P.F.F.I. Social Security Frequently Asked Questions (FAQ)
I would point out from the start of this FAQ that NO ONE from the PFFI is an expert in Social Security and any information from any of us should be verified with your local social security representative, State Controller’s Office or an IRS representative.
Updated answers and new questions are highlighted in yellow
1. Q: Will the money be taxed as regular income? A: The employer’s portion of the refund (if the vote fails) will be subject to taxes. Chris Casteel from the IRS explained that it will either be subject to the earning bracket those earnings will push you into, or you could request to have a straight 25% tax assessment. Keep in mind, a no vote would make your taxes 6.2% less than normal since you would be out of SS. Consult your tax advisor to see what would be the best choice for each individual. There will also be interest on the back pay from the employer’s portion as well as the employee’s portion. This interest will also be subject to taxes.
2. Q: If yes, how will those taxes be calculated; will it be the same as constant staffing, meaning will the boost of income push us into the 35% Fed + 7% state tax bracket, or since it was part of regular earnings will it be taxed at our regular rate? A: As stated in a previous question, The IRS representative answered this question.
3. Q: Will it be possible to roll all or part of the money in to a 401K or deferred comp to protect it from taxation at time of payment? A: 457 Plan: Limitation is $17,000 for the 2012 year plus an additional $5,500 if age 50 and older. This includes both employer and employee contributions combined. Pleas note that the employer will have to pay medicare tax on their contributions if they pay into the 457 plan. 401(k) plan: Seperate limitation of $17,000 for the 2012 year plus an additional $5,500 if age 50 and older. NOTE: The employer can make a 1-time contribution to an employees 401(k) plan of up to a combined $50,000 (both employer & employee contributions). However, if this $50,000 1-time election is made the employees maximum contribution is $17,000 (even if age 50 and older). Additional 457 limitations: You may be able to contribute more into a 457 plan during the last three years of the normal retirement age in your position. Pleas reference the following website for further information: http://www.irs.gov/retirement/article/0,,id=172437,00.html
Also keep in mind that if you were to roll the employee portion into a 401(k) or 457, you will be double taxed on that money as it has already been taxed and would be taxed again when withdrawn from one of those plans.
4. Q: If taken as cash, paying the taxes, is any part subject to PERSI withholding? A: Yes, we have been told by the powers from PERSI that it will be subject to PERSI withholding (7.67% for the employee & 27.94% for the employer) It is unclear how the employers will handle this situation as they will be hit with an almost 28% tax on each employee. They may take it from what you are owed.
5. Q: If rolled over into a 401K, will any part be subject to PERSI withholding? A: Yes, we have also been told by the powers from PERSI "if the employer distributes the employer portion of the past SS contributions to the employees as deferred or paid wages PERSI contribution will need to be paid. The fact the wages are deferred by depositing them in a retirement vehicle does not negate the PERSI contributions". That will also be subject to PERSI withholding (7.67% for the employee & 27.94% for the employer) It is unclear how the employers will handle this situation as they will be hit with an almost 28% tax on each employee. They may take it from what you are owe. PERSI would most likely consider the distribution of these funds as an unusual compensation: Unusual compensation patterns as defined by Rule 59.01.06.104...Upon application for a retirement benefit, any portion of compensation which represents payments in excess of and inconsistent with the usual compensation pattern, for example, but not limited to lump sum contract payouts, excess vacation paid but not taken, paid sick leave, or a clothing allowance will not be considered in determining benefits. It is PERSI's determination at this point these payments would not effect a members average monthly salary calculation: Statute 59-1302(5D) defines base period as...The period of 42 consecutive calendar months during which the member earned the highest average salary; and membership service of at least 1/2 the number of months in the period, excluding months of service attributable to: military service, service qualifying as minimum benefit pursuant to section 59-1342(5), and Workers' compensation income benefits.
6.Q: If we choose to withdraw from Soc. Sec., how long after the vote will it take to receive a check? A: The Local IRS representative explained that most 218 agreements that he has been involved with have taken 4 to 6 weeks for a refund to be issued. It is also dependant upon the jurisdiction having their 941x's and W-2c's submitted to the IRS.
7. Q: What if I went over the threshold for SS earnings? ($106,800 for 2011) Can I buy back for a second job? A: It has been explained that only the open tax years (3 years, 3 months & 14 days) would be subject to employee repayment if you exceeded the maximum SS payments allowed into the system. You would have to file an amended W-2 for those open years and would then be required to pay the employee portion of the SS tax for it to be re-calculated into your SS earnings and benefits. The IRS representative can further explain this at the education class.
8. Q: How do you figure out how much individuals would get back if we get out of S.S., the three years, three months check? A: You would look at your W-2 for the years in question, take the SS earnings amount and multiply that number by 12.4% for 2009 & 2010 and by 10.4% for 2011.
9. Q: How many quarters(years) does a individual have to work to be qualified for S. S. retirement, benefits, etc.? A: 40 quarters (10 years) of qualified credits make you eligible for benefits. What amount of benefits you are entitiled to is based on your yearly substantial earnings. The SS website explains how much substantial earnings are for each year (http://www.socialsecurity.gov/pubs/10045.html#a0=3). Also your benefit is calculated over a 35 year earning average. This will be explained in full detail at the educational classes.
10. Q: If we get out, do our children/families get the death benefits? A: If you have 40 qualified quarters you will receive some type of benefit and the death benefit should also be included. This would be another question to confirm with the SS administration.
11. Q: Is there a way to figure what our benefits will be if we get out, it will be a lot of zeros until we are 65? A: A benefit calculator is available on the SS website and there are also instructional videos on the PFFI website as well as available in a DVD hard copy to assist you in calculating your current benefit and a benefit if you were to vote to be out of SS. It takes into account earnings and non-earnings for the 35 year benefit period, not until you reach 65.
12. Q: If we opt out of SS, can a member choose to leave all or a portion of his refund in the SS system and keep that time of service in SS? A: It has been explained to us that if a jurisdiction elects to be out of SS, the entire membership will be given a refund of the 3 years, 3 months and 14 days. The additional two years (2007 & 2008) that are under a protective claim 941x form are jurisdiction wide and individuals cannot choose to leave those refunds in their SS accounts. A jurisdiction could choose to retract their protective claim if their membership voted to do so.
13. Q: Are the ballots for the votes being mailed directly to the voting members? (That would answer a question about absentee votes.) Also how will abstained votes be tallied? A: Ballots will be mailed to each eligible voter to their current address that is on file with PERSI. Make sure to keep your address up to date with them. Abstained votes will be counted as “no” votes, meaning that the voter would want to be out of SS.
14. Q: For PERSI- will all retirement options remain available to our members, the SS catch up provisions should still apply to those already vested and those entities that are not part of this referendum correct? A: PERSI will remain the same regardless of the outcome of the vote There is one impact on retired members that chose the SS option. Example, A member retired @ $5,000/month from PERSI. They chose the SS option and their SS benefit projection is $2,000/month @ age 67. They were 57 at the time of retirement and the sliding scale from PERSI made them eligible to receive an additional $1,000 for their PERSI benefit until age 67, so their new PERSI payment would now be $6,000/month. At age 67, PERSI will deduct the projected $2,000 from their PERSI benefit, giving them $4,000 from PERSI. If that member's jurisdiction voted to be out of SS and it had an impact on their SS benefit, they will receive their adjusted amount (even if less than $2,000) from SS and PERSI will still drop their benefit by the $2,000.
15. Q: For PERSI- will a recent retiree (since the recapture period for SS refund 2008 ?) who selected a SS catch up provision have their benefit recalculated and reduced? A: It is possible that if and when a vote to get out happens, the credits would be removed and SS will most likely change the individuals benefit from SS, but as previously stated, PERSI will not recaculate the actual SS benefit, they will still utilize the projected at the time of retirement.
16. Q: For State Controller- on the “notice of referendum” they sent out on page 2 the last paragraph reads “to be eligible to vote, the voter must be a member of PERSI on the date the Notice of Referendum is issued and through the date the vote is held” does this include those who retire between the notice and the date of the vote? A: Yes it will affect you (as a retiree) and that you will not have the opportunity to vote unless you are still a working (contributing) member of PERSI.
17. Q: Under paragraph 5 of page one of the Deemed Majority Vote Firefighters Referendum ‘B’ it is stated that “If the majority of eligible voters do not vote yes to social security coverage, another referendum cannot be held among the employees of the same retirement system for at least one year after a referendum that did not result in a majority yes vote.” Does this then indicate that after that one year has passed, we could request another referendum and would that request be honored? A: It is our understanding that there would be an ability to request an additional referendum. The State Controller would have the authority to approve or deny an additional referendum following a one year waiting period.
18. Q: If a person already has 40 quarters in Social Security, would that person still be receiving a benefit if they were no longer "in" because of opt out? A: As long as they still had 40 quarters following removal of the quarters from a failed referendum vote.
19. Q: What is the best way to compare what our Social Security benefit would provide vs. another investment vehicle? A: You would first have to estimate your benefit for SS with assumptions of how long you will work and how much your earnings would be. This can be done on the SS calculator. The basic calculator does not factor in the Windfall elimination provision that could affect the amount of your benefit for not paying into SS for more than 30 years. You would then calculate the difference of your projected benefit if you were to stay in vs. your projected benefit if you were to be out and that would be the number per month you would need to replace from the shortage.
You would then have to assume how much you would receive in back pay, minus taxes if unsheltered and add in contributions moving forward depending on how much of a match you will receive from your employer. (if any, or a reduction from the current 6.2%, depending on negotiations) You would then make assumptions of what percentage of interest you would receive on your investments, add that in yearly with your contributions and calculate until your assumed retirement date. Then you would no longer put in contributions from your retirement date until SS retirement age and only add in interest for those years. You would then begin to draw out the difference of what you were projected to get and what you would really get and run withdraws along with continued interest and it should tell you how long the invested money would last.
20. Q: How will the vote be affected by personnel on leaves of absence? And military leave? A: Leave of absence would need to be in a paid status and still show as a paid active member of the jurisdiction, otherwise they would not be eligible to vote. Military leave is covered by the additional 60 days added to the notification period. Members on military leave will have their ballot mailed to them at their deployment site in plenty of time to be filled out and returned to cast their vote.
21. Q: Confirm that we have secured our refund from 2007-present. A: We have asked that all affected jurisdictions fill out 941x forms for eligibility of a protective claim. The IRS has confirmed that if they have received protective claims, they will be part of the refund in the case of a no vote referendum.
22. Q: How are retirees affected? And former employees affected (separated from employment after 2007)? A: Retirees and separated employees will not be eligible to vote, but the outcome of the vote will have an effect on their SS benefits as the credits would be removed and their benefit re calculated. They also need to be contacted by their employer so that they can fill out all paperwork necessary to receive a refund should a referendum fail.
23. Q: Is the refund (when placed in a 401k or 457) going to be considered a contribution (thus subject to the $17,000 per year limit) or simply a rollover from one retirement fund to another? A: We did receive a legal opinion that SS is not considered a “qualifying plan” and that it would not be eligible to be rolled into another retirement account, but I would advise you to talk to your own accountant and ask this question at the educational meeting.
24. Q: Will members with a hire date prior to 3/31/1986 receive backpay on their medicare contributions following a no vote? A: Yes, but they will not be eligible to receive backpay for the protective claim years of (2007 & 2008) as those were not specifically asked for on the 941x forms.
25. Q: Will members with a hire date prior to 3/31/1986 be required to continue to pay medicare contributions with a no vote? A: No, the employee and employer portions (1.45% each, 2.9% total) will cease following a failed referendum.
26. Q: If a member retires at a young age, say 52, are they eligible for disability up until SS retirement age? A: If there are no qualified earnings in 5 of the past 10 years prior to SS retirement, you are not eligible for disability, regardless if you are in or out of SS.
27. Q: Does the GPO affect all of our retirement or just a portion since we could have dozens of years paid in under a SS covered pension and only 5 years out of a SS covered pension with a no vote? A: Yes, if at the time of your retirement, you are participating in a retirement system not covered under SS, you will be subject to the GPO fully, the program is not pro-rated, it is an all or nothing.
