Pick-up of Employee Contributions

Federal tax law permits employers to pick up employee retirement contributions. This is governed by federal tax law. There are no Ohio statutes or SERS rules governing the implementation of a Pick-up Plan of mandatory employee contributions.

The earliest effective date of a Pick-up Plan is the date of a board action implementing or changing the Pick-up Plan. According to IRS guidelines, Pick-up Plans may not be implemented retroactively.

After you adopt a Pick-up Plan, you must notify SERS through eSERS and include the Board Resolution, using the Pick-up Plan application. Please refer to the eSERS Guide for further information on adding a Pick-up Plan through eSERS.

Under a Pick-up Plan, the employer picked-up employee contributions are:

  • Tax deferred for federal income taxation purposes until the member receives the contributions in the form of a refund or retirement benefit
  • Tax deferred for state income taxation purposes, but an employer should contact local taxing authorities to determine the tax treatment of a Pick-up Plan for city or other local income taxation
  • Designated as employee contributions and refundable to the member for retirement system purposes

In order to implement a Pick-up Plan, federal tax law requires an employer to adopt a written plan that specifies the following:

  • The group of employees to be covered. Employees in the covered group cannot opt out of the Pick-up Plan
  • The method of pick up
  • The planned effective date

Employees in the covered group cannot opt out of the Pick-up Plan.

Employer Pick-up of Retirement Contributions

Under current IRS Rulings, employee contributions to SERS may be picked up by the employer and excluded from the employee’s gross income for federal income tax purposes.

Types of Pick-up Plans

There are three Pick-up Plan methods: salary reduction, fringe benefit not included in compensation, and fringe benefit included in compensation, which is also referred to as pick-up on pick-up.

If you have further questions, please contact your tax advisor.

Salary Reduction

Contributions are still deducted from employees’ salaries, but they are deferred for federal and state income tax purposes.

Contributions must be reported as tax deferred on Contribution Reports.

Example:

Salary: $20,000
SERS’ contribution: $2,000
Take home pay: $18,000
Taxable income: $18,000
Reported to SERS: $20,000

Fringe Benefit not Included in Compensation

Under a fringe benefit not included in compensation Pick-up Plan, the contributions are paid by the employer from the employer’s funds. The contribution is not deducted from employees’ salary.

Contributions must be reported as tax deferred on Contribution Reports.

Example:

Salary: $20,000
SERS’ contribution: $2,000
Take home pay: $20,000
Taxable income: $20,000
Reported to SERS: $20,000

Fringe Benefit Included in Compensation, or Pick-up on Pick-up

A fringe benefit in compensation is often referred to as a “pick-up on pick-up” plan. Under a fringe benefit included in compensation plan, the contributions are paid by the employer, and an additional contribution on the 10% also is paid. This plan provides for a higher salary for retirement purposes only, which will affect the pension amount.

Contributions must be reported as tax deferred on Contribution Reports.

Example:

Salary: $20,000
SERS’ contribution: $2,200 (10% of 20,000, plus 10% of that figure)
Take home pay: $20,000
Taxable income: $20,000
Reported to SERS: $22,000