PLR 9948037: Municipal police pension contributions qualify as employer pickup

Plain-English summary

A municipality arranged to pay mandatory police pension contributions by reducing officers' cash salaries. Its resolution specified that the municipality would pay the contributions in place of the officers, who could not choose cash instead. The IRS ruled that the picked-up contributions were excluded from the officers' gross income when made and were not wages for income tax withholding under § 3401(a). The ruling applies only to contributions covered by the specified resolution and only from the later of the date it was signed or put into effect. The IRS assumed the plan would qualify under § 401(a) and did not decide whether it was a governmental plan or address FICA tax.

Ruling snapshot

• Question: Were the municipality's mandatory police pension contributions employer pickups under § 414(h)(2)?
• Outcome: Approved for the specified contributions and effective period.
• Key authorities: IRC §§ 401(a), 414(h)(2), and 3401(a); Rev. Ruls. 77-462, 81-35, 81-36, and 87-10.

Full text (IRS public release)

INTERNAL REVENUE SERVICE 199948037

Index No.: 414.01-00

OP:E:EP:T:1

In re: SEP 8 1999
EIN:

Attn:

LEGEND:

State A =
Employer M =

Plan X =

Gentlemen:

This is in response to a request submitted on your behalf by your authorized representative on November 3, 1998, 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:

The law of State A provides that a municipality shall establish and administer a police pension plan, funded in part by mandatory employee contributions, and that the municipality may pick up the police pension fund - contributions. On January 15, 1997, Employer M, a municipality under the law of State A, voted to proceed with a government "pick up" plan as established under state law, whereby, police officer contributions to a governmental plan are "picked up" by Employer M within themeaning of Section 414(h) (2) of the Internal Revenue Code.

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Employer M has prepared, and is prepared to adopt, a Resolution providing for the procedures to fund the Police Pension Fund within the meaning of Section 414(h)(2) of the Internal Code. Under the Resolution, Employer M shall pick up policemen's contributions to Plan X in accordance with the law of State A and the policemen's cash salaries shall be reduced by the amount picked up. Policemen will not be given the option to receive cash directly in lieu of contributions. Employer M asserts in its ruling request that Plan X meets the qualification requirements of section 401(a) of the Code.

Based on the facts described above, Employer M

requests the following ruling under section 414(h) of the Code:

Contributions made to the police officers’ pension, pursuant to the law of State A and Section 414(h) of the Internal Revenue Code, shall not be included as gross income of the police officers, pursuant to section 3401(a) (12) (A) of the Internal Revenue Code, until such time as they are distributed or made available.

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

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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 resolution adopted by Employer M satisfies the criteria set forth in Revenue Rulings 81-35 and 81-36

that:

(1) it specifies that the contributions, although designated as employee contributions, are to be made by Employer M in lieu of contributions by the employees; and

(2) the employees may not elect to receive such contribution amounts directly.

Accordingly, we conclude that the mandatory employee contributions "picked up" by Employer M shall be excluded from the gross income of the policemen in the year in which they are made and the picked-up contributions are not wages within the meaning of section 3401(a).

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The ruling applies only to contributions specified in the resolution adopted on June 10, 1998. The effective date for the commencement of the pickup of the policemen's contributions cannot be earlier than the later of the date the resolution is signed or the date it is put into effect.

State A has not requested a ruling and 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 proposed contributions.

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.

A copy of this letter is being sent to your authorized representative in accordance with a power of attorney on file in this office.

Sincerely yours,

John Swieca
Chief, Employee Plans
Technical Branch 1

Enclosures:
Deleted copy
Notice of Intention to Disclose

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