Mandatory Pre-Tax Contributions

[Guest Jhagan]

Can a governmental 401(a) plan have mandatory pre-tax contributions? Would this be allowed under section 414(h)? If so, should there be special language in the Plan Document to allow for the pre-tax contributions?

[Guest CVCalhoun]

Yes, a governmental plan can have mandatory pre-tax contributions under section 414(h)(2). See Rev. Ruls. 81-35 and 81-36.

As for whether there should be special language in the plan document in order to have mandatory pre-tax contributions, the short answer is that it is not required. The original purpose behind section 414(h)(2) seems to have been to permit a local authority which contributed to a statewide plan to make contributions in lieu of employee contributions otherwise mandated by the state plan. Thus, it is clear that an employer can simply adopt a pick-up arrangement, without the plan itself having to contain any special language.

At the same time, we have found that including language in the plan document is often useful. For one thing, the plan will ultimately be responsible for reporting what distributions from the plan are taxable, and cannot do so accurately unless it knows whether or not the employee contributions are pretax. For another, there may be state law barriers to the mandatory salary reductions necessary to implement mandatory pretax contributions, which can be resolved if the state statute which constitutes the plan document is appropriately amended to permit the arrangement.

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