Oakland County fears $2 million loss in tax snag
Pontiac — An administrative foul-up involving how Oakland County rehired retirees has led to more than $300,000 in federal tax penalties, with the county potentially on the hook for another $2 million, officials say.
At issue is a decades-long practice of permitting retired full-time employees to return to work part-time within a short time after retiring and immediately draw off their county retirement packages. A misunderstanding of IRS regulations resulted in the federal tax agency levying 10% penalties on 56 county employees this past year, the county says.
Now the county, which prides itself on balanced budgets and progressive fiscal policy, is scrambling to correct the mistake and ensure it doesn't happen again.
The county recently agreed to reimburse the affected employees for $306,763.03 in IRS penalties and set aside $2 million that may be needed to cover an additional 250 rehired employees who could find themselves in violation of federal tax regulations.
“This was a problem which we uncovered about a year ago when changing over companies that manage funds in the retirees' defined benefit programs and deferred pay programs,” said Gerald D. Poisson, chief deputy Oakland County executive. "Some were retiring full-time on a Friday and returning to work part-time the following Monday. We learned that is not appropriate.
“We reported it to the IRS, informed retirees, and are resolving the problem,” Poisson said. “It’s difficult to point out specifically who is responsible — this was overlooked by several county departments, the retirement board, elected officials, attorneys, even an IRS auditor.”
“But we’re not interested in pinning blame,” he said. “We just want to correct the problem and felt a good start was to make certain retirees weren’t penalized.”
Oakland County Board of Commissioners Chairman David Woodward, who is frequently at odds with his Republican counterparts, said work to resolve the problem is ongoing but “is a tough pill to swallow.”
“No one is happy about this,” said Woodward, D-Royal Oak. “That said, when the problem was discovered, a solution was developed, it was discussed openly in the public and unanimously approved .
“Additional steps are underway so that this never happens again,” he said. “Our residents expect county leaders to work together to solve problems. That’s exactly what we did and continue to do.”
Oakland County isn't alone in hiring back retired county workers to handle part-time jobs. Macomb and Wayne counties also utilize the practice, which is endorsed by statewide organizations such as the Michigan Association of Counties.
Deanna Bosworth, the association's director of governmental affairs, described retired workers as an important resource with a “wealth of experience and knowledge that counties can utilize.”
Bosworth said after “significant contractions in public employment” during the Great Recession, local and regional governments have resumed hiring, but a 2018 survey of local leaders found half of them encountered problems in finding qualified employees.
“In such an environment, it's only prudent for county leaders to seek out skills and experience where they can find them, in accordance with all applicable state and federal laws and regulations,” she said.
But the apparently unintentional violation of federal tax regulations has proven costly in Oakland County. Last year, during a change in pension managers, county officials were notified by a new county pension fund managing company that permitting workers to draw county retirement benefit funds without a “bona fide separation” between full-time and part-time service violated IRS regulations.
In 2018, the county had 56 part-time employees who were subject to a 10% IRS tax penalty due to withdrawals from their defined benefit or defined contribution plans during the year.
Poisson recently told commissioners that talks are ongoing with the IRS to correct the oversight but that the county needed to set aside a contingent liability fund of $2 million for an additional 250 workers. Oakland County’s annual budget is $893.6 million, which includes a general fund of $466.4 million.
The part-time workers — primarily deputies working security at the courts — are paid $22.93 an hour without fringe benefits. In exchange, the county gets trained certified officers with years of experience in identifying and diffusing potentially violent situations.
Regular full-time deputies, ranging from first year to sixth years on the job, cost the county $74,000 to $103,000 a year, including fringe benefits.
Unlike security company guards, the part-time deputies are all armed and have arrest powers. They are considered at-will employees who can be discharged any time.
Poisson said the commissioners have been advised by an outside legal firm, which specializes in tax law, that the IRS may look back another three years.
“A worst-case scenario is that it may involve another 250 cases and a contingent fund of $2 million,” Poisson said. “We ... are working with the IRS to reach a resolution.”
Some retired deputies, like Andrew Sparks, appreciate the county looking out for its retirees. But he is also confused by the error.
“I was surprised to hear that (potential penalties) were overlooked,” said Sparks, who retired as a full-time deputy in October 2014 after 35 years and returned to work a few weeks later.
Like other part-timers, Sparks, 61, is restricted to working 1,000 hours in a calendar year. He said he usually works no more than three days a week and enjoys not having to work weekends and being able to set his schedule in advance so he can plan extended time off.
He said he was older than 59 1/2 last year, exempting him from a tax penalty under IRS rules. He’s not certain what may happen for years 2015 through 2017.
Retired workers who drew county pensions but took part-time employment outside the county jobs are not affected. Nor are those who waited a month or longer before applying for a part-time county job.
“Everyone’s situation was a bit different but the county said it would make good on the penalties and so far they have done that, as far as I know,” Sparks said. “I enjoy working with the county, seeing the other men and women I worked with, and making a few dollars.”
Last year, after the oversight was discovered, Sparks was ordered to take off more than a month, then reapply for his part-time job.
“Since I was retired, I didn’t have even money coming in so it required some new budgeting for me,” Sparks said. “I just learned to live with less for a few weeks.”
Macomb and Wayne counties both report they hire back retirees under certain conditions. Both said retired employees must wait at least 30 days before applying for a part-time job and are restricted from working more than 1,000 hours in a year.
Andy McKinnon, Macomb County’s human resources director, said 38 retired county employees receive pensions and work part-time for the county as van drivers, typists, receptionists, painters, public health nurses, office assistants and building security officers called “blue coats.”
Wayne County spokesman James Martinez said about 66 retirees are employed as part-time temps or project consultants.
“These jobs range in scope from aides/clerks to part-time police officers in courts and jails to engineers and attorneys,” he said. “Nineteen of the 66 retirees countywide are in the sheriff’s office.”
Matt Bach, a spokesman with the Michigan Municipal League, said the practice of accepting an employee’s retirement and then hiring them back is somewhat common among the state's local governments.
“It’s also a symptom of a larger problem of the state’s continued disinvestment into Michigan’s communities,” he said. “The state’s funding for municipalities is broken and needs to be fixed."
Bach explained because of "this broken municipal finance system," communities have to find creative ways to save money while maintaining serviced residents expect.
"One way to cut costs is to reduce staff," he said. "In doing that, you not only erode your talent base, but you also lose valuable expertise and institutional knowledge that seasoned employees have.
"One way to tackle this is to accept the retirement of retirement-eligible employees and then bring them back, sometimes at reduced pay levels," Bach said. "That way you don’t lose the expertise and you can maintain a high-level of service for residents.”