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Pension Retirement Contributions Subject to FICA and Medicare

Effective January 1, 2017, employers participating in the Kentucky Retirement System (KRS) will apply Social Security (FICA) and Medicare tax to the employee’s pension contributions. Participant’s in the Kentucky Teacher’s Retirement System (KTRS) are still exempt from FICA but will apply the Medicare tax to those pension contributions.  Kentucky employers were previously able to deduct the employee’s pension contributions out of gross wages when calculating FICA and Medicare tax.  This change will impact both employees and employers.  Each employee will have additional withholding (less income) for the tax paid into FICA and Medicare and increased social security benefits upon retirement.  The employer will also have to pay their portion of FICA and Medicare and will see an increase in their expense for this change.  The current rate for FICA is 12.4% split equally between the employer and employee.  The current rate for Medicare is 1.45% split equally between the employer and employee.

For a CERS employee making a semi-monthly gross salary of $1,000, and a 5% retirement contribution, this change will result in an additional withholding of $3.83 per pay period. The employer will also have an additional semi-monthly expense of $3.83.  For each individual employee this figure doesn’t sound like much but not all contribution rates are 5%, so some individuals will see an even greater change in their pay.  In addition, for an employer with $1,000,000 of total employee contributions this will result in an additional expense of $76,500 each year.  Participating employers need to plan now to make the withholding changes in their payroll system to account for the change and each Employer needs to analyze the budgetary implications of this additional expense and adjust their budget accordingly.

For additional assistance please contact Heather R. Cochran at RFH, PLLC. 859-231-1800