“What are Section 414(h) ‘pick-up’ contributions?”
Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:
Section 414(h) “pick-up” contributions are mandatory contributions to a 401(a) governmental plan that are actually treated as “employer” non-deferral contributions that are “picked-up” pursuant to section 414(h) of the Internal Revenue Code.
Such contributions are advantageous to employees in two ways: a) they are pre-tax (employee contributions to a 401(a) plan would otherwise be treated as after-tax contributions) and b) they do not count against the 402(g) elective deferral limit, since they are treated as employer contributions for purposes of that limit (though they do count against the 415(c) limit on combined employer/employee contributions).
Such contributions are only permitted for governmental employees and are most commonly seen in state retirement systems or in public university plans. IRS Revenue Ruling 2006-43 is the current principal IRS guidance on what actions are required in order for a State or local government employer to “pick up” employee contributions to a qualified plan.
Such contributions should NOT be confused with mandatory employee contributions to a 403(b) plan, which are not subject to 414(h). Employee contributions to a 403(b) plan that are a condition of employment or pursuant to a one-time irrevocable election of whether or not to participate in the plan are generally not subject to the 402(g) limit on elective deferrals. For a more detailed discussion of such contributions, see our prior Ask the Experts column in this regard.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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