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Senate bill would allow federal employees to opt out of payroll tax deferral

By ERIC YODER | The Washington Post | Published: October 12, 2020

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WASHINGTON — Federal workers could opt out of a now-mandatory Trump administration policy that in effect has shifted four months' worth of Social Security payroll taxes into early 2021 for most of them, under a Senate bill introduced Friday.

"During this time of heightened uncertainty, our public servants deserve the ability to choose what makes most sense for them and for their pocketbooks. That's why the President's payroll tax deferral must be made optional," said lead sponsor Sen. Chris Van Hollen, D-Md.

Starting in September, Social Security payroll taxes have been suspended for the majority of the 2.1 million federal workers apart from the U.S. Postal Service, in what amounts a loan they must pay back starting January.

The bill's introduction follows letters from members of Congress and federal employee unions asking the administration to make the policy optional inside the government, as it is for private sector employers. Among executive branch agencies, only the quasi-corporate Postal Service, with some 630,000 employees, had that choice — and, like many companies, decided against suspending those withholdings.

In a late September hearing, Treasury Secretary Steven Mnuchin said it would be "reasonable" to allow federal employees the choice of participation. Despite a follow-up letter from Van Hollen to Mnuchin and the Office of Management and Budget, the policy has remained mandatory for most federal employees as well as for uniformed personnel. OMB did not immediately reply to a request for comment.

The policy suspends through the end of the year, with the 6.2 percent withholding for those earning below $4,000 every other week. The number of affected employees probably is in the range of 1.3 million, given federal salary patterns; also, about 5 percent of employees are under a retirement system that doesn't include Social Security coverage.

Some employees with basic biweekly pay above $4,000 are subject to the suspension because Social Security-taxable income is reduced by pretax health insurance premiums and flexible spending account set-asides. Meanwhile, extra earnings such as overtime could push an employee over the threshold for a pay period.

In an August memo setting the policy, President Donald Trump said, "This modest, targeted action will put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most."

He further said the administration would "explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred." A change in law would be needed to waive that obligation, though, and there has been no such move in Congress.

Some financial planners have recommended employees set aside the money on the expectation of having to pay higher withholdings after the turn of the year.

The largest of the payroll processors federal agencies use, the Defense Finance and Accounting Service, has offered similar advice to employees of the agencies it services — the Health and Human Services, Energy and Veterans Affairs departments, and Defense Department civilian and military personnel.

"Individual situations will vary, but it is important to review the increase in your net pay so that you can plan for your pay to be reduced by roughly that amount in January through April of 2021, in addition to your normal 2021 tax withholdings," it said in a question-and-answer posting online.

Federal employee unions and other organizations, which support the Senate bill, echo that advice but describe the underlying policy in harsher terms.

"The President's payroll tax deferral scheme is nothing more than a scam on hardworking federal employees — making their paychecks look bigger until the end the of the year when they'll be hit with a surprise increase in their payroll taxes right after the holidays," American Federation of Government Employees president Everett Kelley said in a statement.

"While the legislative and judicial branches of the federal government decided not to participate, employees in the executive branch were forced into it without sufficient explanation of when the deferrals would start, how employees could calculate whether they were subject to it, and how the deferred taxes will be collected by the government next year," the National Treasury Employees Union said.

While the bill, co-sponsored by 16 Senate Democrats, would not apply retroactively, "it would allow federal employees to opt-out going forward, which would minimize their added tax obligations next year," the union added.

Meanwhile, the IRS has said failure to repay the shortfall by April 30 will result in interest and penalties.

The payroll providers have signaled that the money is to be repaid through an increase in an employee's regular Social Security deduction starting in January — although they have not said whether that deduction will simply be doubled, whether some other formula will be used or whether employees will have a choice of repayment terms.

The Defense finance agency said the amount "will be collected from your wages between January 1, 2021 and April 30, 2021. Additional information on the collection process will be provided in the future."

The Interior Business Center similarly said, "The payback period for deferred taxes will occur between January 1, 2021, and April 30, 2021."

Also not addressed so far are the implications of an employee leaving federal employment before the shortfall is repaid. Apart from normal turnover, retirements of federal workers always peak around the turn of the year for reasons related to how those benefits are calculated.