MPSERS 3% Contribution by Employees: An Update
Jan 06, 2012
As of the date of this publication we are awaiting a decision from the Michigan Court of Appeals regarding the propriety of the school employees 3% contribution to the school employee retirement system. The Michigan Court of Claims ruled that the 3% contribution is unconstitutional.
Next Steps – Stay the Course, and Wait for a Final Court Decision
The conventional wisdom for school districts is to stay the course pending a final decision by the courts (the decision by the Court of Appeals could be appealed to the Michigan Supreme Court) about the 3% contribution. If a school district employer decided to subject the 3% contribution to FICA withholding, then the district should continue this practice. For a school district that decided to not subject the 3% contribution to FICA tax, this practice can continue to be applied.
If the courts decide that the 3% contribution is invalid, then presumably the money will be returned by the retirement system to the school districts for refund payment to employees. This type of payment to employees would be ordinary wages subject to FICA. However, for employers that have previously withheld FICA on the 3% contributions, any refund to employees of the 3% contribution should not be subject to FICA and there would be no basis for an employer to apply to the IRS for a FICA tax refund.
If the Courts conclude that the 3% contribution is valid, then an application will be filed with the IRS for a determination on whether the contribution is subject to FICA. This process can roll along without further employer action until April 15, 2014. If by this time the IRS has not ruled on whether the 3% contribution is subject to FICA, then schools that have withheld the related FICA will need to file protective claims on amounts subject to FICA in 2010 to ensure the right to recover 2010 FICA tax paid assuming a favorable IRS ruling (i.e., assuming the IRS rules that the 3% contribution is not subject to FICA).