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Voluntary pre-tax contributions in 401(a) plans


Guest Anne Comer
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I believe that the only Pre-tax contributions permitted to a DB plan are under IRC 414(h), and apply to govt. entities.

W/r/t DC plans, contributions under 401(k) and 403(B) are pre-tax.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Guest CVCalhoun

The only way to have voluntary pretax contributions to a governmental 401(a) plan (other than one sponsored by an employer which has a grandfathered 401(k) plan) is to have them pursuant to an irrevocable one-time election which meets the requirements of section 414(h). For example, a governmental plan could permit a one-time election as to whether to participate in a DB plan, which would last for the duration of the employee's employment. However, it could not provide annual elections as to whether to participate or how much to contribute.

If you want to provide annual elections, you would need to look at a 457 plan or, in the case of a public school or university, a 403(B) plan.

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Employee benefits legal resource sitea

[Note: This message has been edited by CVCalhoun]

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  • 10 months later...

Does this mean that a governmental 414(h) plan could not designate a range of employee before-tax contributions (employer pick-up) from say 2%-5% because it would give employees the option of choosing to receive certain amounts (anything over the 2%) directly instead of having them paid to the plan? So 414(h) plans can only have one designated percentage that MUST be contributed?

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No, there could be a range of permitted contributions. But the one-time irrevocable election rules would then apply not only to the decision, but as to the level of contributions. For example, suppose that a plan permitted contributions equal to 2, 3, or 4 percent of compensation. A participant could make a one-time irrevocable election to contribute at a 3 percent rate. However, the participant could not thereafter switch to a 2 or 4 percent rate, and could not cease to participate at all.

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Employee benefits legal resource site

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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Guest KClarke

Along the same line as the question regarding the range of employee pre-tax contribution, can the employer have a vary the amount of its contribution to match the employee's contribution?

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  • 1 month later...
Guest Chris2682

I'm working with a county government in Colorado and am Trying to ascertain the taxability of COntributions to a 401(a) Defined Contribution plan.

The Defined Contribution Plan contains two parts

First there is the Mandatory Contribution piece. This is 4.5 % matched by the employer 100%, Fully Vested at time of contribution. The Employee has no choice in contributing to the plan

The second piece is a Voluntary Contribution. This allows the employee to contribute additional after tax funds to the plan.

My Understanding, from my client, is that the 4.5% Contribution from the employee is treated as Pre-tax deduction for Federal and State.

Could someone please comment on this

Best Regards

Chris

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I would suspect that the 4.5 percent is "picked up" by the employer within the meaning of 414(h)(2) of the Internal Revenue Code. If the employees' wages are mandatorily reduced by an identical amount, it has the same effect as if the money were taken out of the employee's paycheck, but it is treated as an employer contribution (therefore pretax) for federal income tax purposes.

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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