Case of the Week: 414(h) Pick-Up Plans

The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and executive compensation arrangements. A recent call with a financial advisor from Texas is representative of a common inquiry involving plan types. The advisor asked:

“What is a 414 pick-up plan?”

Highlights of Discussion

A 414 pick-up plan is a type of governmental plan1 in which designated employee (after-tax) contributions are treated as employer contributions as long as the employing unit formally “picks up” the contributions.2 In this case, the employing unit treats the amounts as employer contributions for federal income tax purposes and does not include these amounts in the participating employees’ gross income.

IRS Revenue Ruling 2006-43 defines what the employing unit must do in order to pick up the contributions. It must:

  • Specify that the employee contributions are being paid by the employer. In order to accomplish this, an authorized person of the employing unit must take formal action to ensure the contributions will be paid by the employing unit in lieu of employee contributions. The action can only apply prospectively and must be evidenced by a written document (e.g., minutes of a meeting, a resolution, or an ordinance).
  • Not permit a participating employee as of the pick-up date to have a right to make a cash or deferred election with respect to the contributions. For example, participating employees may not opt out of the pick-up, or receive the contributed amounts directly instead of having them paid by the employing unit to the plan.

Further details of these requirements are contained in Revenue Ruling 2006-43 and the IRS’ summary of pick up plans.

Conclusion

IRC §414(h)(2) provides that for any plan established by a governmental unit, where the contributions of employing units are designated employee contributions, but the employer through written authorization picks up the contributions, the contributions are treated as employer contributions.

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“Case of the Week” is the winner of an APEX Award for Publication Excellence for 2017.

Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.

©2018, Retirement Learning Center, LLC. Used with permission.

Footnotes

  1. An IRC §401(a) qualified plan established by a state government or political subdivision thereof, or by any agency or instrumentality of the foregoing. Governmental pick-up contributions also apply to certain plans established and maintained by Indian tribal governments.
  2. See IRC §414(h).

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