Posted June 9, 2017
In 2011, legislators passed Senate Bill 1609, which contained several provisions meant to shore up the plans administered by PSPRS. One of those provisions was a gradual increase in member contribution rates from 7% to 11% in the elected officials' plan (EORP) and from 7.65% to 11.65% in the public safety plan (PSPRS). In August 2011, those provisions were challenged via two separate, but parallel, lawsuits—Hall for EORP and Parker for PSPRS. In November 2016, the Supreme Court upheld the lower court decision in Hall that ruled those increased member contribution rates were unconstitutional. These two lawsuits have been adjudicated separately where the Parker case was stayed (put on hold) pending the final outcome of Hall. Nevertheless, the facts and circumstances are essentially the same where both parties to Parker agreed, at the time of stay, to appropriately apply the remedies of Hall when finalized.
After seeking further clarification from the Supreme Court on their ruling, the PSPRS Board of Trustees in April directed employers in both EORP and PSPRS plans to revert the rates back to pre-SB1609 levels for affected members. As a result, members who were hired prior to July 20, 2011 are also entitled to receive a return of those excess contributions with interest. Therefore, at its May 31, 2017 meeting, the PSPRS Board of Trustees authorized local boards who have stopped withholding at the higher rate to begin working with their employer in returning those contributions as soon as practicable. However, while the Hall case has been remanded (sent back) to the Superior Court, the ruling on the interest amount from a hearing on June 6, 2017 has yet to be decided and released. As such, the Hall case is not finalized yet, but the excess contributions should still be returned as soon as possible to stop the interest clock from ticking.
The following information is being provided to help guide local boards and employers as they work together in returning those excess contributions and interest. This information is also designed to help affected members understand what to expect.
WHO: PSPRS and EORP members who became members of the system prior to July 20, 2011 and who paid employee contributions that exceeded 7% (for EORP) or 7.65% (for PSPRS) will likely be eligible to receive a refund of those excess contributions unless they terminated and already received a refund. PSPRS has prepared a list of affected members for each employer, along with the amount of excess contributions that must be returned to them. Those lists are available on the Employer and Local Board portals and may be downloaded or exported into Excel for ease of use and analysis. Members will also be able to see their individual amounts in their Members Only account soon.
Employers will need to return excess contributions to active members, inactive members, retirees, and beneficiaries/estates of members who died. PSPRS will provide last known addresses for retirees and may be able to help find contact information in cases where the member has died. In situations where a member transferred to another employer, all their contributions were transferred to the new employer where the new employer will be responsible for processing the return of all excess contributions.
WHAT: Affected members are eligible to receive a return of the excess contributions plus interest. Since the interest rate has not yet been determined by the courts, only the contributions can be refunded at this time. The excess contributions are considered wages so will be reported on a Form W-2 and should only be subject to federal and state withholding. They should not be subject to FICA taxes since FICA should have been taken out when the contributions were originally deducted from member paychecks.
Once interest amounts are determined, employers will have to make those payments as well. Interest is not considered wages, but is taxable income reported on a Form 1099-INT. Employers should report the interest amount on Line 1 of the 1099-INT. Members may request that federal taxes not be withheld from the interest portion by submitting a Form W-9 to the employer. According to the instructions for Box 4 of the Form 1099-INT, if a recipient does not furnish its TIN to the employer in the manner required, you must backup withhold at 28%.
Once determined, there may be two types of interest to pay out—pre-judgment and post-judgment that may or may not be at the same interest rate. Pre-judgment interest is the interest awarded from the pay period ending date of each excess contribution up to the date of judgment (presumably to be June 6 for Hall). Post-judgment interest is the interest earned from the date of judgment until the last penny of excess contributions is repaid to the member. Post-judgment interest will likely apply to the total of excess contributions plus pre-judgment interest.
It is important to understand that the hearing on June 6 was just for the Hall case where the pre-judgment interest period will end at the date of judgment provided in that ruling. While the same interest rate determined in Hall should be applied to the Parker case, the date pre-judgment interest will stop for PSPRS members is yet to be determined. A status conference (not a hearing) is being held mid-July to discuss when the stay will be lifted for the parties to come back to court and formally apply the remedies of Hall to Parker. So, it could be another couple months until the interest issue is finalized in Parker for PSPRS members. However, if contributions are returned to the affected members before the pre-judgment period has been determined, interest will only be owed up until the date those excess contributions were repaid.
HOW: Because the plans administered by PSPRS are 401(a) qualified plans, the IRS dictates the method used to return the excess contributions to members. PSPRS is not allowed to return the contributions directly to members or employers. Instead, employers need to return the excess contributions to members, and then may take advantage of credit memos set up by PSPRS to offset future employer contributions. PSPRS will prepare credit memos equal to the contributions plus pre-judgment interest. Employers that want to take advantage of those credit memos may use those credit memos in lieu of sending us future employer contributions until the credit memos are used up. However, using those credit memos is only an option where employers are not required to use them if they choose not to.
Additionally, employees are able to defer these excess contributions into a 457 account or some other tax-deferred vehicle that may already be available through their employer. They may also desire to change their tax withholding amounts to avoid being taxed in a higher bracket for any lump-sum payment. Therefore, it is strongly encouraged that the local boards and employers coordinate with their employees the timing of these payments to ensure they have sufficient time to make any deferral or tax withholding changes within their policies and procedures already established.
Unfortunately, because the interest payments are not considered wages, they cannot be deferred and must be paid directly to the employee.
Additionally, PSPRS is not allowing employers to offer contribution holidays to their employees as a method to payback those amounts. Doing so would be administratively complicated for both PSPRS and the employer and very costly to the employer in post-judgment interest.
WHEN: PSPRS does not control when employers are to return the excess contributions to employees, but encourages employers to do so as soon as possible to reduce the amount of interest that must be paid. Some employers will have enough cash on hand or make other arrangements to pay the excess contributions immediately. Other employers may need to pay them in installments as they take advantage of the credit memos. Again, employers would be wise to coordinate with their employees the method and timing of these payments. Whatever that method and timing may be, it is imperative that the employer also communicate with PSPRS those decisions so that the appropriate amount of interest is applied.
For more detailed information about this issue, please see this memo provided to the Board of Trustees.