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Sunday, March 25, 2012

Splitting The Atom

Now that the PERS Board has decided on the method for implementing the collection of the 1999 overcredit, there are a number of important details that remain to be decided.  Moreover, there exists considerable confusion among those "window retirees" for whom the collection is only a dim memory.  The purpose of this post is to summarize what is known, so far, about the collection effort, what remains to be answered, and to clarify a common misperception about the 2003 effort to freeze the COLA for Tier 1 members charged with an over credit.

There are four groups of people to be subjected to collection efforts.  The first group is the 20,000 or so retirees who were notified in 2006 of their adjusted benefits and were sent an invoice for overpayments, but whose invoices were suspended by Judge Kantor in his initial ruling on the Robinson case.  The second group consists of window retirees who took either a single or double lump sum, who've been invoiced, but collections were also suspended.  Third, are members of the two previous categories who have been invoiced and who started paying via actuarial recovery beginning in about 2006 or early 2007.  Finally, there are beneficiaries and alternate payees who are receiving benefits after the death of a PERS member, or a divorce from a PERS member who have not been invoiced or collected.

The most complicated group will be those retirees who collected their PERS benefit as a double lump sum settlement and have no ongoing business relationship with PERS.  In order to collect what is owed, PERS first has to locate these individuals.  If they remain in Oregon, the Oregon Department of Revenue will locate them.  If they are outside of Oregon, the Revenue Department does not have reach; consequently, PERS will have to contract with collection agencies who will use skip tracers to find these retirees.  (Heck, if they wanted to pay me, I could probably locate about ⅔ of them with a simple web search).  If found, and if these retirees work with PERS, PERS will allow these members to set up a payment plan to recover the lump sum that will span approximately 6 years.  This is a far better deal than before.

For any window retiree, beneficiary, or alternate payee in a current business relationship with PERS - i.e. receiving any sort of monthly benefit - a current address already exists, and PERS has an easy way to notify affected retirees.  The default repayment option is a base 2% reduction in benefits (from the gross benefit) for however long it takes to repay the amount invoiced.  In most cases, overpayments will be recovered in approximately 6.5 years, at which time the reduction will stop and members will have repaid all owed benefits.

Members have the option of repaying the benefit as a lump sum, or they have the option of accelerating the repayment by selecting a repayment amount greater than 2% of the gross benefit.

More details will be forthcoming next week as PERS prepares a "Frequently Asked Questions" document for posting on their website.

One question that has appeared with some frequency in my own mailbox has been the question of whether PERS will "finally" apply the "lost" COLAs for the years 2003, 2004, 2005 and possibly 2006.  The answer to this question is an unequivocal NO.  Regardless of what you think PERS has or hasn't done, PERS has already applied the necessary COLA payments to the revised benefit you're receiving now.  When PERS recalculated your benefit to comply with the court-ordered, legislatively approved and mandated 11.33% for the benefit year 1999, it went back and recalculated the benefit it actually owed you when you retired.  The original benefit was computed with a 20% credit for 1999.  The new benefit was computed with the "correct" credit of 11.33%.  Once they computed the correct benefit, they then applied subsequent COLA for 2003, 2004, 2005, and, if relevant, 2006.  The effect of this was to raise the corrected base benefit to nearly the level (or surpass it) that the un-COLAd benefit was at the time of the adjustment.  Thus, according to PERS, the courts, and the Legislature, there is no additional COLA to which members are entitled.  You may not agree with this, but this is exactly what happened.

I will update information as it becomes available.  Suffice it to say that the re-invoicing will take place sometime beginning this summer, and repayments will follow 30 days after you are re-invoiced and choose or default to the method of payback.  The initial billings are planned so that they coincide with the new 2% COLA for July, payable on August 1.  It will barely hurt.


texipup said...

The people that were already recalculated...do they get a letter also? I was recalculated on the last day before Judge K. ordered PERS to stop.

mrfearless47 said...

It is my understanding that unless you paid PERS back with a lump sum repayment, all window retirees still in debt status will receive at least one, if not two letters.

Unknown said...

S.J comments: ■ "PERS does not anticipate any tax issues for retirees. No amended tax forms will need to be filed for years in which workers were overpaid, because future income reports will reflect the deductions being taken to repay the money."--------
I don't understand, will the repayment deduction become an offset against taxable income and thus will have a lower taxable income????? Scenario:
I have $55,000 benefit. My "taxable amount" (-my 6% contrib)=$54,500.If my 2% repayment deduction is $1100, then my taxable income will be ($54,500-1100=$53,400)?????

mrfearless47 said...

@SJ. I'm not sure I'd word it the way the SJ did. PERS has no idea what our tax situations are. The deduction will be taken pre-tax, which avoids the problem of having the money taxed a second time. But, unless I'm certain that the form 1099-R that we receive annually distinguishes the gross benefit (Box 1) from the taxable benefit (Box 2), then it will be possible to claim the difference between box 1 and box 2 according to the method outlined in IRS Publication 525 (page 36). The process isn't easy, and it does involve recalculating taxable income for previous years. But for most people, it probably won't make a significant difference in their current taxes to take the chance of an IRS audit. Moreover, there is no way that Turbo Tax or the other electronic tax preparation programs allow the deduction. Thus, you will have to manually enter the tax deduction and then physically mail your tax return. The Turbo Tax error checking will flag manual entries and deny you electronic filing.