New Tax Withholding Rates for Benefits

Many CalPERS retirees and beneficiaries saw slightly bigger benefit payments beginning with their April 1, 2009, payment. This is the result of new income tax withholding rates issued by the Internal Revenue Service (IRS). In addition, beginning with the June 1, 2009, payment, CalPERS began implementing higher California State income tax withholding rates. Both of these changes could have ramifications when filing next year’s income tax returns. Here are some facts:

• The federal economic stimulus plan recently signed into law provides for a “Make Work Pay” tax credit of $400 for individuals and $800 for families, lowering tax obligations by those amounts with the goal of giving taxpayers more disposable income to spend and thus stimulate the economy.
   
• The IRS issued new income tax withholding tables with lower withholding rates to reflect the lower tax obligation that would result from the tax credit. The IRS also ruled pension funds must use the new withholding rates for benefit payments.
   
• However, under the law, the Make Work Pay tax credit only applies to “earned income.” Pension benefits are not considered earned income, which means the tax obligation for pension benefits does not change.
   
• This results in a situation for retirees and beneficiaries in which the tax withholding amount on their benefit payment goes down while their tax obligation has not actually been reduced.
   
• The situation could result in underpayment of federal income taxes during the year that would have to be made up when filing income tax returns the following year, along with the possibility of penalties for under withholding of taxes during the year.
   
• California State personal income tax rates were increased by 0.25 percent this year as a part of the State budget deal that was enacted in February 2009. The higher State withholding rates were applied to CalPERS benefit payments beginning with the June 1, 2009, payment. However, the tax increase applies to the entire 2009 tax year, which could result in under withholding of State income taxes from CalPERS benefit payments for the entire year.
   
• If you have questions regarding how these federal and State tax changes could affect your future tax obligation, please contact a tax consultant, the Internal Revenue Service, or State Franchise Tax Board. Please be aware that you may voluntarily increase your tax withholding by filing a new Form W-4P for federal taxes and a Form DE-4P for State taxes. 
   
• For your convenience, you can download the Tax Withholding Election form from our Forms and Publications Center, or call 888 CalPERS (or 888-225-7377) to request a copy to be mailed to you.

Dated: 06-11-2009