Money Changes Everything

At the end of last year (2011), the Oregon Supreme Court ruled in its Robinson v PERS opinion that PERS could collect the overpayments that have been outstanding since as early as 2006 when the Strunk/City of Eugene remediation plan was implemented.  To refresh memories, the overpayments were the result of PERS calculating benefits for people who retired between April 2000 and April 2004 on the basis of the challenged 20% earnings crediting for 1999.  When the 2003 Legislature and the PERS/City of Eugene settlement agreement were finalized, the earnings order was vacated and replaced by one crediting only 11.33% for 1999. The overpayments resulted because PERS used the account balances that included the 20% crediting and then subsequently recalculated benefits using 11.33%.  Thus, from the time an individual retired in the specific window mentioned above to the time the benefits were corrected beginning in 2006, individuals were receiving more than they were legally entitled to receive.  (I'm stating facts here, not my individual opinion about the propriety or ethics of collecting on the overpayments).  For almost 20,000 individuals, they were overpaid anywhere from a high three figure amount to some healthy five figures.  PERS began collecting from some members before Judge Kantor ruled that PERS couldn't collect the money and so they are not affected by what PERS does now.

The most common question I receive is "how is PERS planning to collect the money".  Again, a brief history lesson.  When PERS decided to begin collecting the overpayments, it gave retirees two options to pay.  The first option was to repay the money in a lump sum and be done with it.  The second option was to take the balance due, compute the individual's life expectancy, and reduce the benefit an amount deemed to recover the overpayment by the time the retiree reached his or her actuarial life expectancy.  Because PERS intended to charge no interest on the repayments (it wasn't the individuals' fault that they occurred), the plan was to keep on collecting until the individual and his/her beneficiary died.  Of course, for individuals with long life expectancies, they would be paying significantly more than individuals whose life could be foreshortened by illness, or unexpected events.

It is unlikely that PERS will change the methods by which individuals can repay the benefit overpayment, but the time elapsed since the original collection invoice and now has been significant and many of us have had plenty of time to think about this and to come up with important questions about the process that have not been satisfactorily answered.   Yesterday, I sent a list of four questions to PERS.  Predictibly PERS was not ready to answer these questions, but they remain important and will demand answers before PERS starts collecting from anyone else.  For the benefit of all, I post my questions here.  I don't pretend that these are the only questions, but they are ones that have occurred to me and to others as the day of reckoning draws nearer.  People are not going to have a long period to decide what mechanism to choose, and the answers to these questions may go a long way toward helping people make the correct decision.  Of course, these presume that individuals actually have a choice.  For many people, paying in a lump sum simply isn't an option.

My questions are predicated on a simple fact.  The money owed is money we've already received and have already paid federal and, in most cases, state income taxes.  We are going to be required to repay the gross amount, not the after-tax amount.

Herewith are my questions, with an additional one not posed in my email.

1.  Under the actuarial repayment method (ARM), is the payment computed only once and then remains fixed for the duration?  In other words, are there circumstances under which the ARM payment changes (e.g. after a COLA or a pop-up following the death or divorce of a beneficiary)?

2.  Is the ARM payment taken pre-tax (as it should be), or is it taken post-tax, which means it will be taxed twice.

3.  Under a lump sum repayment, will the 1099R for the tax year in which the payment is made (presumably 2012), reflect the amount in box 10, 11, 12, 13, 14, where such non-taxable credits are typically reported?

4.  If the 1099R does not show the amount of the lump sum payment as an income offset for 2012, then will the invoice we receive be detailed enough that the amount of overpayments will be listed by calendar year of overpayment?  This level of detail would be critical should those of us who have sizable overpayments to make decide to file a "right of claim" (section 1341, IRS Code) on the amount as either an itemized deduction or a tax credit (lump sum greater than $3000) against our 2012 Federal and State income tax returns?  This should be mandatory of PERS.  The IRS isn't likely to take kindly to the typically uninformative bills and statements that we've gotten from PERS up to this point.  It is imperative to have complete documentation of what and why we are repaying so that we can take this to the lawyer or accountant of our choosing and file whatever papers we need with the IRS to facilitate a credit for the amount of taxes we've paid on money we're no longer entitled to.  No one is asking PERS for tax advice and no one is asking PERS to do anything extraordinary.

5.  Would it be permissible to pay the lump sum by taking money from an existing tax-advantaged account - IRA, 401K, 403B, 457, SEP - and negotiating a trustee to trustee transfer, thereby not triggering a taxable event?  In this circumstance I don't believe that there is a "right of claim" to be exercised and this might be the easiest method of all for many.

This is not an ordinary event in one's tax life.  Most people don't have to repay amounts that have already been taxed.  PERS should bend over backwards to provide ordinary, but complete, documentation of the when, how, why, and how much so that individuals can avoid the whammy of repaying a pre-tax amount with post-tax dollars.