Pick-Up of Employee Contributions

Federal tax law permits employers to pick up employee retirement contributions. There are no Ohio statutes or SERS rules governing the implementation of a Pick-up Plan for mandatory employee contributions.

The earliest effective date of a Pick-up Plan is the date of the board action implementing or changing the Pick-up Plan. According to IRS guidelines, Pick-up Plans may not be implemented retroactively.

After adopting a Pick-up Plan, employers must notify SERS through eSERS by using the Pick-up Plan application and including the Board Resolution. Refer to the eSERS Guide for instructions on adding a Pick-up Plan in eSERS.

Requirements and Tax Treatment

Under a Pick-up Plan, employer picked-up employee contributions are:

• Tax-deferred for federal income tax purposes until the member receives the contributions as a refund or retirement benefit
• Tax-deferred for state income tax purposes; employers 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 for retirement system purposes and refundable to the member

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. Employees in the covered group cannot opt out of the Pick-up Plan
• The method of pick up
• The planned effective date

Employees in the covered group cannot opt out of the Pick-up Plan.

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 employee’s gross income for federal income tax purposes.

Types of Pick-up Plans

There are three Pick-up Plan methods: salary reduction, fringe benefit not included in compensation, and fringe benefit included in compensation, which is also referred to as pick-up on pick-up.

Salary Reduction

Contributions are deducted from employees’ salaries but are deferred for federal and state income tax purposes.

Contributions must be reported as tax deferred on Contribution Reports.

Example:

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

Fringe Benefit Not Included in Compensation

These contributions are paid by the employer from the employer’s funds. The contribution is not deducted from employees’s salary. Contributions must be reported as tax deferred on Contribution Reports.

Example:

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

Fringe Benefit Included in Compensation (Pick-up on Pick-up)

These contributions are paid by the employer, along with an additional contribution on the employee’s 10%. This plan provides for a higher salary for retirement purposes only, which will affect the pension amount.

Contributions must be reported as tax deferred on Contribution Reports.

Example:

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

Please refer to the eSERS Guide for further information on adding a Pick-up Plan through eSERS.