Are we closer to a resolution of the 3% HCC Deduction tax treatment?

This update follows numerous attempts by the Michigan School Business Officials, the Office of Retirement Services, and many other interested parties, to obtain clarification from the Internal Revenue Service regarding the federal tax treatment to be accorded to the health care contributions (HCC) that began under 2010 PA 75 and were continued under 2012 PA 300, respectively. A number of local and intermediate school districts (in addition to local and state media outlets) have reported that the IRS has been providing confusing—even conflicting—information on this important issue that affects every district and hundreds of thousands of current and former public school employees.

We have just learned that the IRS has provided new guidance to several districts that assessed, reported, and remitted FICA taxes relative to the “New” 3% HCC that took effect under 2012 PA 300. Although districts that filed protective claims for quarters affected may have originally received notification that those claims were disallowed, the IRS has issued a statement to some districts saying, in essence, “We reevaluated our position and have determined that your claim(s) will be allowed in full.”

What this means is the 3% deduction currently in place, the “New 3%,” would appear to be exempt from FICA tax. This is a big move from the IRS’ original position, and appears to be a big “win” for districts! Granted, the Michigan School Business Officials (and others) are still attempting to verify and confirm that this is the IRS’s “official” determination in that regard. Furthermore, there will be additional steps that need to be taken by districts that have taxed the PA 300 3% deduction, but in the end the district and employees should see funds coming back for several years of FICA tax.

The importance of this determination—upon verification--is that those districts who have exempted the 3% deduction since the last quarter of 2012, seemingly should be able to continue that approach Those that chose to tax the deduction are definitely encouraged to reconsider that decision for future pay periods, and to file the proper documentation as soon as possible to initiate a refund request for any open years. Once again, it is our understanding that the district must have properly filed the initial protective claims for the quarters affected in order to resubmit and receive the refund for any closed years.

This appears to be excellent news for schools. However, there will be additional “clean up” including the potential reissuing of W-2’s for the affected years, and dealing with the refunding of any amounts to staff. We are hoping to receive guidance on how to accomplish this, but it is imperative that you contact your audit/accounting firm and discuss your approach.

This does not include the 3% HCC Deduction under PA 75 of 2010, which was the deduction made in the initial reform. A tax decision on that issue is being held until the Michigan court case is resolved. Stay tuned!

We will continue to monitor these situations and report to you any pertinent information.

David and Bob