SECTION 4 EMPLOYER PICKUP

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Theodora Maxwell
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1 SECTION 4 EMPLOYER PICKUP Contents EMPLOYER PICKUP...1 Salary Reduction Pickup...1 Fringe Benefit Pickup...2 Notification to STRS Ohio...4 Reporting Tax-deferred Contributions to STRS Ohio...4 Sample Forms Notification for Employer Pickup of Employee Contributions...5 Sample Board Resolution to Authorize Employer Pickup of Employee Contributions...7 Employers Manual Contents (6/15)

2 State Teachers Retirement System of Ohio

3 EMPLOYER PICKUP Individual employers may choose to pick up employee retirement contributions as a means of deferring federal and state income taxes on these amounts. The authority for employer pickup is the Internal Revenue Code. There are no Ohio laws or Administrative Code Rules governing this program. It should be noted that picked-up amounts are designated as employee contributions as defined in Section , R.C. Employer pickup amounts, along with other employee contributions, are refundable to the member upon valid application (see Section 8). Picked-up contributions are not included in taxable income for federal or state income tax purposes at the time the contributions are made. However, these amounts become taxable when received by the individual in the form of a refund or retirement benefits. Employers should contact tax authorities to determine the effect of employer pickup on city or local income taxes. When picked-up contributions are included in a refund, federal and state income taxes may continue to be deferred by rolling over or transferring the picked-up contributions to an individual retirement account or other eligible employer plan. Members should contact a tax advisor or the Internal Revenue Service (IRS) for additional explanation of these options. The Internal Revenue Code specifies two conditions for employer pickup of retirement contributions: 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 The employee must not be given the option of choosing to receive the amounts directly instead of having them paid by the employer to the pension plan. These conditions must be included in the school board resolution authorizing the employer pickup plan (see sample resolution on Page 7). Additionally, the IRS has issued a private-letter ruling stating that pickup may not be effective for contributions made before the date of the school board resolution implementing the plan. There are three forms of pickup: Salary reduction pickup; Fringe benefit pickup not included in compensation; or Fringe benefit pickup included in compensation (pickup-on-pickup). SALARY REDUCTION PICKUP Under this form of employer pickup, individual employees salaries are reduced by the amount of employee retirement contributions. The contributions are then paid by the employer. Note that the pickup is included in the original contract salary before reduction and does not require any additional cash to be paid by the employer. The contribution amount is based on the original contract salary, and the earnings for retirement purposes include the contributions picked up by the employer. The employee receives the added benefit of reduced gross income for federal and state income tax purposes. Employers Manual Page 1 (6/15)

4 Salary reduction pickup example Under this form of employer pickup, individual members salaries are reduced by the amount of member retirement contributions. The employer then pays the contributions. This form of pickup does not require any additional cash to be paid by the employer. The member receives the benefit of reduced gross income for state and federal purposes. For example, if the employer has a salary reduction pickup plan in place and a full-time educator has a $40,000 contract, then: Contract salary and earnings for STRS Ohio purposes... $40,000 Member contributions (currently 14%)... 5,600 Taxable federal and state income... $34,400 FRINGE BENEFIT PICKUP Contributions picked up by an employer in addition to stated salary may or may not be included in compensation subject to retirement contributions. When the employer action specifies that employer pickup, in addition to stated salary, is to be included in compensation for retirement purposes, total compensation should be determined by adding the amount of retirement contributions to be picked up to stated salary. Member and employer contributions must then be remitted on this total compensation. The authorizing action by the employer must expressly state that the employer pickup is to be included in earned compensation for retirement contribution purposes. Otherwise, STRS Ohio will assume that the pickup is not to be included in earnings for retirement purposes. Fringe benefit pickup not included in compensation example As a way to further compensate employees without increasing their gross income, some employers may choose to pay all or a portion of the member contributions. Under this form of pickup, members receive the benefit of the employer paying all or part of their member contributions without salary reduction, thus keeping their gross salary at the same amount. For example, if the employer has a fringe benefit pickup not included in compensation plan in place and a full-time educator has a $40,000 contract, and the employer agrees to pay the entire share of member contributions, then: Contract salary and earnings for STRS Ohio purposes... $40,000 Member contributions paid by employer (currently 14%)... $5,600 Taxable federal and state income... $40,000 Page 2 (6/16) State Teachers Retirement System of Ohio

5 Fringe benefit pickup included in compensation (pickup-on-pickup) example This form of pickup not only allows the employer to pay all or part of the member contributions, but also includes those amounts in the member s salary for STRS Ohio retirement purposes. For example, if the employer has a fringe benefit pickup included in compensation plan in place and a full-time educator has a $40,000 contract (with no additional earnings), and the employer agrees to pay the entire share of member contributions, then: Contract salary and taxable federal and state income... $40,000 Member contributions paid by employer (currently 14%)... +$ 5,600 Compensation for STRS Ohio purposes... $45,600 Total contributions due to STRS Ohio equals ($45,600 x 14%)...$ 6,384 Partial pickup included in compensation for retirement purposes example Employers are also permitted to pay a portion of the member contributions and the remaining amount is treated as salary reduction. For example, a full-time educator has a $40,000 contract and the employer has a 6% fringe benefit pickup included in compensation plan. The remaining 8% is salary reduction pickup. Contract salary... $40,000 Employee retirement contribution (8% of salary paid by employee)...$ 3,200 Employee retirement contribution (6% of salary paid by employer in addition to stated salary)... $ 2,400 14% of $2,400 pickup... $00,336 Total employee contributions...$ 5,936 Taxable income (federal and state)... $36,800 Earnings for retirement purposes... $42,400 Employer contributions... $ 5,936 ($42,400 14% = $5,936) Employers Manual Page 3 (6/16)

6 NOTIFICATION TO STRS OHIO Each employer is responsible for notifying STRS Ohio when a pickup plan has been adopted or changed. Notification for Employer Pickup of Employee Contributions form (see sample on Pages 5 6) is available under online forms on the employer website. Upon adoption or revision of a pickup plan, the notification form should be completed and submitted to STRS Ohio along with a certified copy of the applicable school board resolution or action authorizing the pickup plan. For STRS Ohio purposes, pickup may be adopted for one or more recognized employee groups: 1. Superintendent or president 2. Administrators or administrative faculty 3. Teachers or teaching faculty Each employee who is a member of STRS Ohio (including substitute teachers and tutors) is considered a part of one of these groups. Once the pickup plan is adopted for a recognized employee group, the pickup becomes a condition of employment and each employee within that group may not be given the option of receiving the contributions directly. However, the type and percentage of pickup can vary within a group as long as the total percentage of all pickup plans is the same for each member within that group. STRS Ohio agrees to account for the amount of the pickup but otherwise assumes no further liability. The current taxation or deferred taxation of the pickup is determined solely by the IRS, and compliance with the guidelines set forth above does not guarantee that the tax on the pickup will be deferred. STRS Ohio may refuse to accept pickup plans if so directed by the IRS, if guidelines based upon the changing state of the law are not followed, or if the qualified plan status of STRS Ohio is placed in jeopardy. REPORTING TAX-DEFERRED CONTRIBUTIONS TO STRS OHIO Tax-deferred employee contributions must be reported separately from after-tax employee contributions on the payroll report (see Section 3) and the annual report (see Section 5). There are separate fields for reporting after-tax contributions and tax-deferred contributions on these reports. Additionally, tax-deferred contributions should be reported separately from after-tax employeepaid contributions on deposit and service reports and the Application for Withdrawal Payment (see Sections 6 and 8, respectively). Page 4 (6/15) State Teachers Retirement System of Ohio

7 State Teachers Retirement System of Ohio 275 East Broad Street Columbus, OH (fax) NOTIFICATION FOR EMPLOYER PICKUP OF EMPLOYEE CONTRIBUTIONS This notification must be filed with STRS Ohio when an employer elects to pick up all or a portion of the required employee contributions stipulated in Section , Revised Code, or when an existing employer pickup plan is amended. Important: A copy of the agreement or board action authorizing the pickup must be submitted with this notification. Employer Employer no. Address City ZIP code Effective date of pickup is Employee group covered: School District College/University q Superintendent q President q Administrator q Administrative faculty q Teacher q Teaching faculty Employee contributions for earned compensation required under Section , R.C., will be accounted for as follows: Employee Contributions Salary reduction pickup... Pickup paid by employer in addition to regular contract salary... Is this amount included in compensation for retirement purposes? Total STRS Ohio contributions required under Section , R.C... % % q Yes q No % I understand this notification will remain in effect until a notice of change or termination is filed with STRS Ohio. I also understand all of the guidelines listed on the reverse side of this notification have been met or acknowledged. Signed Date Title , 3/17/0 Employers Manual Page 5 (6/17) Sample Form (Side 1)

8 Guidelines for Implementing Employer Pickup of Employee Contributions 1. The employer elects to pick up all or a portion of the required employee contributions in accordance with applicable federal and state rulings. 2. An employer electing to pick up all or a portion of the required employee contributions set forth in Section , R.C., must file a notification form provided by STRS Ohio. Changes in the amount of pickup must be filed with STRS Ohio in advance of the effective date. 3. Pickup must be a condition of employment for each employee group and not optional for individual employees. 4. All certificated personnel classified in the employee category designated on the notification form must be included. (For pickup purposes, all employees who are active members of STRS Ohio must be eligible under one of the three employee categories listed on the notification form as determined by the employer.) 5. The amount picked up by the employer on behalf of the employee does not discharge, relieve or reduce the employer contributions required by Section , R.C. 6. The amount picked up by the employer is applied toward employee contributions under Section , R.C. All statutory and regulatory requirements applicable to Sections and , R.C., must also apply to the pickup. 7. When preparing the annual report, the employer must report picked-up (tax-deferred) contributions separately from regular (taxed) contributions. 8. STRS Ohio agrees to account for the amount of the pickup but otherwise assumes no further liability. The current taxation or deferred taxation of the pickup is determined solely by the IRS, and compliance with the guidelines set forth above does not guarantee that the tax on the pickup will be deferred. STRS Ohio may refuse to accept pickups if so directed by the IRS, if guidelines based upon the changing state of the law are not followed, or if the qualified plan status of STRS Ohio is placed in jeopardy , 3/17/0 Page 6 (6/17) Sample Form (Side 2) State Teachers Retirement System of Ohio

9 State Teachers Retirement System of Ohio 275 East Broad Street Columbus, OH (fax) SAMPLE BOARD RESOLUTION TO AUTHORIZE EMPLOYER PICKUP OF EMPLOYEE CONTRIBUTIONS Adoption of Pickup Be it resolved, effective (prospective date), the (employer board name) agrees to pick up the total amount of employee contributions required by Section , Revised Code, to be contributed by (group name and specific class of employees) to STRS Ohio. (Employer board name) is permitted to pick up employee contributions pursuant to Section , Revised Code, and 14(h)(2) of the Internal Revenue Code. These picked-up contributions, although designated as employee contributions, are being paid by the (employer board name) in lieu of employee contributions and (Salary reduction) shall be treated as mandatory salary reduction from the contract salary otherwise payable to the employee. or (Fringe benefit) shall be paid by the board as a fringe benefit in addition to the contract salary otherwise payable to the employee. These contributions shall not be treated as additional compensation for retirement purposes. or (Fringe benefit included in compensation) shall be paid by the board as a fringe benefit in addition to the contract salary otherwise payable to the employee. These contributions shall be treated as additional compensation and included in salary for retirement purposes. Employees in the (group) may not opt out of the picked-up contributions or elect to receive the contributed amounts directly instead of having them picked up by the (employer board name) and paid to STRS Ohio. This sample resolution is provided for your convenience and does not constitute tax or legal advice. Although we have attempted to provide accurate information, STRS Ohio cannot guarantee tax results in any way or be held responsible for any loss incurred as a result of the use of this information. Contact your tax advisor or legal counsel for specific information about how this information might affect your situation , 3/17/0 Employers Manual Page 7 (6/17) Sample Form

10 State Teachers Retirement System of Ohio

SECTION 8 ACCOUNT WITHDRAWAL

SECTION 8 ACCOUNT WITHDRAWAL Contents ACCOUNT WITHDRAWAL...1 Defined Benefit Plan...1 Defined Contribution Plan...1 Combined Plan...2 Withdrawal Payments...2 Defined Benefit Plan...2 Defined Contribution