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Understanding Employer "Pick-Ups"

See PDF Article with Additonal Details

Enhancements to Tier 2 Public Safety & Firefighter retirement benefits will take effect beginning July 1, 2020. They apply to new and current employees in the Tier 2 Public Safety & Firefighter Retirement system for benefits earned after July 1, 2020.

Due to the cost of the plan enhancements, contributions to the Tier 2 Public Safety & Firefighter Hybrid plan will be made by the employer (14%) and the employee (2.27%).

However, an employer may “pick-up” the employee’s portion of the retirement contribution and treat it as an employer contribution under IRS Code.

URS cannot and does not provide legal, financial, or tax advice. Accordingly, employers should consult their own legal advisor if they have questions concerning a “pick-up” plan.

In order to “pick-up” the employee contributions, an employer must take formal action to provide that the contributions on behalf of all Tier 2 Public Safety & Firefighter members, although designated as employee contributions, will be paid by the agency in lieu of employee contributions.

The action may only apply prospectively and be evidenced by a contemporaneous written document (e.g., minutes of a meeting, a resolution, ordinance, or statute). 

Employers must take formal action by July 1, 2020, to cover the employee contributions before the benefit enhancements go into effect.

If an employer “picks-up” the employee contribution, taxes on the pick-up contribution may be deferred until the employee receives the contributions as either a refund after termination of employment or as retirement benefits. If an employer does not “pick-up” the employee contributions, they will generally be taxable at the time the contribution is made. An employer “pick-up” plan allows deferral of the income taxes on the employees required contribution amount.

In the 2020 legislative session, Senator Wayne Harper is proposing Senate Bill 56 as a follow up to the changes from enhancements made in the 2019 session. This bill would require that if an employer “picks-up” the contributions for its employees, they must also pay an equal non-elective contribution to Tier 2 Public Safety & Firefighter members in the Defined Contribution Plan. 

Helpful Links

» IRS Guidance on Employer “Pick-Up” Contributions to Benefit Plans

» Revenue Ruling 2006-43

» Section 414(h)(2) of IRS Code

» Senate Bill 129 (2019)

» Senate Bill 56 (2020)