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414(h) Pick-up Plan


Guest wjr
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I have just reviewed a 401(a) Governmental Plan that has only required employee contributions. They are, however, being picked-up under 414(h). The interesting thing is that both existing and new employees have a 90 day irrevocable election to participate and have the option to contribute 5%,10%,15%,20% or 25%. The irrevocable one-time option seems to be permitted based on recent PLRs, but the various percentages all the way to 25% seem to be extremely aggressive. I can't seem to find anything regarding multiple percentages or even anything over single digits.

What is your take on this?

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Guest Harvey Carruth

First, it is important to know whether the plan is a defined contribution plan [iRC 401(l)(2)] or a defined benefit plan [iRC 401(l)(3)]. If it is a defined contribution plan, then under current law IRC 415©(1)(B) would not allow contributions larger than 20% of gross salary, since these mandatory salary reduction contributions would reduce the participant's compensation as defined in IRC 415©(3). The State of Washington Teacher's Retirement System (TRS) Plan 3 has a defined contribution component that allows participants to make a one-time irrevocable selection from among six options (Options A-F), two of which include graduated contribution rates based on age (Options B and C). The lowest rate allowed is 5% (Option A) and the highest rate allowed is 15% (Option F). See http://www.wa.gov/DRS/member/trs/t3hbk.htm for additional details on this plan.

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  • 3 weeks later...

I would agree with Harvey on this one. This is something of a trap for the unwary. Section 415© was recently amended so that most salary reduction contributions (e.g., 403(B) and 401(k) contributions) can be included in income for purpose of calculating the 25% of compensation limit of section 415©. Many people forget that the same is not true of 414(h)(2) ("picked up") contributions. Thus, the largest possible picked up contribution to a defined contribution plan is 20% of the compensation before the salary reduction. For example, if you start out with compensation of $50,000, the maximum contribution would be $10,000, because the contribution is at that point 25% of the compensation remaining after the contribution (%50,000 minus $10,000, or $40,000).

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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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  • 1 year later...

The 414(h)plan has a 3% mandatory employee contribution picked up by the employer. They are in union negotiations now and they want to provide a range of employee contributions e.g. 3%-9%. Once selected by an employee, it would be irrevocable. What about those existing employees who have already made their 3% irrevocable election? Can they change, or would the range now only apply to new participants?

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