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HomeMy WebLinkAboutItem 3c - Resolution No 7081 re Internal Revenue Code'. GQ�LIFORN —�9 F mco�oo.aica Au6usf 5, 1903 STAFF REPORT Administrative Services Department DATE: July 21, 2015 TO: Honorable Mayor and City Council FROM: Hue C. Quach, Administrative Services Director By: Jeannette Flores, Human Resources Administrator SUBJECT: RESOLUTION 7081 AFFIRMING THE PROVISIONS OF SECTION 414(H)(2) OF THE INTERNAL REVENUE CODE IN REPORTING MEMBER PAID CONTRIBUTIONS TO THE CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM AS TAX DEFERRED Recommendation: Adopt SUMMARY In July 1996, the City implemented the provision of employer paying 7% of the employee's contributions to the California Public Employees Retirement System (CaIPERS). The Internal Revenue Code (IRC) Section 414(h)(2) allows public agencies to designate required employee contributions as being "picked -up" by the employer and treated as employer contributions for deferred tax purposes. In order for these contributions, or pick -ups, to be on a pre -taxed basis, the IRC requires the City to memorialize the deductions in a "414 (h)(2) Resolution." After a recent review on all documents archived with the CalPERS Office of Audit Services, a resolution designating the 414 (h)(2) provision in 1996 could not be found. CalPERS recommends adoption of a resolution that would be filed with the agency for compliance with the IRC. It is recommended that the City Council adopt Resolution No. 7081 affirming the provisions of Section 414(h)(2) of the Internal Revenue Code, in reporting member paid contributions to the California Public Employees Retirement System on a pre -taxed basis. DISCUSSION The California Public Employees' Retirement System (CaIPERS) is a defined benefit retirement plan which uses contributions of the employer and the employee as well as income from investments to pay for employee retirement benefits. As part of this plan, both employers and participants may take advantage of significant tax benefits. Resolution 7081 Affirming the Provisions of Section 414 (h)(2) July 21, 2015 Page 2 of 3 One of the tax benefits the City implemented in 1996 was Section 414(h)(2) of the IRC. Section 414(h)(2) designates contributions as being "picked -up" by the employer and treated as employer contributions for tax purposes. The effect of a pick -up is to defer taxes on employee contribution amounts until the members retire and receive retirement benefits or when the member separates from employment and takes a refund of contributions. Absent the Section 414(h)(2) benefit, employee contributions to a defined benefit pension plan qualified under Section 401(a) would be after -tax contributions (e.g. taxable income to the employee at the time the contribution was made. In 1996, the City negotiated to "pick -up" 7% of the employee's contributions and treat them as employer contributions for tax purposes. This benefit qualified the contributions to be excluded from the gross income of employees until such time as they are distributed to the employees at time of retirement or separation. In order to report these contributions on a pre -taxed basis, the IRC requires the City to memorialize the deductions in a "414 (h)(2) Resolution," by specifying the following: 1) The contributions, although designated as employee contributions, are being paid by the employer, and 2) The employer does not permit participating employees to opt out of the pick- up or to receive the contributed amounts directly instead of having them paid by the employer to the plan. Additionally, CalPERS requires a copy of the "414 (h)(2) Resolution" be filed with their office to meet compliance with the IRC. After a recent review of all documents archived with the CalPERS Office of Audit Services, it was discovered that a "414 (h)(2) Resolution" had never been filed with CalPERS. In July 1996, the City Council adopted Resolutions: 5927, 5928, and 5931, which clearly stated the City's intent. However, those resolutions do not include precise languages required in the 414(h)(2) Resolution. To ensure that a proper resolution is in place, CalPERS is recommending the adoption of Resolution No. 7081, Exhibit A, in order to comply with the rules of the IRC. FISCAL IMPACT The proposed resolution has no fiscal impact and serves only to confirm the deferred tax status of employee contributions to CalPERS. Resolution 7081 Affirming the Provisions of Section 414 (h)(2) July 21, 2015 Page 3 of 3 RECOMMENDATION It is recommended that the City Council adopt Resolution 7081 affirming the provisions of Section 414(H)(2) of the Internal Revenue Code in reporting member paid contributions to the California Public Employees' Retirement System as tax deferred. Approved- Dominic Lazzar City Manager Attachment: Resolution No. 7081 RESOLUTION NO. 7081 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF ARCADIA, CALIFORNIA, AFFIRMING THE PROVISIONS OF SECTION 414(h)(2) OF THE INTERNAL REVENUE CODE IN REPORTING MEMBER PAID CONTRIBUTIONS TO THE CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM AS TAX DEFERRED WHEREAS, the governing body of the City of Arcadia has the authority to implement the provisions of section 414(h)(2) of the Internal Revenue Code (IRC); and WHEREAS, the City Council of the City of Arcadia has determined that even though the implementation of the provisions of section 414(h)(2) 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: NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF ARCADIA, CALIFORNIA, DOES HEREBY FIND, DETERMINE, AND RESOLVE AS FOLLOWS: SECTION 1. That the City of Arcadia will implement the provisions of section 414(h)(2) Internal Revenue Code by making employees' contributions pursuant to California Government Code Section 20691 to the California Public Employees' Retirement System on behalf of all its employees or all its employees in a recognized group or class of employment who are members of the California Public Employees Retirement System. "Employee contributions" shall mean those contributions to the Public Employees' Retirement System which are deducted from the salary of employees and are credited to individual employee's account pursuant to California Government Code section 20691. SECTION 2. That the contributions made by the City of Arcadia to the California Public Employees' Retirement System, although designated as employee contributions, 1 are being paid by the City of Arcadia in lieu of contributions by the employees who are members of the California Public Employees' Retirement System. SECTION 3. That employees shall not have the option of choosing to receive the contributed amounts directly instead of having them paid by the City of Arcadia to the California Public Employees' Retirement System. SECTION 4. That the City of Arcadia shall pay to the California Public Employees' Retirement System the contributions designated as employee contributions from the same source of funds used in paying salary. SECTION 5. That the amount of the contributions designated as employee contributions and paid by the City of Arcadia to the California Public Employees' Retirement System on behalf of an employee shall be the entire contribution required of the employee by the California Public Employees' Retirement Law (California Government Code Sections 20000, et seq.). SECTION 6. That the contributions designated as employee contributions made by the City of Arcadia to the California Public Employees' Retirement System shall be treated for all purposes, other than taxation, in the same way that member contributions are treated by the California Public Employees' Retirement System. SECTION 7. The City Council hereby affirms the provisions of Section 414(h)(2) of the Internal Revenue Code in reporting member paid contributions to the California Public Employees' Retirement System as tax deferred. SECTION 8, This Resolution shall become retroactive to the effective date of July 1996. 2 SECTION 9. The City Clerk shall certify to the adoption of this Resolution. Passed, approved, and adopted this day of , 2015. City Clerk APPROVED AS TO FORM: Wt if "F f) �-L Stephen P. Deitsch City Attorney 3 Mayor of the City of Arcadia