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5500 Preparer's Manual for 2012 Plan Years

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.


Guidance issued by IRS on state employer contributions to defined benefit plans

In order for a state or political subdivision to "pick up" employee contributions to a qualified defined benefit plan so that the contributions are treated, for tax purposes, as employer contributions, an authorized person must prospectively take formal action in writing to have the employing unit pay contributions that were previously designated as employee contributions, according to guidance recently issued by the IRS.

Under Code Sec. 414(h)(2), although contributions to qualified plans established by a state government or its political subdivision, or by any agency or instrumentality of either, may be designated employee contributions, they are treated as employer contributions if the contributions are properly picked up by the employing unit. For example, according to the IRS, if an employer that is a political state subdivision participates in a qualified defined benefit plan established by the state to provide retirement benefits to eligible state employees (and to any employees of the state's subdivisions), and amends its governing laws in writing to provide that it will pay amounts designated as employee contributions, and the amendment, effective prospectively, is adopted by persons authorized to amend the employer's governing laws, the employer may treat those amounts as employer contributions for federal tax purposes.

The amounts would not need to be included in employees' gross income until they are distributed. In the example given by the IRS, the plan requires each participating employee to make employee contributions based on a percentage of his or her salary, and the state statutes governing the plan permit any political subdivision to provide that the employee contributions will be paid by the employer in order to be picked up and treated as employer contributions under Code Sec. 414(h)(2).

Transitional relief provided

The IRS has provided transitional relief for plans that, on or before August 28, 2006, included designated employee contributions intended to be picked up as employer contributions. If those plans failed to satisfy the requirements that the pick-up of employee contributions be made pursuant to a formal action in writing, by a person authorized to take such action, the plan will not be treated as failing to meet the requirements of Code Sec. 414(h)(2) prior to January 1, 2009 if: (1) the employer has taken contemporaneous action evidencing an intent to establish a pick-up, and has operated the plan accordingly; and (2) the employer takes formal written action prior to January 1, 2009, for future contributions to meet the requirements in this latest guidance.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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