Tag Archive for: government plan

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Automatic enrollment and governmental 457(b) plans

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My client maintains a governmental 457(b) plan. The plan’s recordkeeper told us they cannot add an auto enrollment provision to the plan because state law prohibits it. Is that true?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Pennsylvania focused on governmental 457(b) plans and automatic enrollment.

Highlights of Discussion

Note:  For general informational purposes only. For specific guidance, seek legal advice.

For governmental 457(b) plans in Pennsylvania, that is true, unless it is a collectively bargained plan. Based on our reading of Pennsylvania state law, automatic enrollment is not allowed unless authorized by an employees’ written authorization or pursuant to a collective bargaining agreement (34 Pa. Code §9.1).

Generally, automatic enrollment is available for governmental 457(b) plans, but state law will dictate whether a particular state will allow it. The issue revolves around having written authorization to withhold amounts from an employee’s pay.

Automatic enrollment was universally authorized in the private sector more than a decade ago through the Pension Protection Act of 2006. However, public sector defined contribution plans were not included in the legislation. For public sector plans, each state is responsible for determining whether it will allow automatic enrollment, and many states have laws preventing its establishment.

According to the National Association of Governmental Defined Contribution Administrators (NAGDA), nine states allow automatic enrollment, 25 states do not allow automatic enrollment and 16 states allow “some” automatic enrollment. For example, Texas is a state that is reported to allows some automatic enrollment. Texas law states: “Employees participating in the state plan are automatically enrolled. However, public employees of other political subdivisions are subject to wage deferral laws that prevent the implementation of automatic enrollment,” (Tex. Labor Code Ann. §61.018, §609.5025, § 609.007).

Conclusion
Whether a governmental 457(b) plan can include an automatic enrollment feature depends on state law. For specific questions on a particular state, seek legal guidance from a professional who is well-versed in that state’s statutes.

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414(h) “Pick Up” Plans

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“What is a “414 pick-up” plan?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Texas is representative of a common inquiry involving plan types.

Highlights of Discussion

A 414 pick-up plan is a type of governmental plan[1] where mandatory designated employee (after-tax) contributions are treated as employer contributions as long as the employing unit formally “picks up” the contributions.[2] When picked up, the employing unit treats the amounts as employer contributions for federal income tax purposes and does not include these amounts in the participating employees’ current gross income. Such amounts remain tax deferred until later distributed.

IRS Revenue Ruling 2006-43 defines what the employing unit must do in order to formally pick up the contributions. It must

  1. Specify that the employee contributions are being paid by the employer. In order to accomplish this, an authorized person of the employing unit must take formal action to ensure the contributions will be paid by the employing unit in lieu of employee contributions. The action can only apply prospectively and must be evidenced by a written document (e.g., minutes of a meeting, a resolution, or an ordinance).
  2. Not permit a participating employee as of the pick-up date to have a right to make a cash or deferred election with respect to the contributions. For example, participating employees may not opt out of the pick-up, or receive the contributed amounts directly instead of having them paid by the employing unit to the plan.

Further details of these requirements, including how they are treated for Social Security and Medicare tax purposes, are contained in Revenue Ruling 2006-43 and the IRS’ summary of pick up plans.

Conclusion

IRC §414(h)(2) provides that for any plan established by a governmental unit, where the contributions of employing units are designated employee contributions, the employer–through written authorization–may pick up the contributions, and treat the amounts as employer contributions for federal tax purposes. As employer contributions, such amounts are not included in the taxable income of plan participants until later distributed from the plan.

[1] An IRC §401(a) qualified plan established by a State government or political subdivision thereof, or by any agency or instrumentality of the foregoing. Governmental pick-up contributions also apply to certain plans established and maintained by Indian tribal governments.

[2] IRC §414(h) plan

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