A 1985 change in federal law that required Lebanon city to withhold Medicare tax from police paychecks appears to have gone unnoticed until a recent IRS audit uncovered the oversight.

In an Aug. 24 email sent to all city police officers, director of administration Melissa Quinones said that, “several weeks ago, the IRS notified the City they were performing an audit on the City’s 2020 employment taxes and related tax filings. An issue the IRS is raising related to the total wages being reported and the amount of Social Security and Medicare taxes being withheld.”

“The city was able to provide a Section 218 Agreement which the City entered into in 1968 with the Commonwealth of Pennsylvania that allows Social Security to not be withheld for police.”

According to the Internal Revenue Service, a Section 218 Agreement “is a voluntary agreement between the State and the Social Security Administration (SSA) to provide Social Security and Medicare Hospital Insurance (HI) or Medicare HI-only coverage for State and local government employees.”

But, said Quinones, “Medicare is not covered by that agreement and due to a change in the law in 1985, if an officer was hired on or after April 1, 1986, mandatory Medicare taxation and withholding is required.” Medicare was created in 1965.

Quinones’ email goes on to say that the city is working with the IRS to resolve the situation, but that “the City will be required by the IRS to withhold Medicare tax from police wages . . . starting . . .September 2, 2022 . . . at 1.45%” of gross wages.

The city gave no indication that required Social Security taxes have not been withheld.

Mayor Sherry Capello told LebTown on Oct. 14 that the city and its tax attorney have met with the police union and informed it of the situation. The city, she said, first met with IRS auditors on Aug. 8.

LebTown asked Capello what if any financial impact the audit findings could have on the city budget, whether and how much the city could have to repay, and whether Medicare coverage for current or former police officers could be jeopardized.

Capello responded that “we are hopeful that we will have an agreement next week and if so, I will be discussing the matter at the City Council meetings. It would be premature to share until this matter is finalized and an agreement is reached.”

The next regular city council meeting will be Monday, Oct. 24 at 6 p.m.

The 1985 changes in the law appear to have gone unnoticed by city elected officials and auditors until this August. Lebanon has had six mayors since 1985. Martin Schneider was mayor in 1985, and City Council was composed of Betts Shultz, Betty Eiceman, and Martin Yocum.

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