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USERRA and 414(h) Pick up Plans


Guest KCW
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Does the USERRA require employers to "make up" contributions to 414(h) pick up plans when an employee returns from military service?

If, yes, does the employer make up "employer matching contributions" only, or "employee" non-elective contributions as well (with no reduction in the employee's compensation)?

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  • 2 weeks later...

There has always been a question in my mind as to whether picked up contributions to a defined benefit plan should be treated as employer contributions (and therefore that the plan would have to pay the benefit without the employee making up the contributions) or employee contributions (which the employee would have to make in order to get the benefit) for USERRA purposes. However, for what it is worth, I was recently told by a staff member of one of the state retirement systems that their local Department of Labor office was taking the position that picked up contributions (at least, in a salary reduction context) were being treated as employee, not employer, contributions for USERRA purposes.

Note, however, that the question of whether the employee must receive the benefits without making contributions, and the question of whether the employer must make the contributions are not necessarily linked. For example, in some plans, the employer is required only to make a contribution equal to that made by the employee. Thus, if the employee were entitled to an additional benefit due to USERRA, without making a contribution, the employer would not necessarily be required to make a contribution either. In effect, the additional benefit would merely be an additional actuarial liability of the plan, to be satisfied ultimately by contributions made to the plan by all contributing employers, not specifically the employer of the USERRA-covered employee. To the extent that this is not the desired result, applicable state or local law and/or the plan document may need to be modified.

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The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Thanks for the reply.

I failed to mention that my question was about a DC plan (mandatory 5% employee salary reduction contribution, picked up by, and matched by the employer).

I infer from your reply and others that the employer has no obligation under USERRA to make-up any salary reduction contribution to a DC pick-up plan except to match any make-up contribution the employee may make.

I also gather that it is up to the returning employee to elect to make-up any foregone contributions.

According to a well known authoritative source, employer pick-ups of elective contributions are frowned upon by the IRS:

"For contributions to be treated as picked up,

(1) they must be designated by the employing governmental unit as being picked up, and

(2) the participant must have no right to receive the contributions in cash, in lieu of having them contributed to the plan."

http://benefitsattorney.com/mbf.html

Does the fact that the returning employee can decide whether or not to make-up salary reduction contributions have any effect on the eligibility of the contributions to be picked up by the employer?

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You are right, contributions are not supposed to be able to be picked up if the employee has any right to receive the amount in cash rather than having it contributed to the plan. However, the IRS has taken a liberal position in a number of recent private rulings, holding that, for example, if an employee makes a one-time irrevocable election to purchase service credit under a DB plan, the cost of that service credit can be treated as picked up. Perhaps this would be a way to go about getting the contributions to be tax-deferred, especially given that USERRA provides for making up the contributions over a period set forth in the statute. Of course, private rulings aren't binding on the IRS unless they are actually issued to the particular taxpayer, so some caution may be indicated.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Everett, I'm sorry, I misstated that one, and I've edited my prior post to eliminate that statement. Employers do have to make up contributions to DC plans. They clearly do not, however, have to make up any voluntary employee deferrals, even if such deferrals are treated as "employer" contributions for tax purposes. (They also do not have to make up earnings and forfeitures.) The situation is somewhat less clear in the case of involuntary deferrals that are treated as employer contributions, i.e., picked-up contributions.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Section 4318(B)(2) of USERRA states "A person reemployed under this chapter shall be entitled to accrued benefits pursuant to subsection (a) that are contingent on the making of, or derived from, employee contributions or elective deferrals (as defined in section 402(g)(3) of the Internal Revenue Code of 1986) only to the extent the person makes payment to the plan with respect to such contributions or deferrals."

I think IRC section 402(g)(3) pertains to the exclusion for elective deferrals ($10,500 in 2001).

Are mandatory, picked-up employee salary reduction contributions to a DC plan like a 401(a) money purchase plan subject to the section 402(g)(3) exclusion?

If money purchase plans are not subject to the section 402(g)(3) exclusion, does USERRA guarantee the returning employee's right to make up involuntary employee contributions?

If it's true that USERRA does not create a right to make up contributions to a DC plan that does not have elective contributions (like a money purchase plan), it would seem to follow that there is no need to determine whether make up contributions could or could not be picked up by the employer under Section 414(h).

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That is exactly the issue to which there is no answer. If pick-ups to a defined contribution plan are treated as employee contributions, the employee would have to make them in order to get any benefit. But if they are treated as employer contributions for USERRA purposes (as they are for tax purposes), the employer could have to make them up without reimbursement by the employee. (Because it is a defined contribution plan, the employer would not have to make up earnings and forfeitures, but would have to make up the contributions themselves if they were treated as employer contributions.)

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Ok, I'm getting a handle on this now.

(1) USERRA says a returning employee has a right to make up accrued benefits "derived from, employee contributions or elective deferrals" subject to the 402(g)(3) exclusion. (Translation: The returning employee has a right to make up either:

  • employee contributions {to a money purchase plan}
    or
    elective deferrals {to a CODA}.)

(2) Now, the question regarding "picked up" employee contributions is: are "picked up" employee contributions only "employee contributions" in form, but "employer contributions" in substance?

I think the answer depends on the context within which the question is posed.

  • (a) From a tax perspective "picked up" employee contributions are employer contributions.
    (B) From any other perspective "picked up" employee contributions are employee contributions that happen to be "picked up" by the employer.

If you were to ask our retirement board, our employees or our employer, "who makes the picked up 5% salary reduction contributions to our money purchase plan", everyone would give you the same answer; "why the employee, of course!"

The 5% employee contribution, matched by our employer, is 5% of the employee's actual pay. If the employee makes no pay that pay period, no contribution is made.

(3) Under this type of plan, I don't think USERRA requires an employer to make up contributions with no salary reduction. I think USERRA requires the employer to allow the returning employee to make up forgone employee contributions based on the pay she would have earned, (or her average pay for the 12 months prior to her military service, etc. etc.). And the employer, in this case, would have to match those make up contributions.

(4) I think the employer could pick up these make up contributions despite the their "elective" nature if it followed certain procedures.

The election(s) the employee would be required to make would be:

  • one-time, or made once a year
    irrevocable
    for a sum certain (up to the total of USERRA-covered forgone contributions)
    for a period certain (how about a minimum of 1 year up to the lesser of 3 times the period of USERRA-covered military service or 5 years?)

The employer should probably obtain an IRS Private Letter Ruling permitting the arrangement (similar to PRIVATE RULING 200118056).

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I have asked IRS officials about how one-time elections work under USERRA. They don't have an answer, other than to acknowledge that it is an interesting question. Eventually, some poor soul will have to consider proposed terms under a determination letter request that treat the one-time election amount as the employee's contribution/deferral.

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