City retirement fund caused a few tax woes

Council switching plans to fix the taxation issue.

The City Council voted unanimously for changes to employee retirement funds, and to pay tax obligations on the previous plan at its regular meeting Monday, Feb. 27.

During the Feb. 21 work session, Human Resources manager Melissa Cruise said that the new plans would increase employees’ yields.

“We can do much better as far as composite rate of return versus what participants have to pay to be part of the plan,” she said.

The newly-chosen retirement plan supplier, Incumbent, is ranked the largest supplier of the type of plan the city uses, she said.

Staff Attorney Jason Kelley, also speaking at the work session, said that, while the current plan guarantees a 3 percent rate of return, the actual number is far lower once fees are factored in.

The tax issue, Kelley said, was caused by a simple mistake — the city’s employer matches paid into 457 accounts, he said, are subject to FICA taxes. These taxes, he said, were not being collected.

“I’ll just tell you this,” Kelley said, “it’s a complicated tax thing.”

The situation is fixed at the moment, he said, and the city is handling current payments correctly, but part of the impetus to change plans was to avoid these extra costs.

The city, he said, will pay its matching funds into an account that will prevent it from being taxed.

“We’re getting into the tax weeds here,” he said, “but this allows the city to pay into the retirement funds without FICA tax being due.”

However, there is still an amount that has to be paid. That amount is not yet calculated, he said, because paying these funds into the account, which should have been taxed, counts as income. That income, he said, needs to be taxed as well. The city, he said, has roughly three years of financial data to look through to calculate this.

The resolution was to amend the city budget to appropriate no more than $150,000 for this expense, which Kelley said should be adequate.

The important thing, he said, is the city fulfills its tax obligations and takes care of its employees.

“Getting it approved, having a plan and knowing that we’ve got this taken care of,” he said, “that’s a big deal.”