City, Unions Alarmed
Some Disability Pay Might Be Taxable

By REUVEN BLAU

The city's disability pension for civil servants injured on the job may not actually be completely tax-free, a potential problem that could add costs to thousands of injured retirees living on fixed incomes, THE CHIEF-LEADER has learned.

PETER L. GORMAN: 'A great concern.'

The issue is currently being reviewed by city pension officials as well as local and national union leaders after a question about the retirement fund's tax free status was raised by a retired Teacher several weeks ago.

Focus on Annuity, ITHP

The potential problem appears to primarily affect annuity payments and increased take home pay (ITHP) benefits that many retired workers receive in conjunction with the disability benefit. The central component of the pension - payments worth 75 percent of a worker's average salary - will likely remain tax-free, sources said.

The issue of liability is extremely complicated and many details remain murky, pension experts said. "Even I don't understand it totally," said one person familiar with issue. Most officials involved in the matter spoke on condition of anonymity, as the issue is still being reviewed.

Since its conception more than a half-century ago, the benefit, known as a 3/4 disability pension, has been completely exempt from city, state, and Federal taxes. But it is now unclear whether other components of the pension are tax-free. "The way the IRS law works is that it says that any payment 'in the nature of Workers' Comp' could be tax-free," an insider said.

The disability pension, which covers practically all the city's more than 300,000 employees, has been touted as a tax-free benefit for more than 70 years.

Taxable Pieces

Based on initial reviews, the city's Law Department has issued a preliminary decision concluding that portions of the pension that are not considered "in lieu of workers' comp" must be taxed. "Those are the issues that are not clear," a city official said.

In response, the police and fire unions have sought an independent review from a law firm specializing in tax regulations. "As a police and fire group we banded together to hire our own tax attorney to look into the opinion," said Peter L. Gorman, the president of the Uniformed Firefighters' Officers Association. "We are just taking what we think are reasonable and proper steps."

The city's and union's lawyers are scheduled to meet within the next few weeks to discuss their findings. "Eventually this is going to have to be run by the IRS," said one city official. "If you go to them and ask for a ruling you're leaving yourself wide open. We want to go to them with questions to show that we already have an understanding of certain parts of the law."

A Burden for Some

But it appears that not every lawyer is in agreement. "It comes down to legal understanding, and there are five opinions that I've heard," said one source.

Initial reviews indicate that part of the pension will be taxable, which will add an unexpected expense to thousands of injured city workers who are living on fixed incomes, union officials pointed out. "That's a great concern," Mr. Gorman said. "Our members are not protected by Workers' Comp; that's why we thought it was important that we band together."

It remains unclear if any possible tax obligation will be retroactive, but the IRS can only go back three years, according to regulations. By all accounts, only five or 10 percent of the benefit will likely be taxable, depending on various factors. But any added costs could create a significant burden for disabled retirees.

Aware of that reality, the city plans to stress to the IRS that many of the individuals who stand to be affected have been severely injured while on the job and that they may not have enough money set aside to cover an added expense, sources said.

City to Stress Hardship

"You don't throw yourself on the mercy of them, but you show the people who will be affected are severely disabled as a result of service for the city," a city official said. "Some people go out with a bad knee or leg, but some are in rough shape; we are concerned about a hardship, too."

While the city's civilian workers are also entitled to the disability benefit, the issue mainly affects the uniformed unions, whose members are more likely to be injured on the job. According to the city, approximately 1,100 retirees in the Police Pension Fund have retired with a 3/4 disability pension. The matter also only affects members in the Tier 1 and 2 pension systems, which includes practically every cop and firefighter, and those with more than 30 years' service in other jobs.

The issue may also have national ramifications, as many other municipalities throughout the nation offer their workers a similar tax-free 3/4 disability pension.

It is unclear why nobody has ever realized the tax ramifications of the annuity fund and ITHP. "It was assumed the Law Department had an agreement on record," said a source. "A lot of people are looking for someone to blame on this."

Another insider added, "A long time ago someone once told me if you want to get the right answer, you have to ask the right question. Chances are nobody asked the right question."