Pick-up of Employee Contributions

Federal tax law permits employers to pick up employee retirement contributions. This is governed by federal tax law. There are no Ohio statutes or SERS rules governing the implementation of a pick-up plan of mandatory employee contributions.

Under a pick-up plan, the employer picked-up employee contributions are:

  • Tax deferred for federal income taxation purposes until the member receives the contributions in the form of a refund or retirement benefit
  • Tax deferred for state income taxation purposes, but an employer should contact local taxing authorities to determine the tax treatment of a pick-up plan for city or other local income taxation
  • Designated as employee contributions and refundable to the member for retirement system purposes

In order to implement a pick-up plan, federal tax law requires an employer to adopt a written plan that specifies the following:

  • The group of employees to be covered
  • The method of pick-up
  • The planned effective date
  • Employees in the covered group cannot opt out of the pick-up plan

There are two methods of pick-up plans: salary reduction and fringe benefit. An employer also may use a combination of these methods.

A fringe benefit plan also may be referred to as an offset against future salary increases, in lieu of salary increases or board paid.

If you have more questions, contact your tax advisor.

Reporting to SERS

After an employer adopts a pick-up plan in accordance with federal tax law, notice must be provided to SERS using eSERS. A pick-up plan can be submitted using the Pick-up Plan tab under the Organization Information menu. Please refer to the eSERS Guide for further instruction.

Employer Pick-Up of Retirement Contributions

Under current IRS Rulings, employee contributions to SERS may be picked up by the employer and excluded from the employees’ gross income for federal income tax purposes. School districts have adopted three types of pick-up plans.

Salary Reduction

Contributions are still deducted from employees’ salaries, but are deferred for federal and state income tax purposes. Contributions must be reported as tax deferred on monthly reports.

Example:

Salary: $20,000
SERS’ contribution: $2,000
Take home pay: $18,000
Taxable income: $18,000
Reported to SERS: $20,000

Board Paid

Under a Board paid pick-up plan, the contributions are paid by the employer out of the employer’s funds. The contribution is not deducted from employees’ salary.

Contributions must be reported as tax deferred on monthly reports.

Example:

Salary: $20,000
SERS’ contribution: $2,000
Take home pay: $20,000
Taxable income: $20,000
Reported to SERS: $20,000

Pick-up on Pick-up

The third type of plan is often called the pickup on a pick-up. Contributions are paid by the employer, and an additional contribution on the 10% is also paid. The pick-up on the pickup provides for a higher salary for retirement purposes, which will influence the amount of pension.

Contributions must be reported as tax deferred.

There have been occasions when the district intended that the pick-up on the pick-up be implemented, but the correct contributions and earnings were not reported. It is essential that the earnings be increased by 10% and the appropriate contribution sent.

The Board of Education should adopt a resolution specifying the type of pick-up plan, the group of employees covered, and the effective date.

Employers are advised to check with the IRS for a determination of the legality of a local pick-up plan.

In accordance with IRS regulations, SERS has set up the following requirements for implementation of a pick-up plan:

  • A pick-up policy may apply to a designated group of SERS members, including treasurers; business managers; employees covered by a collective bargaining agreement; employees excluded from a bargaining unit; supervisors; and school board members.
  • Once a pick-up plan is adopted for a designated group, the pick-up cannot be optional for employees within that group. For example, if a pick-up is adopted for all employees in a bargaining unit, individual unit members may not opt out of the plan.
  • Notice of a pick-up plan must be submitted to SERS prior to implementation. Employer must submit pick-up plans through eSERS, using the Pick-up Plan tab under the Organization Information menu. Any changes to the pick-up plan also require notice.
  • SERS will not accept a retroactive pick-up plan.
  • Once a pick-up plan is adopted and SERS is notified, it must then be reported as pick-up on the monthly payroll reports. Failure to report a pick-up properly on the monthly payroll reports will delay the actual implementation date.

The System credits contributions picked up to the individual member accounts, and the amounts are included in the accumulated contributions of each member. These contributions are refundable to the employee upon termination and will be reported to the IRS.

Example:

Salary: $20,000
SERS’ contribution: $2,200 (10% of 20,000, plus 10% of that figure)
Take home pay: $20,000
Taxable income: $20,000
Reported to SERS: $22,000