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Refund Claim for FICA Taxes on the Optional 3% Retiree Healthcare Contributions

By James M. Crowley / Apr 22, 2015

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. The Supreme Court has not ruled on an appeal challenging the constitutionality of the mandatory healthcare contributions under Michigan Public Act 75 of 2010 ("PA 75").

By way of background, in 2010, Michigan Governor Rick Snyder signed PA 75 into law that required, beginning July 1, 2010, a mandatory contribution from each active member of the MPSERS of 3% of his or her compensation to a public employee retirement health care fund to help defray the costs of retiree healthcare (the "Mandatory 3% Contributions"). Shortly thereafter, a lawsuit was filed to prevent enforcement of PA 75, and in August 2012, the Michigan Court of Appeals held that the Mandatory 3% Contributions were unconstitutional. The State appealed the Court of Appeals' decision to the Michigan Supreme Court. However, the Michigan Supreme Court ordered that the application to appeal be held in abeyance pending the decision in the legal challenge to PA 300 which is discussed below. 

On September 4, 2012, in response to the Michigan Court of Appeals' decision with respect to PA 75, Governor Snyder signed into law PA 300 which required that 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. Under the first option, active members hired on or before September 3, 2012 could choose to continue to have their employer apply the 3% reduction to their compensation and have it contributed to the retiree healthcare fund (the "Optional 3% Contributions"). Alternatively, active members hired on or before September 3, 2012 could elect to participate in a two part retirement program. 

On September 4, 2012, a lawsuit was filed to prevent enforcement of PA 300. On November 29, 2012, the Michigan Court of Claims upheld PA 300 as constitutional, but required an extension of the deadline by which to elect one of the two options. This decision was appealed to the Michigan Court of Appeals which agreed with the Court of Claims upholding the constitutionality of PA 300. The Court of Appeals' decision was appealed to the Michigan Supreme Court, and the Michigan Supreme Court has now also held that PA 300 does not violate the Michigan Constitution.

As we have previously reported, there is a strong  position, based on IRS guidance and case law, that the Mandatory 3% Contributions and the Optional 3% Contributions are not subject to FICA taxes. This position is supported by the Michigan Office of Retirement Services ("ORS") which has issued a bulletin to school districts indicating its opinion that both the Mandatory and Optional 3% Contributions are not subject to FICA taxes. Accordingly, we have advised school districts that they have a sufficient  basis to  file a refund claim with the IRS for the FICA taxes previously withheld and paid on both the Mandatory and the Optional 3% Contributions.

Notwithstanding this position we further advised school districts to hold off filing the refund claims until the legal challenges to PA 75 and PA 300 had been resolved and to file a protective claim for refund for years which were approaching the three year statute of limitations on the filing of such claims (i.e. 2010 and 2011). Now that the legal challenges to PA 300 have been resolved, school districts that have not already done so may consider filing a claim for refund for any FICA taxes withheld on the Optional 3% Contributions in 2012 and thereafter.

A refund claim by a school district for FICA taxes is required to be filed on a Form 941-x for each applicable quarter within a calendar year and must  include a detailed explanation of the reasons why the school district is requesting the refund. It should also be noted that the school district has the option of including a request for a refund of the employees' share of FICA taxes in addition to the school district's share of FICA taxes. To do so, however, the school district would need to obtain written consent from each affected employee stating that the school district may file the claim for the employee's share of FICA tax, as well as a statement from each employee stating that he or she has not claimed and will not claim a refund or credit for the over collection of the FICA taxes.

If you have any questions, please contact James M. Crowley at (248) 988-5851 | jcrowley@clarkhill.com or another member of Clark Hill's Education law group.