PSRS/PEERS Responds to New IRS Notice Regarding Tax Withholding Tables
By: M. Steve Yoakum, PSRS/PEERS Executive Director
Before I explain our approach to the IRS Notice 1036-P, I have to reflect on the actions taken by the Internal Revenue Service (IRS) over the last few months. After the American Recovery and Reinvestment Act of 2009 was signed into law, the IRS provided new withholding tables to implement the Making Work Pay Credit. The effective date of the change was set for April 1, 2009. It didn’t take long for retirement systems to realize that the Making Work Pay Credit would not apply to their retired members. If the new tax withholding tables were applied, it would result in retirees under withholding taxes from their pension benefit during the 2009 and 2010 tax years.
A number of retirement organizations representing millions of retirees began to seek clarification from the IRS and express concern about implementing the new tables. By late February, it was still unclear whether or not the IRS would require retirement systems such as PSRS/PEERS to use the new withholding tables. Retirement systems were reportedly receiving different answers from IRS field representatives.
On March 4 we received the final word from the IRS and we were required to implement the new tables for payments made after April 1. Retiree groups including AARP continued to voice their opposition to the change even after IRS Publication 15-T was released.
We waited as long as possible hoping for a new opinion. By early April, we had to send correspondence to our members notifying them of the change and allowing them to adjust their withholding before the April 30 benefits were issued. We identified all benefit recipients withholding federal taxes in accordance with the tax tables. As a result, we mailed letters to 28,000 members explaining the situation and providing them with a new tax form. This same action was simultaneously taking place at every retirement system across the country. Before the April 30 benefits were paid, we had received thousands of phone calls, dozens of emails, and over 7,000 new tax forms to process. It was a confusing time for our retirees impacted by the change.
The cost, time, and stress for our staff and most importantly our retirees had finally subsided. Then on May 14, well after the IRS deadline to implement the new tables had passed and all changes were made, the IRS issued a new “adjustment procedure for pension plans.” Notice 1036-P gave pension plans the ability to continue using the old tax tables.
In light of what we had just experienced, we decided to leave the new tables in place for the 2009 year. We feared a change back to the old tax withholding tables would add more confusion to an already confusing event.
In January 2010, we will revisit this question once again. We can implement the old tax withholding tables for the new tax year. If we decide to make the change, we will send correspondence and new tax forms once again to all benefit recipients impacted by the change.
For more information, visit the Internal Revenue Service's Website.