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HomeMy WebLinkAbout09 TAX DEFFERRED MEMBER CONTRIBUTIONS8,~,~ ~~~~ ,`~ 1 p ., ~_,_ AGENDA REPORT Agenda Item 9 Reviewed: City Manager Finance Director MEETING DATE: TO: FROM: SUBJECT: SUMMARY MAY 18, 2010 WILLIAM HUSTON, CITY MANAGER KRISTI RECCHIA, DIRECTOR OF HUMAN RESOURCES TAX DEFERRED MEMBER CONTRIBUTIONS TO THE CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM Tax deferral of employee-paid member contributions to the California Public Employees' Retirement System (CaIPERS) is permitted under Section 414(h)(2) of the Internal Revenue Code (IRC). Adoption of the attached resolution will allow member contributions paid by employees to be made on a tax deferred basis using apre-tax payroll deduction. RECOMMENDATION Adopt Resolution No. 10-41 to authorize tax deferred member contributions to CaIPERS under Section 414(h)(2) IRC. FISCAL IMPACT None. BACKGROUND AND DISCUSSION Beginning June 21, 2010, all employees who are members of CaIPERS will pay a portion of the required member contribution to the retirement plan. By adopting the attached resolution, all member contributions paid by employees will be administered via apre-tax payroll deduction. Internal Revenue Code (IRC) Section 414(h)(2) allows public agencies to designate employee contributions to the CaIPERS retirement plan as being "picked-up" by the employer and treated as employer contributions for tax purposes. The effect of a "pick- up" is to defer tax on employee contribution amounts until the member retires and receives retirement benefits, or separates from employment and takes a refund of contributions. Absent the Section 414(h)(2) provision, employee contributions to a defined benefit pension plan qualified under Section 401(a) would automatically be after-tax contributions (e.g. taxable income to the employee at the time the contribution was made). City Council Agenda Report May 18, 2010 Tax Deferred Member Contributions to CaIPERS Page 2 If an employer adopts the IRC 414(h)(2) provision, employees pay their share of member contributions from reportable compensation and defer state and federal income taxes on the member contributions. The 414(h)(2) provision allows employees' contributions to be treated as employer contributions for federal and state tax purposes, thus lowering the employees' taxable gross income. The amount reported to the Internal Revenue Service (IRS) is reportable compensation less the member contributions. Federal and state taxes on the amount of contributions are postponed until distribution either through a retirement allowance or a lump sum payment (refund). There is no increase in the member's pay rate reported to CaIPERS when reporting tax deferred member contributions under IRC 414(h)(2). To implement this provision in compliance with IRS guidelines, the City Council must adopt a resolution that meets the requirements specified in IRS Revenue Ruling 2006- 43. The attached resolution has been prepared in accordance with CaIPERS' guidelines for complying with IRS regulations. Upon adoption of this resolution, any portion of the member contribution paid by employees will be made on a tax deferred basis. Kristi Recchia Director of Human Resources Attachments: 1. City Council Resolution No. 10-41 RESOLUTION NO. 10-41 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF TUSTIN, CALIFORNIA, AUTHORIZING TAX DEFERRED MEMBER CONTRIBUTIONS TO THE CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM UNDER INTERNAL REVENUE CODE SECTION 414(h)(2) WHEREAS, the City of Tustin, California (the "City") has the authority to implement the provisions of Section 414(h)(2) of the Internal Revenue Code (IRC); and WHEREAS, the City has determined that even though the implementation of the provisions of Section 414(h)(2) IRC is not required by law, the tax benefit offered by Section 414(h)(2) IRC should be provided to all employees who are members of the California Public Employees' Retirement System (CaIPERS): NOW, THEREFORE, BE IT RESOLVED: That the City will implement the provisions of Section 414(h)(2) IRC by making employee contributions pursuant to California Government Code Section 20691 to CaIPERS on behalf of its employees who are members of CaIPERS. "Employee contributions" shall mean those contributions to CaIPERS which are deducted from the salary of employees and are credited to individual employees' accounts pursuant to California Government Code Section 20691. II. That the contributions made by the City to CaIPERS, deducted from employee salaries as employee contributions, are being paid by the City in lieu of contributions by the employees who are members of CaIPERS. III. That employees shall not have the option of choosing to receive the contributed amounts directly instead of having them paid by the City to CaIPERS. IV. That the City shall pay to CaIPERS the contributions deducted from employee salaries as employee contributions from the same source of funds as used in paying salary. V. That the amount of the contributions deducted from an employee's salary as employee contributions and paid by the City to CaIPERS on behalf of an employee shall be the entire contribution required of the employee by the Public Employees' Retirement Law (California Government Code sections 20000, et seq.). VI. That the contributions deducted from employee salaries as employee contributions and made by the City to CaIPERS shall be treated for all purposes, Resolution 10-41 Page 1 of 2 other than taxation, in the same way that member contributions are treated by CaIPERS. PASSED AND ADOPTED at a regular meeting of the City Council of the City of Tustin held on the 18th day of May 2010. JERRY AMANTE Mayor ATTEST: PAMELA STOKER City Clerk STATE OF CALIFORNIA ) COUNTY OF ORANGE ) SS CITY OF TUSTIN ) I, Pamela Stoker, City Clerk and ex-officio Clerk of the City Council of the City of Tustin, California, do hereby certify that the whole number of the members of the City Council of the City of Tustin is five; that the above and foregoing Resolution No. 10-41 was duly passed and adopted at a regular meeting of the Tustin City Council, held on the 18th day of May 2010, by the following vote: COUNCILMEMBER AYES: COUNCILMEMBER NOES: COUNCILMEMBER ABSTAINED: COUNCILMEMBER ABSENT: PAMELA STOKER City Clerk Resolution 10-41 Page 2 of 2