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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,
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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.
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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
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Mayor of the City of Arcadia