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Is this a pick-up?


Guest Kathleen Meagher

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Guest Kathleen Meagher

My client, a city, participates in the state PERS. The city picks up the mandatory employee contributions. The city and the employees' unions would like to agree that the city's PERS contract will be amended to improve benefits, and that the employees will pay the amount of the increase in the city's contribution.

They'd like to let employees pay this "cost-sharing" on a pre-tax basis. Could it be treated as a salary reduction pick-up? Section 414(h)(2) requires that picked-up amounts be "designated" as employee contributions. Can the city make such a designation on its own even if PERS does not treat these as employee contributions?

Failing pick-up treatment, could these contributions be excluded from income as deferred compensation under section 457? That seems like a stretch to me, but maybe it would work.

Thanks for any opinions or ideas.

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I briefly looked at this issue two months ago. I became concerned that (1) such a cost-sharing agreement would be void as inconsistent with the specified employee contribution rate in the state PERS statute and (2) the additional employee payment would be treated not as a payment by the employee to PERS but as a payment by the employee to the employer, since the PERS statute requires that the payment come from the employer; I think this concern (2) responds to your second paragraph.

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The fact that the state PERS does not treat these as employer contributions should not preclude a pick-up within the meaning of federal law, but you would have to look at any restrictions under applicable state law or the PERS plan document. Section 414(h)(2) came into being at a time when Congress was trying to tighten up the law to keep employees from arguing that mandatory employee contributions were not constructively received, and therefore were not includible in income for federal tax purposes. It responded by passing section 414(h), which generally provides that an employee may not treat a contribution as an employer contribution if the plan calls it an employee contribution. However, state and local governments made the argument that unlike private employers, they had no ability to modify their plan documents to call the contributions "employer" contributions, even if in fact the employer was paying them. To deal with this issue, section 414(h)(2) permits state and local governments to treat even those mandatory contributions called "employee" contributions under the plan document as employer contributions, so long as the employer, not necessarily the plan, takes the necessary action.

With regard to the applicability of restrictions under applicable state law or the PERS plan document, we actually went through this many years back, at at time when the Virginia Retirement Systems had no provision for employer pick-ups. We represented a local jurisdiction that wanted to pick up employer contributions, but was concerned that if it did, such contributions would be subject to the plan's vesting schedule as employer contributions, rather than being 100% vested as employee contributions were. The member of the Virginia attorney general's office with responsibility for VRS confirmed that contributions could be treated as paid by the employee for Virginia purposes, even if they were technically "employer" contributions under federal law. Obviously, other states might take a different view, but this was at least helpful in the case of Virginia employers.

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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