About 700 city employees received letters last week informing them that since 2007 the city has been taking more out of their pay for FICA, inclusive of Social Security and Medicare than necessary.

What could this amount to?

 In his letter, City Finance Director Peder Schaefer cites an example of an employee with a gross pay of $64,321, saying a cost sharing of $3,899 for health care should have been deducted from the gross before applying Social Security and Medicare contribution rates. 

“Correct application reduces the contribution to FICA to $4,622 or $298 less for the year,” Schaefer writes.

“We were doing it wrong,” Schaefer said when asked how the mistake occurred.  He said the mistake surfaced when the city acted to correct an error in withholdings for taxes for about 30 employees.  The magnitude of the miscalculation of FICA contributions was significantly larger and more complicated than they originally realized.

Schaefer said the city looked at the history of the miscalculation and elected to limit city requests for reimbursements to the statute of limitations, which is three years.  Should all those employees affected seek reimbursement, Schaefer estimated it would cost the city approximately $150,000 for each of the three years.

But Schaefer also cautions reimbursement may not be the best choice for the employee. Asked to explain, he said depending on overtime pay a firefighter for example could see an adverse impact.

“Employees should understand that a request for reimbursement or refund could have some negative affect on social security benefits upon retirement.”

He goes on to write, “employees are encouraged to discuss their individual situations with their tax, accounting, and/or finance professionals.”

Schaefer said not all 800 municipal employees are affected. As a group, teachers are not impacted.

Further, the letter says the City Treasurer will produce a table with a calculation of the recovery amount available for each employee for each year. Additionally, employees seeking reimbursement will be issued an amended W-2 for each year.

“Because withholding for income taxes or your income tax liability was not affected, there should be no reason to file an amended tax return.” The letter also notes employees have the right to seek a refund directly from the IRS.

Schaefer said employees affected will receive a communication including additional information and the necessary paperwork to process reimbursement through the city.

Schaefer said he was “shocked” the error hadn’t been picked up in all these years.

Asked for his take on whether to seek a reimbursement, Schaefer said, “we can’t get involved in offering advice.”