on certain protective claims (Form 941-X*) filed by individual districts in regard to the federal tax treatment of the retiree healthcare contributions (HCC) remitted under Public Act 300 of 2012. While no official determinations have been issued, the IRS has informally indicated that it will be considering the retiree HCC under both Public Act 75 of 2010 and Public Act 300 of 2012 as exempt from federal income taxes. Furthermore, ORS announced that although the IRS had informally indicated that Public Act 75 of 2010 retiree HCC will be considered as exempt from FICA taxes, conversely, the final informal indication from the IRS is that the judgements on the protective claims will state that Public Act 300 of 2012 retiree HCC are subject to FICA taxes.
What’s next?
At this time the presumption of the judgment of the IRS on the protective claims is informal.
The ORS stated they are planning to file a Private Letter Ruling request with the IRS seeking a final determination on behalf of the Michigan Public School Employees’ Retirement System (MPSERS) regarding the federal tax treatment of the retiree HCC provided under both Public Act 75 of 2010 and Public Act 300 of 2012.
What does this mean for you?
If your district filed protective claims with the IRS regarding Public Act 300 of 2012 retiree HCC, you should notify ORS and the Michigan School Business Officials of the status of those claims. If you have questions, please contact a member of Yeo & Yeo’s Education Services Group.
History of the 3% healthcare contribution
Public Act 75 of 2010 required each active member of MPSERS to contribute up to 3% of their compensation to the Retiree Healthcare Fund to help the cost of retiree healthcare (which became the HCC discussed above). Those contributions, being mandatory in nature and “picked up” by the district as “employer contributions,” were collected from July 1, 2010, until September 3, 2012. The retiree HCC remitted thereunder continue to be held in escrow awaiting a final determination regarding the legality of Public Act 75 of 2010.
On September 4, 2012, in response to the Michigan Court of Appeals’ decision with respect to Public Act 75, the Governor signed into law Public Act 300 which obligated all active members of the MPSERS, as of September 3, 2012, to elect one of two options regarding their retirement healthcare, within a limited window of time:
1. Active members hired on or before September 3, 2012, could select to continue having the 3% deduction.
2. Members hired on or before September 3, 2012, could elect to participate in a two-part retirement program.
Whereas the courts have yet to issue a final ruling on the legality of Public Act 75 of 2010, on April 8, 2015, the Michigan Supreme Court released its opinion holding that the optional healthcare contributions under Michigan Public Act 300 of 2012 (“PA 300”) do not violate the Michigan Constitution.
In view of the fact that the Michigan Supreme Court has upheld the constitutionality of Public Act 300 of 2012, the IRS has indicated that it is preparing to issue rulings on the protective claims that have been made by individual districts regarding the treatment of the retiree HCC under Public Act 300 of 2012. As discussed above, the IRS has informally indicated that, for federal tax treatment purposes, it views a distinction between the retiree HCC remitted under Public Act 75 of 2010 and Public Act 300 of 2012, respectively. Accordingly, it is expected that the IRS’s ruling will recognize that the retiree HCC remitted under Public Act 300 of 2012 (i.e., from September 4, 2012, to present) are subject to FICA taxes.
*Form 941-X is the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, which was filed if your district subjected the 3% healthcare contributions to FICA taxes between July 1, 2010, and September 3, 2012. This form was completed for each quarter that a claim was made for.