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Date: July 14, 2016

Bulletin Number: CU-547

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Subject New Repayment Rate for Deduction Code 582 CUNY (SS/Medicare Deficiency) for Employees with a FICA Tax Deficiency

Purpose

To notify agencies that newly established FICA tax deficiency repayment plans, using Deduction Code 582 CUNY (SS/Medicare Deficiency), will have a deduction rate of ten percent of gross pay applied.  Existing FICA tax deficiency repayment plans currently using Deduction Code 582 CUNY (SS/Medicare Deficiency) with an effective date prior to 9/1/16 and will remain at their current rate.

Affected
Employees

Employees who originally had wages paid as FICA Exempt earnings which have since been determined to be FICA taxable.

Rarely, an employee may have simultaneous FICA repayment obligations resulting in a total FICA repayment that exceeds ten percent of gross pay. 
If an employee has existing active FICA repayment obligations under Deduction Code 582 prior to September 1, 2016, and then becomes obligated to repay additional FICA on or after September 1, 2016, the prior obligation will be converted to Deduction Codes 580 CUNY (Medicare Deficiency) Flat Rate and 581 CUNY (Social Security Deficiency) Flat Rate in order to maintain the deduction rate of three percent of gross pay for the existing FICA repayment obligation.  A new FICA repayment obligation can then be established with Deduction Code 582 at a deduction rate of ten percent of gross pay.
If, prior to September 1, 2016, an employee has existing active FICA repayment obligations under Deduction Code 580 CUNY (Medicare Deficiency) Flat Rate and/or 581 NYS/SCF (Social Security Deficiency) Flat Rate and then becomes obligated to repay additional FICA on or after September 1, 2016, using Deduction Code 580 CUNY (Medicare Deficiency) Flat Rate and/or 581 CUNY (Social Security Deficiency) Flat Rate, the new repayment obligation amounts will be added to the existing repayment obligation amounts.

Repayment of FICA tax deficiencies is separate from repayment of salary overpayment.  If an employee must repay both FICA and salary, the payment of one obligation does not offset the other obligation.  Both will proceed independently.

If an employee has a taxable earnings change that increases their FICA tax obligation, it is highly likely that the employee will also have an increased income tax obligation.  Any change in employee income tax obligations are solely the employee’s responsibility to address with the appropriate taxing authority.

Background

Internal Revenue Code (“IRC”) §6205(a)(1) provides that proper “adjustments” (corrections) can be made, without interest, pursuant to Treasury Regulations.  Treasury Regulation §31.6205-1(b) provides for the “adjustment” (correction) of errors in Federal Insurance Contributions Act (FICA) tax and income tax withholding.  The adjustment rules are designed to provide a streamlined, interest-free correction of underpaid FICA and income tax withholdings, in cases where an employer promptly self-corrects an inadvertent error, as soon as the error is ascertained.  With respect to underpaid FICA tax, an integral part of this adjustment process is the employer’s timely payment of the full amount of underpaid FICA tax to the IRS and the subsequent deduction of the employee’s share of the underpaid FICA from the employee’s remuneration. 

This adjustment procedure for underpaid FICA taxes benefits employers and employees, by allowing them to correct an underpayment of FICA tax without paying interest to the IRS. The Treasury Regulations emphasize, however, that the employer must make the correction and pay the full underpaid tax within a prescribed time period, which is essentially within the timeframe for filing the payroll return for the period in which the error was discovered. (See Treas. Regs. 31.6205-1 (b)(2).

With respect to the subsequent deduction of the employee's share of the FICA tax from the employee's pay, if an employer pays or withholds less than the correct amount of tax, Internal Revenue Code ("IRC") section 6205(a)(l) provides that proper "adjustments" (corrections) can be made, without interest, pursuant to Treasury Regulations. Treas. Regs. 31.6205-1 (b) provides for the "adjustment" (correction) of errors in FICA tax and income tax withholding.

As the employer, once OSC becomes aware of a FICA deficiency, we are required to correct the employee wages and remit both the employer and employee share to the IRS in full.  OSC is then required to quickly begin collecting from the employee the employee share that was remitted to the IRS by the Office of the State Comptroller on their behalf.  Failure to quickly begin collection of the employee share would require OSC to “gross up” the employee’s earnings, in effect causing the employee to be immediately responsible for the income and FICA tax liability of such payments and exposing the employee to interest obligations and possible penalties by the IRS for the years of non-payment.

The State remains in compliance with the error-correction procedures of the Treasury Regulations under IRC section 6205 if the State consistently makes reasonable efforts to obtain reimbursement of the employee's share of the corrected FICA tax.

While there are many reasons why an individual may have incorrectly received non-taxable earnings, the vast majority were paid while the individual was presumed to be:

  • on a paid Workers’ Compensation leave but later it is determined that some or all of the period of time the employee was not on Workers’ Compensation leave.
  • a full-time student but later determined that full-time student status ended and should have been paid as an employee.

Effective Date(s)

The ten percent rate will be applied for newly established FICA tax deficiencies repayment plans using Deduction Code 502 NYS (SS/Medicare Deficiency) beginning September 1, 2016.

OSC Actions OSC will continue to use the following Deduction Codes to initiate collection efforts for employee owed FICA taxes:
  • 580 CUNY (Medicare Deficiency Flat Rate)
  • 581 CUNY (Social Security Deficiency Flat Rate)
  • 582 CUNY (SS/Medicare Deficiency)

Implementation of this bulletin will not change the repayment rate of already established FICA repayment plans. 

To assist agencies, OSC has developed a draft letter template that agencies can use to satisfy notice requirements to an employee.

OSC will continue issuing appropriate Forms W-2c to the employee reflecting the change in taxable earnings once FICA repayment plans have been established through the use of any of the Deduction Codes noted above.

Agency Actions Agency update access is not available for any of the FICA tax deficiency deductions.

Agencies must maintain timely and accurate FICA Status on the Job Data Payroll panel: Main Menu>Workforce Administration>Job Information>Job Data>Payroll.

When FICA repayment is required by an employee agencies must inform the employee in writing (email is satisfactory) that OSC has remitted payment to the IRS for the employee share of FICA taxes owed and that a repayment plan will be established for the employee in accordance with IRS requirements.

Written notice to the employee must include the years to which the repayment applies and the amount that must be paid.

This information must be shared with the employee regardless of which FICA, Social Security and/or Medicare Deduction Code is used. Agencies must maintain a copy of this notification for four years beyond final repayment by the employee of the OSC remitted FICA payment.

The attached draft letter template may be used and modified to satisfy notice requirements to affected employees.

Questions Questions regarding Social Security, Medicare tax deficiencies and use of repayment Deduction Codes may be directed to the Tax and Compliance mailbox.