21 January 2021

Upcoming Deadline for Michigan Public Schools to Participate in Proposed IRS Closing Agreement on 3% Retiree Healthcare Contributions

February 5, 2021 is the deadline for Michigan public school districts to submit a Form 2848 to the State of Michigan Office of Retirement Services (“ORS”) to participate in and be covered by the proposed IRS closing agreement related to 3% retiree healthcare contributions.  Michigan public school employees who did not opt out of retiree health coverage under the Michigan Public School Employees Retirement System (“MPSERS”) Act are required to make 3% contributions to ORS for retiree health coverage.  Many public school districts asked whether the 3% contributions, which are taken from an employee’s compensation, are “wages” for federal income and FICA tax purposes.  For a limited time, the IRS is allowing Michigan public school districts to participate in a closing agreement that favorably resolves the tax treatment of these contributions.  The IRS indicated that the closing agreement will provide that the retiree healthcare contributions are exempt from federal income and FICA taxes.

ORS is facilitating a process that will allow Michigan public school districts to participate in and be covered by the IRS closing agreement.  To participate, a school district must satisfy two requirements.  First, a school district must execute a Form 2848 and deliver it to ORS by February 5, 2021.  The Form 2848 will authorize legal counsel for ORS to enter into the closing agreement on behalf of the school district.  Second, the IRS is requiring a $3,000 user fee for each school district that participates in the closing agreement.  ORS is coordinating with MPSERS to make payments on behalf of school districts as an administrative expense.  This removes cost as an impediment to the school district deciding whether to participate in the closing agreement (although it could result in higher future contribution rates).

The IRS closing agreement is binding on the IRS on this particular tax issue.  If a school district participates in and is covered by the closing agreement, the IRS must treat the retiree healthcare contributions as exempt from federal income and FICA taxes, and cannot later change its mind.  This is beneficial for school districts that chose not to withhold these taxes because it prevents the IRS from challenging the tax position in the event of an audit.  This is also beneficial for school districts that withheld these taxes but want to seek a refund from the IRS.

Board Approval

Given the short time remaining between now and the February 5th deadline, school district personnel may question whether board approval is necessary to opt into the closing agreement.  Generally, decisions need not be approved by a school board where administrators have been given the authority to handle day‑to‑day tax matters for a school district.  This is particularly true for those school districts who have been operating with the understanding that the compensation at issue is not “wages” for federal income and FICA tax purposes.  That having been said, school district policies may control administrator discretion.  Additionally, opting into the closing agreement requires the submission of Form 2848, which will grant power of attorney to legal counsel for ORS for execution of the closing agreement.  School districts with a policy requiring school board approval for selection of legal counsel may be limited by such a policy.

In sum, school district policies should be reviewed to ensure school administrator action alone is sufficient to commit a school district to the closing agreement.  Because school policies can be unique to any given school district, administrators are encouraged to contact legal counsel relative to this issue.


Michigan public school districts that choose to participate in the IRS closing agreement must be aware of the upcoming deadline on February 5, 2021 to submit Form 2848 to ORS.  Unless the deadline is extended, school districts will thereafter no longer be able to participate in the closing agreement and bind the IRS to the position that the retiree healthcare contributions are exempt from federal income and FICA taxes.  The retiree healthcare contributions may be exempt from these taxes in the absence of the closing agreement, but the closing agreement provides protection to participating school districts from the IRS changing its position on this issue.  If a school district does not participate in the closing agreement, the closing agreement is at least some evidence that the IRS has acquiesced on the issue of whether the contributions are taxable.

If you have any questions, please contact the authors or one of the Miller Johnson attorneys listed to the left.