Update on the 3% Refund – Tentative Guidance Issued with More Updates Coming Soon

CPAs & Advisors

Jennifer Watkins
Jennifer Watkins CPA Principal CPAs & Advisors

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Yeo & Yeo, along with Michigan School Business Officials, the 1022 Committee, and various representatives of the State of Michigan met again regarding the 3% refunds last Friday. Many questions arose on reporting and issuance that we will answer to assist school districts with completing employee distributions and tax reporting. A few issues still need to be resolved, but we were able to get guidance to some key questions.

We still recommend that school districts wait for the written guidance that will be sent once finalized, but we have summarized several items below that will help districts plan and issue their distributions correctly.

Note: We receive new guidance on this daily. As meetings occur between the Office of Retirement Services (ORS), the 1022 Committee, MSBO, etc., certain guidance may change. We will send updates as we receive them and adjust the items below accordingly.

Frequently Asked Questions:

When will I receive the funds and how will I get the payment?

The payment is planned to be pushed out on January 22. It will be a separate deposit from the monthly State Aid amount.

What is the initial journal entry?

Once the money is received, initial accounting should be straightforward. Below is an example journal entry for the initial payment.

  • Debit – Cash
  • Credit – Liability

(It is recommended that the cash be placed in a non-interest bearing account.)

Will there be impact on revenue and expenditure accounts?

Revenue – No impact.

Expenditure – Maybe, depending on the treatment of the 3% refund. If the amount being received for previous wages (3% refund) was not initially taxed for FICA, districts will have an expenditure for FICA in the current year. The 1022 Committee is looking into a recommendation as to account number and allocation of this expenditure, taking into account the effect of other reporting and calculations, such as COE or indirect cost rates, etc.

Can we cut a check through Accounts Payable or does it have to go through payroll and be reported on a W-2?

For the majority of districts, the answer is no. However, if your district included the 3% refund in federal and state wages and included it for FICA wages then yes, you would return the payment through an Accounts Payable check with no follow-up in reporting (no 1099s or W-2s necessary for the wages piece).

Should we try to obtain a new W-4?

We recommend using the most current W-4 on file.

What should we do with the interest and how do we need to report it?

The interest will need to be paid out to each individual in addition to the 3% refund. As for the reporting, currently we do not see any reporting that will need to be done by the districts. Many issues have arisen in relation to the interest – at the most basic level, whose responsibility is the reporting in the first place? However, none of the interest payments to individuals are anticipated to be more than the $600 limit for either a 1099-Misc. or a 1099-Int (*limit for non-financial institutions). Therefore, the reporting of the funds should not be a requirement for your district.

Will there be W-2 reporting?

For the majority of districts, yes. If the district excluded the 3% refund for federal and state wages and included or excluded for FICA wages, then it must be reported on the W-2. It will depend on the district’s treatment of FICA as to what box (1, 3, and/or 5) on the W-2 the 3% refund will need to be reported in.

The FICA rate has changed since 2011, which one should we use?

We recommend using the current rate.

What should I tell my Board and my employees as to a timeline?

This is an individual district decision; however, we feel April 30, or 60 to 90 days past receipt, would be a good target. It is likely that most districts will first issue current employee checks, and then work on distributing the deceased and/or former employee payments next. A few items to consider that may affect your individual timeline are: # of employees who are no longer active, changes in district software, etc.

Is the 3% refund subject to retirement?

No, it is a refund of wages and has already been subject to retirement.

Do the one-year Unclaimed Property laws for payroll checks apply and when does the timeline start?

Yes, if you are unable to find contact information for a former employee, the unclaimed property rules do apply. The start of the one-year mark is from the date of last activity or when the funds are available to be issued to the individual.

Below are the links to other resources:

Yeo & Yeo will send updates as we receive them.

For further information see our article, FICA 3% Healthcare Contribution Refunds – Guidance for Distribution will be Forthcoming.

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