FICA Taxes on 3% Retiree Healthcare Contributions
The legal challenges to the mandatory and optional healthcare contributions under Public Acts 75 and 300 have yet to be resolved. In the interim we continue to receive inquiries from school districts as to whether they should continue withholding and paying FICA taxes on the New 3% Contributions and whether they should file for a refund for the employer portion of FICA taxes previously paid on both the Old and New 3% Contributions. With respect to the refund claim, there is also the question of whether the employee portion of FICA taxes should be included in the refund claim.
As we have previously reported, there is a strong position, based on IRS guidance and case law, that the Old 3% Contribution and the New 3% Contributions are not subject to FICA taxes. This position is supported by the Michigan Office of Retirement Services ("ORS") which has recently issued a bulletin to school districts indicating its opinion that both the Old and New 3% Contributions are not subject to FICA taxes. Based on this position, we believe that school districts have a sufficient basis to discontinue the withholding of FICA taxes on the New 3% Contributions and to file a refund claim with the IRS for the FICA taxes previously withheld and paid on both the Old and New 3% Contributions.
Notwithstanding this position, at this time, due to the ongoing legal challenges to Public Acts 75 and 300, we are advising school districts that are currently withholding FICA taxes on the New 3% Contributions to continue this withholding until the legal challenges are resolved. Hopefully the legal challenges will be resolved in 2014 and, if the healthcare contributions are upheld school districts, will be able to make a corrective withholding adjustment and refund the excess amounts withheld before the end of 2014 tax year.
In addition, we are also recommending that school districts file a protective claim for refund for the FICA taxes withheld and paid on the Old 3% Contributions in 2010 ( which claim must be filed on or before April 15, 2014 ). The school district can file future refund claims for other years once the legal challenges are resolved (or before those years' respective refund claim filing deadlines listed below).
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 over payment 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 over payment 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:
Deadline for Filing
FICA Refund Claim
|2010||April 15, 2014|
|2011||April 15, 2015|
|2012||April 15, 2016|
|2013||April 15, 2017|
The IRS allows a protective claim for a 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 challenges to Public Acts 75 and 300. By filing the refund claim by April 15, 2014 for the FICA taxes paid in 2010 on the Old 3% Contributions, a school district will preserve its right to a possible refund of FICA taxes.
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.
Please consult with a Clark Hill attorney within our Education & Municipal Practice Group if you have any questions regarding the refund of FICA taxes on the Old and New 3% Contribution.