Federal employees can’t opt out of payroll tax deferral, agency says

Editor’s note: This story was updated on Wednesday, Sept. 2 at 5 p.m. with additional statements from the National Treasury Employees Union, which is requesting more details from the Office of Management and Budget about upcoming payroll tax deferral plans. 

The president’s upcoming payroll tax deferral has prompted questions among federal employees about whether they can opt out of a confusing policy for which their agencies have provided limited details.

At least one large agency has suggested employees won’t have that option.

“There is no opt-out or opt in-option,” according to a Tuesday email sent to employees at the Defense Contracting Management Agency.

“No payroll providers, departments/agencies, nor employees will be able to opt-in/opt-out of the deferral. The Office of Management and Budget and the Office of Personnel Management [and] the Defense Finance and Accounting Service will implement the guidance according to the expectation that all federal civilian payroll providers will act in unison,” the email, which Federal News Network obtained, reads.

DFAS handles payroll for the Defense Department, as well as the Department of Veterans Affairs, Department of Health and Human Services, Energy Department, Executive Office of the President and others.

Federal News Network made multiple requests to the Office of Management and Budget for details on a potential opt-out policy, including whether active-duty military are subject to the president’s payroll tax deferral. OMB did not respond.

But a senior administration official told Federal News Network earlier this week it would launch the payroll tax deferral, which President Donald Trump authorized in an executive memo in early August, in time for employees’ second September paycheck.

However, federal employees have received limited information and mixed messages so far about their options for opting out of the president’s payroll tax deferral.

Congress seeks more answers

Rep. Don Beyer (D-Va.) led Democrats on the House Ways and Means Committee on Wednesday in seeking more clarity.

Members wrote to Agriculture Secretary Sonny Perdue. USDA oversees the National Finance Center — one of a handful of large payroll providers that serves multiple federal agencies. Other recipients were Treasury Secretary Steven Mnuchin and Michael Rigas, the acting director of the Office of Personnel Management.

“We are concerned about the lack of cross-agency coordination regarding this significant change for the federal workforce,” House members wrote. “We are especially alarmed that after many businesses and groups, including the U.S. Chamber of Commerce, have expressed concern about the ramifications of deferral for employers and employees, federal public servants are being used as guinea pigs.”

The House members questioned whether federal employees would have a chance to opt out of the payroll tax deferral — and whether active-duty military members would be subject to the upcoming changes.

Memos from the National Finance Center to its customers make no mention of an opportunity to opt-out.

An email to Social Security Administration employees Tuesday afternoon made no mention of an opt-out opportunity.

“We realize that you may have several questions regarding this matter,” the SSA email reads. “We are working closely with our payroll provider, the Department of the Interior (DOI), regarding the implementation of this presidential memorandum. DOI is awaiting guidance from the Department of the Treasury regarding the steps necessary to implement the deferral and the repayment of the OASDI deductions next year.”

Union also wants more clarity

The National Treasury Employees Union on Tuesday said its request for the payroll tax deferral to be optional had “fallen on deaf ears.” The union wrote to OMB on Wednesday afternoon, detailing a long list of questions that it had about the administration’s plans to implement the payroll tax deferral.

“Can you confirm that wages federal employees are earning right now, in pay period 18, will not have Social Security taxes withheld? If that is accurate, federal employees deserve to be informed of that immediately,” Reardon said in Wednesday’s letter. “As the largest employer in the country, the federal government is failing in its responsibilities to its workforce by not adequately informing federal employees and explaining the implications and consequences of the payroll tax deferral.”

In guidance issued late Friday afternoon, the IRS said employers could eliminate the Old Age, Survivors and Disability Insurance (OASDI) deductions for employees whose gross biweekly Social Security wages are less than $3,999.99. The policy kicked in Sept. 1.

But the payroll tax deductions are temporary, and federal employees will have to pay back deferred taxes starting in January. They’ll have until April to do so before penalties and interest may accrue, the IRS said.

DCMA acknowledged as much in its email to employees. The IRS is still determining how the deferral and collection will impact employees’ W-2s.

“Essentially, employees will see a temporary increase in their take home pay checks, but will see smaller paychecks in early 2021,” the email reads.

With employees likely unable to opt out, all federal workers earning $104,000 or less a year will be subject to the president’s payroll tax deferral.

Though federal employees’ annual salaries vary depending on their locality pay area, the payroll tax deferral seems to apply to the vast majority of the workforce. In the Baltimore, Washington, D.C., locality pay area, most GS-12s and below fall under the $104,000 threshold.

In the “rest of U.S.,” the threshold sits at GS-13, step 5 and below.

Per NTEU’s own calculations, an employee who makes $70,000 a year, or about $2,693 a pay period, would see an increase of $167 for each of the remaining nine paychecks this year. Employees in that scenario would have to pay about $1,500 back in 2021, the union said.

Federal employee organizations, meanwhile, are scrambling to educate their members about the upcoming payroll tax deferral and the implications it might have on next year’s paycheck.

NTEU called the rollout “chaotic and confusing” and criticized the administration for failing to advertise the effects of the payroll tax deferral on federal employees and their upcoming tax obligations.

“Since the administration has failed to educate its own workforce, we have warned the employees we represent that while their paychecks might be larger for the rest of 2020, they need to be prepared to pay back the amounts that were deferred, starting in January,” Reardon said Tuesday. “The administration has yet to explain to employees how the deferred taxes will be recouped in 2021, whether through additional payroll tax withholdings for several weeks or months, or a lump sum. There are a lot of other details surrounding pay raises and employee departures that are still unknown.”

Mnuchin urged Congress on Tuesday to pass legislation that would forgive employees from having to pay back deferred taxes.

But the National Active and Retired Federal Employees (NARFE) Association offered a warning to its members: don’t on count on such legislation becoming law.

“While the presidential memorandum directs the Secretary of the Treasury to explore avenues, including legislation to eliminate the obligation to pay the deferred taxes, federal employees should not expect that to occur,” Ken Thomas, NARFE national president, said in a statement. “Congress has not supported the deferral policy, and there has been no indication that it will accede to the administration’s request to approve legislation to eliminate the taxes. Furthermore, there is no clear, legal avenue for the Secretary of the Treasury to do so unilaterally.”

NARFE instead urged its members to save the extra income they receive this year to cover next year’s taxes.

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