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Letter to Representative Rangel and Senator Baucus on the Pension Withholding Issue

March 24, 2009

Dear Chairman Baucus and Chairman Rangel:


The National Education Association (NEA) would like to request your assistance in addressing an unintended consequence of the IRS’ issuance of new tax withholding tables and the application of these tables to retiree pensions.  This problem impacts our more than 275,000 dues-paying retiree members and thousands of other public- and private-sector pensioners. 

The Internal Revenue Service has issued new tax withholding tables to reflect the “Making Work Pay” tax credit on earned income.  While pension benefits are not considered earned income and are not subject to the “Making Work Pay” credit, the IRS nevertheless instructed all pension plans to use the new withholding tables designed for employers.  The result will be widespread under-withholding on pension income, causing thousands of retirees to owe hundreds of dollars in taxes unexpectedly at the end of the year.  

Because pension benefits do not entitle retirees to this tax credit, it seems illogical for pension payers to be required to use the new tables.  Officials at the IRS have been apprised of the problem, but have not rectified it.  Instead, the IRS recently issued Publication 15-T, which includes the following statement:  "For the calculation of income tax withholding on pensions, the new withholding tables also apply."

If the IRS does not modify its position, pension plans will begin withholding on April 1, based on the new tax tables.  The only way retirees will be able to avoid under-withholding will be to instruct their pension plan proactively to withhold more from their checks.  Calculating the right amount will not be easy and will surely lead to unnecessary confusion.

To avoid this situation and save tens of thousands of retirees from having to pay back taxes, we recommend that the IRS reconsider their directive and find a better way.  A possible solution would be for the IRS to allow pension plans to use the old tables.

We urge you to intervene on behalf of pensioners by strongly encouraging the IRS to reconsider its directive.  Your efforts can ensure that thousands of pensioners on fixed incomes won’t be saddled with big payments next tax season.

Sincerely,

Diane Shust
Director of Government Relations

Randall Moody
Manager of Federal Advocacy