Did Maryland need a new law to start letting the state pay, or 'pick up,' employees' pension contributions tax-free in the 1980s?

Plain-English summary

A member of the Maryland House of Delegates asked the Attorney General about a 1986 law directing the Board of Trustees of the Maryland State Retirement and Pension Systems to develop an employer "pickup" plan, a technique under federal tax law where the government pays employees' required pension contributions and treats them as employer contributions so employees do not pay income tax on that money until they eventually receive it in retirement. The Board had prepared a plan and applied for IRS approval, but a major 1986 federal tax overhaul created uncertainty, no implementing bill moved during the 1987 legislative session, and the IRS did not approve the plan until after that session ended. The legislator wanted to know whether the plan could go into effect on the Board's own authority or needed a new law, and if legislation was required, whether it was fine to wait until 1988.

The Attorney General concluded that the 1986 law, by directing the Board to come back to the General Assembly with proposed implementing amendments (including specific safeguards against costing the state or its employees money), showed the General Assembly intended to review and approve the program itself rather than let the Board's plan take effect automatically. The opinion also concluded that nothing in state or federal constitutional law prevented the General Assembly from acting on this at its 1988 session rather than 1987, since one legislative session generally cannot bind a later one, and here the delay was a practical necessity created by the federal tax overhaul and the IRS's slow response. As a result, the opinion advised the Board of Trustees that it could not put the pickup program into effect before the General Assembly passed the necessary implementing legislation.

Currency note

This opinion was issued in 1987. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Could Maryland's pension Board of Trustees have started the employer pension pickup program on its own once the IRS approved it in 1987?
No, according to this opinion. Although the IRS's own approval letter did not require any further state legislative action, the Attorney General concluded that Maryland's 1986 enabling law contemplated the Board coming back to the General Assembly with implementing amendments, meaning the program could not take effect until the legislature itself acted.

Why did Maryland end up delaying action on this pension program from 1987 to 1988?
A major federal tax law, the Tax Equity and Reform Act of 1986, was signed shortly after Maryland's plan was submitted to the IRS and created uncertainty about whether the pickup program would still benefit employees as expected. The IRS also had not yet ruled on the plan when the 1987 legislative session began, so the opinion found the General Assembly had little practical choice but to wait for the 1988 session to act with better information.

Is it legally risky for a state legislature to postpone action on a program from one year's session to the next?
Not according to this opinion. The Attorney General explained that each legislative session holds the same authority as any other, so what one General Assembly session could do, a later session can do just as well, absent some specific constitutional or statutory deadline requiring earlier action.

Background and statutory framework

Under §414(h) of the Internal Revenue Code, a governmental employer can "pick up" its employees' required pension contributions, meaning the government pays them and designates them as employer rather than employee contributions, so the money escapes federal income tax and withholding until the employee later receives it in retirement. Chapter 802 of the 1986 Laws of Maryland directed the Board of Trustees of the Maryland State Retirement and Pension Systems to develop such a plan for state and other covered employees by October 1, 1986, and to seek IRS approval, contemplated three possible outcomes depending on whether the IRS approved, rejected, or had not yet responded to the plan by the start of the 1987 legislative session, and in every scenario short of outright rejection directed the Board to submit implementing legislative amendments to the General Assembly, including safeguards to prevent the plan from reducing state tax revenue or harming employee compensation.

The opinion applied ordinary principles of statutory interpretation, looking to both the statute's language and its context to determine what the General Assembly intended, and found that Chapter 802's repeated instruction for the Board to submit amendments for legislative "consideration," together with its silence on any self-executing mechanism (unlike an earlier deferred-compensation law that had expressly let the Governor implement a plan by executive order without further legislative action), showed the General Assembly meant to retain control over the pickup program's implementation. On the timing question, the opinion relied on the well-established principle that the General Assembly holds the full legislative power of the state subject only to constitutional limits, and that one legislative session cannot bind a later one, so nothing prevented deferring action to 1988, especially given the federal tax-law uncertainty and delayed IRS ruling that made 1987 action impractical.

Citations

Statutes:

• Chapter 802, Laws of Maryland 1986 (directing the Board of Trustees to develop and seek IRS approval for an employer pickup plan)
• §402(a) of the Internal Revenue Code of 1954 (general tax deferral for qualified pension plan distributions)
• §414(h) of the Internal Revenue Code (favorable tax treatment for governmental employer "pickup" of employee contributions)
• Article III, §15(2) of the Constitution of Maryland (General Assembly Compensation Commission's authority over legislator compensation)
• former §67(a) of Article 73B of the Maryland Code (repealed deferred-compensation law allowing executive-order implementation without further legislative action)
• Chapter 741, Laws of Maryland 1985 (repeal of former Article 73B, §67(a))

Cases:

• Kaczorowski v. City of Balto., 309 Md. 505, 514-15 (1987)
• Perkins v. Eskridge, 278 Md. 619 (1976)
• Kenneweg v. Allegany County Commissioners, 102 Md. 119 (1905)
• Wright v. Wright's Lessee, 2 Md. 429, 449 (1852)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1987/Volume72_1987.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

RETIREMENT SYSTEMS

Tax Deferment—"Pickup" Program—Initiation of Program Requires Legislative Action, Which May Be Taken at the General Assembly's 1988 Session.

October 27, 1987

The Honorable Charles J. Ryan
Maryland House of Delegates

You have requested our opinion on the requirements of Chapter 802 (House Bill 1550), Laws of Maryland 1986, dealing with the State's "pickup" of employee pension contributions. Specifically, you ask:

1. "Does implementation of the new program require positive action by the General Assembly?"

2. "If positive action is required, is it reasonable and lawful to defer that action until the 1988 Session?"

3. "If positive action by the General Assembly is not required, is the Board of Trustees [of the Maryland State Retirement and Pension Systems] required to implement an employer pick-up program before the 1988 General Assembly, under the circumstances?"

For the reasons stated below, we conclude that:

1. Chapter 802 requires action by the General Assembly to implement the employer pickup program developed by the Board of Trustees.

2. Nothing precludes the General Assembly from acting at the 1988 Session.

3. Given the need for further legislation, the Board of Trustees may not implement an employer pickup program before the 1988 Session of the General Assembly.

I
Background

A. Employer Pickup Programs

Section 402(a) of the Internal Revenue Code of 1954 (the "Code") provides that an employee's share of a qualified pension plan is not taxable to the employee until the plan distributes that amount, typically in the form of retirement benefits.1 Under another provision of the Code, §414(h), an employee's contributions to a qualified retirement or pension plan may gain the same favorable tax treatment if the employee's governmental employer pays, that is, "picks up," contributions for members of its plans and designates those picked-up contributions as employer contributions. When the technique is adopted by a governmental employer and approved by a determination letter or ruling from the Internal Revenue Service, the employee's contributions may be reported to the IRS in a way that makes them not subject to federal withholding and not subject to the income tax itself until received later.

B. Maryland's Proposed Plan

Chapter 802 of the Laws of Maryland 1986 is an uncodified act that, among other things, directs the Board of Trustees for the Maryland State Retirement and Pension Systems on or before October 1, 1986 to:

1. "develop a program for the State or other employer of a member of the State retirement or pension systems ... to pick up the retirement or pension contributions required to be made by the member as to qualify the program for the tax treatment under §414(h). . .";2 and

2. "apply for a letter of determination or ruling from the Internal Revenue Service that the program qualifies for the tax treatment under §414(h) . . ." These two duties were to be carried out by October 1, 1986.

It is our understanding that the Board of Trustees indeed prepared a pickup plan and submitted it to the IRS for a determination letter or ruling on October 1, 1986. However, shortly thereafter (on October 22, 1986), President Reagan signed into law the Tax Equity and Reform Act of 1986 ("Reform Act"), which made extensive changes in the tax treatment of qualified retirement and pension plans. While the Reform Act seemingly did not change the reporting technique for qualified public retirement plans authorized by §414(h), it did make other changes in the Code that, on first impression, appeared to make adoption of the employee pickup plan less attractive than it would have been under the provisions of the prior Code. Thus, at the start of the 1987 Session of the General Assembly, there was considerable uncertainty as to whether implementation of a pickup plan should be pursued. Moreover, at that time the IRS had not yet issued its response to the Board of Trustees.

Section 1(c)(3) of Chapter 802 deals with these contingencies:

"If no final response is received from the IRS prior to the beginning of the 1987 Session of the General Assembly, the Board of Trustees shall submit to the General Assembly for consideration during the 1987 Session amendments to the law to implement the employer pickup program developed by the Board of Trustees. The effective implementation of the program shall be contingent on a letter of determination or ruling from the Internal Revenue Service that the program qualifies for the tax treatment under §414(h) of the [Code]."

In addition, Section 1(d) sets out specific amendments to the law to be included by the Board of Trustees in its 1987 submission to the General Assembly.

In fact, no implementing legislation was introduced or considered during the 1987 Session of the General Assembly. The Secretary to the Board of Trustees observed in a letter that Chapter 802 "does not appear to specifically address the intent of the General Assembly with respect to implementation under the present circumstances," that is, uncertainties caused by the Reform Act. Letter from Bennett H. Shaver to Delegate Charles J. Ryan, at 2 (April 6, 1987). Mr. Shaver went on to suggest that "advice from the Attorney General be solicited and implementation be delayed until the 1988 General Assembly can evaluate the alternatives and authorize the appropriate action." Id. Your request for this opinion followed.

Subsequently, the Secretary to the Board of Trustees learned that the suspected adverse impact to State employees from the Reform Act would, in reality, be minimal. Then, on July 10, 1987, the IRS issued a ruling approving the pickup plan submitted by the Board of Trustees.

II
Implementation of a Plan

A. Necessary Action by the General Assembly

The favorable letter of determination from the IRS provides that "[t]he effective date for the commencement of any proposed pick-up as specified in the final resolution cannot be any earlier than the later of the date the final Resolution is signed or the date it is put into effect." Letter from Allen Katz, Chief, Employee Plans Rulings Branch, to Board of Trustees, at 3 (July 10, 1987). Therefore, insofar as the IRS is concerned, implementation of the employer pickup program does not require positive action by the General Assembly, only adoption of a final resolution by the Board of Trustees.

However, whether Board action alone is sufficient to implement the new program under State law is a question of what the General Assembly intended in Chapter 802. In seeking to identify the legislative purpose or goal, we look to both the language of the law and its context. Kaczorowski v. City of Balto., 309 Md. 505, 514-15 (1987).

Section 1(c) of Chapter 802 lists three alternative courses of action for the Board of Trustees to take during the 1987 Session, depending on whether the IRS had rejected, approved, or given no final response to the submitted pickup plan prior to the beginning of that session. Paragraph (1) tells the Board of Trustees that if the IRS had rejected the program for tax treatment under §414(h) of the Code prior to the beginning of the 1987 Session of the General Assembly, "no further action of the Board of Trustees is required and an employer pickup program will not be pursued."

Paragraph (2) states that if the IRS had issued a favorable letter or ruling on the program prior to the 1987 Session, "the Board of Trustees shall submit to the General Assembly for consideration during the 1987 Session amendments to the law to implement the employer pickup program developed by the Board of Trustees and approved by the Internal Revenue Service."

Paragraph (3), which turns out to address the actual circumstances, tells the Board of Trustees that if the IRS had not responded before the start of the 1987 Session, the Board must take the same action required by paragraph (2) had the IRS approved the plan, that is, "submit to the General Assembly for consideration during the 1987 Session amendments to the law to implement the employer pickup program developed by the Board of Trustees." Further, paragraph (3) makes implementation contingent on receipt of a favorable letter of determination or ruling from the IRS.

In addition to the implementation amendments that the Board of Trustees is asked to submit under paragraph (2) or (3) of subsection (c), subsection (d) requires the Board to submit the following amendments:

1. appropriate addition and subtraction modifications for State income tax purposes, to prevent the pickup program from either reducing State income tax revenues or doubling State income taxation of employees' retirement contributions;

2. amendments that the Board considers necessary to "protect against the adverse impact of the employer pickup program on any aspect of employee compensation and benefits"; and

3. amendments deemed necessary "to protect against the adverse impact from the pickup program on employer costs."

It seems to us that, by requiring the Board of Trustees to submit implementation amendments for consideration by the 1987 General Assembly, Chapter 802 plainly contemplates action by the General Assembly before the pickup program may be inaugurated. This view is supported both by the general scheme of Chapter 802 and the specific language used: that the Board of Trustees "develop" the plan, seek a ruling from the IRS, and, unless the IRS disapproves, come back to the General Assembly with proposed amendments to the law to "implement" the program.

Conversely, we find nothing in Chapter 802 to indicate that the General Assembly intended the Board's plan to be self-executing.3 Indeed, subsection (c)(2) makes it clear that, even if IRS approval had been obtained prior to the 1987 Session, the Board nevertheless was required to submit amendments to the law at that session to implement the program. Moreover, the General Assembly not only contemplated submission of enabling legislation by the Board but also required inclusion of certain specific provisions, to prevent the program from adversely affecting the State's revenues and costs and its employee compensation scheme. Section 1(d). In light of the General Assembly's evident intent to establish a cost-free employer pickup plan, it seems to us that the General Assembly must have intended that all amendments necessary to assure that result be in place before the pickup program could become effective.4

Accordingly, it is our opinion that action by the General Assembly is required to effectuate the employer pickup program developed by the Board of Trustees and approved by the IRS. It follows that the Board of Trustees should take no action to adopt its final resolution until it has submitted all necessary implementing amendments to the General Assembly for its consideration and the General Assembly has acted upon those amendments.

B. Action at 1988 Session

The General Assembly possesses all of the legislative power of the State and may exercise that power subject only to restraints placed on it by the United States and Maryland Constitutions. Perkins v. Eskridge, 278 Md. 619 (1976); Kenneweg v. Allegany County Commissioners, 102 Md. 119 (1905). Since we know of no State or federal constitutional impediment to prevent the General Assembly from considering amendments to a law at a later session than it originally contemplated, we have no hesitation in concluding that the General Assembly may implement an employer pickup plan at its 1988 Session. The actions of the General Assembly at one session cannot ordinarily restrict the General Assembly in future sessions: "Within the purview of the constitution ... all legislatures are co-equal; what one may do a succeeding one may also do or undo." Wright v. Wright's Lessee, 2 Md. 429, 449 (1852). Here, moreover, considering the uncertainties engendered by 1986 Reform Act and the belated approval by the IRS of the Board's proposed pickup plan, the General Assembly had no practical choice but to defer action on implementation at its 1987 Session and to consider the question afresh at its 1988 Session.

C. Action by Board

In light of our response to your first question, we conclude that the Board of Trustees may not implement an employer pickup plan before the 1988 Session of the General Assembly.

III
Conclusion

In summary, it is our opinion that:

1. Chapter 802 requires action by the General Assembly to implement the employer pickup program developed by the Board of Trustees.

2. Nothing precludes the General Assembly from acting at the 1988 Session.

3. Given the need for further legislation, the Board of Trustees may not implement an employer pickup program before the 1988 Session of the General Assembly.

J. Joseph Curran, Jr., Attorney General
Carol S. Sugar, Assistant Attorney General

Jack Schwartz
Chief Counsel
Opinions and Advice

Editor's Note: In Chapter 430 (House Bill 561) of the Laws of Maryland 1988, the General Assembly acted to implement the employer pickup program.

1 The IRS has determined that Maryland's retirement and pension plans are qualified plans.

2 The State retirement and pension systems for employees and teachers, the judges' contributory plan, and the State Police Retirement System are covered by the proposed pickup program. Pursuant to Article III, §15(2) of the Constitution of Maryland, the General Assembly Compensation Commission establishes "[a]ny compensation and allowances paid to members of the General Assembly . . .." Thus, a pickup plan for members of the General Assembly would have to be established by the General Assembly Compensation Commission.

3 In this respect, Chapter 802 contrasts markedly with former §67(a) of Article 73B, the enabling legislation for the State's deferred compensation plan: "The Secretary of Personnel, in furtherance of the existing duties conferred upon him by law, and with the advice of the Governor's task force on deferred compensation, shall promptly develop a deferred compensation plan for State employees which will meet the criteria for approval by the Internal Revenue Service, and shall report his recommendations to the Governor. Upon receipt of the Secretary's recommendations, the Governor may, by executive order, promptly inaugurate and implement the plan, without the need for further legislative action. Nothing herein, however, shall preclude the General Assembly from further legislating with respect to the plan." (Repealed by Chapter 741, Laws of Maryland 1985) (emphasis supplied).

4 Senate Bill 886, introduced at the 1987 Session, would have allowed State employees to defer payment of State taxes on their employee contributions to a State retirement or pension system until after retirement. The fiscal note accompanying the bill indicated that it would decrease State revenues by $5,000,000 and local revenues by $2,500,000 in fiscal year 1988. Similar revenues would be lost to the State if proper addition and subtraction tax modifications were not enacted for the proposed employer pickup program developed by the Board of Trustees.