PLR 200109050: Community college pension contributions picked up by employer are excluded from employees' income

Plain-English summary

A community college planned to pay mandatory employee contributions to a state pension plan under a board resolution. Employees could not take the contribution amounts as cash. The IRS ruled that the picked up contributions would be treated as employer contributions under section 414(h)(2) and excluded from employees' gross income in the year contributed. The ruling applies only to contributions covered by the resolution and cannot take effect before the later of the resolution date or its implementation date. The IRS assumed the pension plan would qualify under section 401(a) and did not decide its governmental plan status or federal payroll tax treatment.

Ruling snapshot

• Question: Would the college's payment of mandatory employee pension contributions be excluded from employees' income?
• Outcome: Approved for contributions covered by the resolution, subject to the stated timing and qualification assumptions.
• Key authorities: IRC §§ 401(a) and 414(h)(2); Rev. Ruls. 77-462, 81-35, 81-36, and 87-10.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Washington, DC 20224

Index No.: 414.01-00

Person to Contact:
Telephone Number:

Refer Reply to:
T:EP:RA:T1
Date: DEC 7 2000

EIN:

LEGEND :

State A =
Employer M =
Plan X =

County A =
County B =
County C =

Gentlemen:

This is in response to a request submitted on your
behalf by your authorized representative on January 17,
2000, for a private ruling letter concerning the
federal income tax treatment of certain contributions
to Plan X under section 414(h) (2) of the Internal
Revenue Code ("Code").

In support of the ruling request the following
facts and representations have been submitted:

Employer M is a comprehensive community college
serving the residents of Counties A, B, and C of State
A. The college provides quality postsecondary credit
programs leading to an associate degree or a
certificate of proficiency, as well as documents of
participation for community and continuing education
courses.

State A has established various pension plans,
including Plan X, which are qualified under section
401(a) of the Code. Employer M, an agency of State A,
is a participating employer in Plan X. Employees of
Employer M who participate in Plan X are required to
contribute to Plan X.

Pursuant to a resolution by the Board of Trustees
of Employer M dated May 13, 1999 (the "Resolution"),

Employer M will pick up, i.e., assume and pay, the
mandatory employee contributions of employees of
Employer M who participate in Plan X in lieu of such
employees paying such contributions. In addition,
employees of Employer M who participate in Plan X will
have no option to receive the picked-up contributions
in cash instead of having such contributions paid to
Plan X.

Employer M requests a ruling that contributions
made by employees of Employer M who participate in Plan
X which are picked up by Employer M pursuant to the
Resolution will not be included in the gross income of
such employees for federal income tax purposes.

Section 414(h) (2) of the Code provides that
contributions, otherwise designated as employee
contributions, shall be treated as employer
contributions if such contributions are made to a plan
described in section 401(a) established by a state
government or a political subdivision thereof and are
picked up by the employing unit.

The federal income tax treatment to be accorded
contributions which are picked up by the employer
within the meaning of section 414(h) (2) of the Code is
specified in Revenue Ruling 77-462, 1977-2 C.B. 358.
In that revenue ruling, the employer school district
agreed to assume and pay the amounts employees were
required by state law to contribute to a state pension
plan. Revenue Ruling 77-462 concluded that the school
district's picked-up contributions to the plan are
excluded from the employees' income until such time as
they are distributed to the employees. The revenue
ruling held further that under the provisions of
section 3401(a) (12) (A), the school district's
contributions to the plan are excluded from wages for
purposes of the Collection of Income Tax at Source on
Wages; therefore, no withholding is required from the
employees' salaries with respect to such picked-up
contributions.

The issue of whether contributions have been
picked up by an employer within the meaning of section
414(h) (2) of the Code is addressed in Revenue Ruling
81-35, 1981-1 C.B. 255, and Revenue Ruling 81-36, 1981-
1 C.B. 255. These revenue rulings established that the
following two criteria must be met: (1) the employer
must specify that the contributions, although
designated as employee contributions, are being paid by
the employer in lieu of contributions by the employee;
and (2) the employee must not be given the option of
choosing to receive amounts directly instead of having
them paid by the employer to the pension plan.
Furthermore, it is immaterial whether an employer picks
up contributions through a reduction in salary, an
offset against future salary increases, or a
combination of both.

In Revenue Ruling 87-10, 1987-1 C. B. 136, the
Internal Revenue Service considered whether
contributions designated as employee contributions to a
governmental plan are excludable from the gross income
of the employee. The Service concluded that, to
satisfy the criteria set forth in Revenue Rulings 81-35
and 81-36 with respect to particular contributions, the
required specification of designated employee
contributions must be completed before the period to
which such contributions relate.

The terms of Plan X and the Resolution satisfy the
criteria set forth in Revenue Rulings 81-35 and 81-36
because the contributions, although designated as
employee contributions, are to be made by Employer M in
lieu of contributions by the employees; and the
employees may not elect to receive such contribution
amounts directly.

Accordingly, we conclude that contributions made
by employees of Employer M who participate in Plan X
which are picked up by Employer M under the provisions
of the resolution will not be included in the gross
income of such employees for federal income tax
purposes in the year of contribution.

The ruling applies only to contributions specified
in the Resolution. The effective date for the
commencement of the pickup of the mandatory
contributions cannot be earlier than the later of May
13, 1999, or the date the Resolution is put into
effect.

The Internal Revenue Service reaches no conclusion
in this letter as to the status of Plan X as a
governmental plan within the meaning of section 414 (d)
of the Code. No opinion is expressed as to whether the
amounts in question are subject to tax under the
Federal Insurance Contributions Act. No opinion is
expressed as to whether the amounts in question are
being paid pursuant to a "salary reduction agreement"
within the meaning of section 3121(v) (1) (B).

This ruling is based on the assumption that Plan X
will be qualified under section 401(a) of the Code at
the time of the pick-up contributions described above.

This ruling is directed only to the taxpayer who
requested it. Section 6110(c) (3) of the Internal
Revenue Code provides that it may not be used or cited
as precedent.

Sincerely yours,

John Swieca, Manager

Employee Plans Technical Group 1

Tax Exempt and Government
Entities Division

Enclosures:
Deleted copy
Notice of Intention to Disclose