Update on 3% Contribution to Education Retiree Healthcare Fund and FICA Refunds

CPAs & Advisors

Jennifer Watkins
Jennifer Watkins CPA Principal CPAs & Advisors

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What is new with the 3% contribution to the Education Retiree Healthcare Fund? Will the IRS refund the FICA taxes on the remittances? Two issues are currently impacting the situation.

Public School Employees Retirement Act

The first issue is PA-75-2010, which is the old 3% contribution that began in 2010 and continued through the first pay of February 2013. This matter is still in court. Overall, it is an issue of the constitutionality of the tax treatment of the 3% contributions.

Public School Employees Retirement Act Reform

The second issue deals with PA-300-2012, which began in February 2013 and deals with the current 3% contributions. This issue is a bit clearer. This is an issue of taxability of the 3% contributions regarding which the IRS has not formally issued a published position; however, the IRS has started to act on it. The IRS is refunding FICA tax from 2013-2015 if the school districts/academies withheld FICA during that time. Also, it appears that 2016 taxes will be refunded as well. If your school district/academy is still withholding FICA, keep filing for refunds.

Status of Protective Claims

Back to the first issue, PA-75. The majority of school districts/academies filed protective claims for 2010-2012 using Form 941-X. Those claims continue to wait for the Michigan Supreme Court’s decision. As of now, we are unsure when the Supreme Court will hear the case, but we have heard it may be this summer. [Update as of 6-7-17: The issue will be going to the Supreme Court.]

The IRS will not and is not refunding the FICA on PA-75 3% contributions. As of now, the IRS is waiting on the Supreme Court’s decision.

The Supreme Court will decide if the FICA exemption is unconstitutional or constitutional. If it is determined to be unconstitutional, the 3% contribution tax may be refunded, but it is a complicated situation. If it is determined to be constitutional, the amount in escrow will apply to the retirement plan, and school districts/academies could still have refunds of FICA depending on Private Letter Ruling results. However, the statute of limitations window for 2013 is about to close, since school districts/academies had until April 15, 2017, to file a protective claim for 2013.

Also, be aware that if you received a refund for 2013, you received it for PA-300 FICA paid only, but you would have needed to file a protective claim for PA-75 FICA paid.

Status of the Private Letter Ruling

The Private Letter Ruling (PLR) filed with the IRS by the Office of Retirement Services was declined because the PLR needed an employer name on it to make it valid. Certain school districts volunteered to be the employer for it, but the attorneys are still working on issuing a new PLR. Once the results are in, it will apply to both FICA contributions made under the PA-75 and PA-300 plans. If the IRS deems it not taxable, it would be a clear, published decision from the IRS for all. However, if it is deemed taxable, we are not sure what would happen, but hope it would be enacted prospectively.

Yeo & Yeo’s Education Services Group will keep you informed as we receive more information about the PLR or other updates on this situation.


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