Follow Up Information Regarding City’s “Tax Notice” Sent to Employees Yesterday

Yesterday, many employees received a “tax notice” from the City regarding the SPSP waiver option that has been a part of MEA’s contract with the City for the last three years.  Since the communication went out, several employees have contacted MEA complaining that the City’s message was confusing and that the real impacts of this issue are unclear based on the City’s description in the communication.

The City recently “discovered” that those employees who chose the 3% pay deduct in FY 2010 and FY 2011, or chose the furlough in FY2012 (rather than the 3% SPSP City match waiver), will have some unintended tax consequences that the City now wants to address.  At the same time, the City intends to make employees “whole” since this issue was the City’s error.  The City believes that it should have treated these choices as “elective deferrals to a 401(k) plan,” which is a fancy way of saying that the City and employees (who are Medicare eligible) should have paid Medicare taxes on the amount of the deferral.

The City estimates that the average Medicare tax impact owed by these affected employees will be less than $60, but the City IS GOING TO PAY THIS FOR YOU.  This means that the only real financial impact on you will be that the City will include its payment on your behalf as taxable income on your next W-2, and you will have to pay income taxes on that amount.  For most employees, this will mean your tax bill will be approximately $10 – $15 higher because of this “gift” from the City.

The only exception to this is that a few dozen employees who made one of those selections AND also exceeded $16,500 (if under age 50) or $22,000 (if over 50) in 401(k) contributions in a year have other more significant tax impacts.  But again, this only applies to about 30 MEA-represented employees.  Those employees will be contacted directly by the City and the City intends to make these employees “whole” for any impacts as a result of this error.

Many employees thought the City’s communication made this issue seem a lot bigger of a deal than it really is, but what is described above is the only impact that will affect employees who selected the pay deduct option in FY10/11 or the furlough option in FY12.  The employees who chose the SPSP waiver in FY10/11/12 will have NO IMPACT as a result of this issue.

If you have any questions or need more information, please don’t hesitate to contact your MEA representative at 619-264-6632.