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Refund Claim for FICA Taxes on Mandatory 3% Retiree Healthcare Contributions

By James M. Crowley / Apr 01, 2015

The legal challenge to the mandatory 3% retiree healthcare contributions under Public Act 75 ("PA 75") has yet to be resolved by the Courts. After the enactment of PA 75, a lawsuit was filed to prevent its enforcement. In August 2012, the Michigan Court of Appeals held that the mandatory 3% healthcare contributions under PA 75 were unconstitutional. The State of Michigan appealed the Court of Appeals' decision to the Michigan Supreme Court which has ordered that this application to appeal be held in abeyance pending the Supreme Court's decision in the challenge to the new 3% retiree healthcare contributions under Public Act 300 ("PA 300"). Oral arguments on the challenge to PA 300 were heard in the Supreme Court on October 9, 2014 but no decision has been issued.  

As we have previously reported, we believe there is a strong argument, based on IRS guidance and case law, that the mandatory 3% retiree healthcare contributions under PA 75 are not subject to FICA taxes. Based on this argument, we believe school districts have sufficient basis to file a refund claim with the IRS for the FICA taxes previously withheld and paid on the mandatory 3% retiree healthcare contributions under PA 75.

There is a statute of limitations associated with the filing of refund claims for FICA taxes. Generally, a taxpayer's claim for a  refund of an overpayment of any tax must be filed by the taxpayer within three years from the time the return was filed or two years from the time the tax was paid, whichever is later. Since school districts are dealing with the overpayment of taxes on Form 941 (which are filed quarterly), for purposes of the statute of limitations, under a special IRS rule, all Form 941s filed for a given calendar year are deemed filed on April 15th of the succeeding calendar year. Accordingly, the current deadlines for filing FICA refund claims are as follows:

Calendar Year          Deadline for Filing FICA Refund Claim

2011                         April 15, 2015

2012                         April 15, 2016

2013                         April 15, 2017

The IRS allows a protective claim for refund to be filed in cases where the right to a refund is contingent on future events which may not be determinable until after the deadline for filing the claim. In our case, the FICA refund claim is contingent on the outcome of the legal challenge to PA 75. Therefore, last year we recommended that school districts file a protective claim for refund of the FICA taxes withheld and paid on the mandatory 3% retiree healthcare contributions under PA 75 in 2010. This claim was required to be filed on or before April 15, 2014. We further recommended that school districts file future refund claims for other years once the legal challenge had been resolved (or before those years' respective refund claim filing deadlines listed above).

Due to the fact that the legal challenge to the mandatory 3% retiree healthcare contributions under PA 75 has not been resolved, we are further recommending that school districts file a refund claim for the mandatory 3% retiree healthcare contributions paid in 2011, which claim must be filed on or before April 15, 2015.

A protective claim for refund can be filed on IRS Form 941-x and must include the following in the required detailed explanation under Part 4, line 25 of the Form:

  • The essential nature of the refund claim;
  • The contingencies affecting the refund claim; and
  • A certification that the school district has not repaid or reimbursed its employees for the over-reported FICA taxes and has not obtained the employees' consent to file the claim.

If the Michigan Supreme Court upholds the mandatory 3% retiree healthcare contributions under PA 75, a school district that files a protective claim for refund will be required to notify the IRS that the contingency has been resolved and to request that the IRS process the claim for refund. The school district will also be required to obtain written consents from its employees if the claim for refund includes the employee portion of the over-reported FICA taxes.

Please consult with a Clark Hill attorney in our Education practice group if you have any questions regarding the refund of FICA taxes on the mandatory 3% retiree healthcare contributions.