ORS update and Taxpayer Advocate Service letter on 3% healthcare contributions

This bulletin provides a short update from ORS related to the current status of the federal tax treatment of the 3% contributions to the MPSERS Health Care Trust, and also attaches a recent letter from the National Taxpayer Advocate related to the same issue.

ORS Update
As you may know, the State of Michigan (through the Office of Retirement Services, “ORS”) continues to obtain a system-wide answer from the Internal Revenue Service (IRS) on the proper tax treatment of employer and employee contributions made to the Health Care Trust.

Although no system-wide answer has yet been published, since at least 2016 ORS has confirmed that multiple reporting units have received consistent favorable guidance from the IRS as to refund claims that had been submitted relative to federal income and FICA taxes that had been reported, deducted, and remitted under 2012 PA 300. This guidance suggests that the IRS has concluded—relative to the specific claims at issue—that the retiree healthcare contributions were exempt from federal income and FICA taxes. ORS continues to monitor this situation and is supporting the efforts of the Michigan School Business Officials, their constituents, and all MPSERS reporting units in obtaining an agreement that favorably resolves these matters for all reporting units.

National Taxpayer Advocate Letter
Attached to this bulletin is a March 18, 2020, letter from the National Taxpayer Advocate that the Taxpayer Advocate Service (TAS) has asked ORS to distribute to the Reporting Units in MPSERS related to the federal tax treatment of the 3% contributions to the MPSERS Health Care Trust.

The letter addresses a number of matters related to the 3% contributions but focuses on (1) the time limits applicable under Section 6511 of the Internal Revenue Code, (2) those Reporting Units that need to make a refund or protective claim, and (3) the mechanics of how to handle the implementation of a refund. It appears the letter is focused on those Reporting Units that have either not yet stopped withholding FICA and income taxes on the 3% contributions or those that have stopped current withholding but need to make claims for prior years.

The TAS also indicated that this may be especially time-sensitive to some reporting units that have not made a refund or protective claim for the 2016 tax year, given the upcoming April 15, 2020 deadline for such a claim. The TAS letter also provides background on the TAS and their contact information. Because neither TAS nor ORS may provide you with any tax advice, you may want to pass this information along to your own tax advisor, and consult with them on any questions that you have regarding this information.

• Taxpayer Advocate Service letter re Michigan FICA signed 18-March-2020.pdf