Legislation that would wipe out federal income taxes owed by hundreds of Maryland state employees and teachers when they recently switched state pension plans was introduced Friday by Representative Benjamin L. Cardin, D-Md.-3rd.
The House bill, co-sponsored by the entire Maryland delegation, would allow tax-free rollovers of retirement funds to individual retirement accounts or other qualified pension plans, retroactive to Jan. 1, 1987.
While the bill has little chance of full consideration this late in the session, Mr. Cardin said there is "a very good chance for [tax] committee attention next year."
Meantime, the congressman said he will seek an understanding with the Internal Revenue Service to minimize the tax impact on Marylanders while the legislation is pending.
"The revenue impact [on federal tax collections] is very low," he said, while the bill would promote "a positive policy effect ofencouraging people to save for their retirement."
As many as 2,000 state employees could face tax bills amounting to millions of dollars, after an IRS ruling in July that money they withdrew from the old Maryland state retirement plan is taxable, even if those funds had been transferred to an IRA.
Many of these employees claim that they were misled by the State Retirement Agency to believe that their withdrawals from the old state pension plan would be tax-free if the money was rolled over.
The state had encouraged employees to withdraw their funds from the old state retirement plan and switch to a newer pension fund, which costs less to maintain and pays lower benefits.
After an inquiry by the state last year, the IRS ruled that money withdrawn from the old fund was fully taxable.
With additional penalties and interest, individuals learned that the tax bills could eat up much more than half of their retirement DTC savings, which in some cases amounted to more than $300,000.
Legal action, including a $100 million class-action suit filed by attorney Robert B. Kershaw of Baltimore, has been brought against the state for alleged deception in wrongly advising employees that the withdrawals would be tax-free.
Some individuals paid full taxes on the withdrawals, others paid partial taxes, and some did not roll over the funds into an IRA, so the actual amount of federal and state taxes and penalties at stake is unknown.
The State Retirement Agency insists that it did not intentionally give mistaken tax advice to people who withdrew money and switched to the new pension fund.