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HomeMy WebLinkAbout005-93 Ordinance , ~ RECORD OF ORDINANCES Dayton Legal Blank Co. Form No, 30043 Ordinance No.______~:__9_~_______ Passed--------- __________________' _______19._ T AN ORDINANCE AUTHORIZING THE CITY OF DUBLIN TO PICK UP THE STATUTORILY REQUIRED CONTRIBUTION TO THE PUBLIC EMPLOYEES RETIREMENT SYSTEM OF OHIO ,... FOR THE EMPLOYEES OF THE CITY PURSUANT TO INTERNAL REVENUE CODE SECTION 414 (H) (2) . '-'"" WHEREAS, pursuant to federal and Ohio laws, the employees of the city of Dublin could defer the federal and state income taxes on a portion of their wages or salaries if the city would "pick up" (assume and pay) the statutorily re- quired contribution by such elected officials and covered employees to the Public Employees Retirement system of Ohio; and WHEREAS, the City of Dublin wishes to implement a "pick up" program via the "Salary Reduction Method" described in "Exhibit A" attached hereto; and WHEREAS, the city of Dublin will not incur any additional financial costs in the deferment of federal and state income taxes under said "Salary Reduction Method"; NOW, THEREFORE, BE IT ORDAINED by the Council of the City of Dublin, State of Ohio, 7 of its elected members concurring: section 1. That effective the pay period beginning March I 21, 1993, the full amount of the statutorily required con- r tribution to the Public Employees Retirement System of Ohio ~ shall be withheld from the gross pay of each person within '-- any of the classes established in section 2 herein and shall be "picked up" (assumed and paid to the Public Employees Retirement system of Ohio) by the City of Dublin. This "pick up" by the City of Dublin is, and shall be de- signated as, public employee contributions and shall be in lieu of contributions to the Public Employees Retirement System of Ohio by each person within any of the classes established in section 2 herein. No person subject to this "pick up" shall have the option of choosing to receive the statutorily required contribution to the Public Employees Retirement System of Ohio directly instead of having it "picked up" by the City of Dublin or of being excluded from the "pick up". The city of Dublin shall, in reporting and making remittance to the Public Employees Retirement System of Ohio report that the public employee's contribution for each person subject to this "pick up" has been made as provided by the statute. section 2. That the "pick up" by the City of Dublin pro- vided by this Ordinance shall apply to all employees and elected officials of the city of Dublin who are contribut- ing members of the Public Employees Retirement System of Ohio. - ( section 3. That the city's method of payment of salary to i employees who are participants in PERS is hereby modified -..... . .' as follows, in order to provide for a salary reduction pick-up of employee contribution to PERS: the total salary for each employee shall be the salary otherwise payable under the city Codes, Ordinances, or Policies. Such total salary of each employee shall be payable by the City in two parts, (a) deferred salary and (b) cash salary. An em- ployee's deferred salary shall be equal to that percentage of that employee's total salary which is required from time to time by PERS to be paid as an employee contribution by that employee, and shall be paid by the City to PERS on be- half of that employee as a pick-up and in lieu of the ~,_" ,llil Irq It,,_~~. _ ",.",_.~__J,.iJ_nI':IU\_[lII_U~I_-_ ,.P!fl_L_-_':_~~"'-''"'~~~'''.' --. "';"'.'_0,,;,,_,"":_'1., ._~ , U l1li J J 4J_ . . ' RECORD OF ORDINANCES Dayton Legal Blank Co. Form No. 30043 Ordinance NO'.mm~__~~~mJ~ended) Passed~m _mnn~__~m_~m~~ __~__ ~mm19_ Page Two ~ PERS employee contribution otherwise payable by that employee. An employee's cash salary shall be equal to that employee's total salary less the amount of the pick-up for ~. that employee, and shall be payable, subject to applicable payroll deductions, to that employee. The ci ty shall compute and remit its employer contributions to PERS based upon an employee's total salary. The total combined expenditures of the City for such employees' total salaries payable under applicable City Codes, Ordinances and Policies and the pick-up provisions of this Ordinance shall not be greater than the amounts it would have paid for those items had this provision not been in effect. section 4. That the City Manager is hereby authorized and directed to implement the provisions of this Ordinance to institute the "pick up" of the statutorily required contributions to the Public Employees Retirement System of Ohio for those persons reflected in Section 2 herein so as to enable them to obtain the result in federal and state tax deferments and other benefits. section 5. That this Ordinance shall take effect and be in force on the earliest date permitted by law. _ Passed this ;S +f...... day of ~ ,1993. . I I ~ ~~ ~or - Pres' 1ng Officer ATTEST: ~C!-~ Clerk of Council Sponsors: City Manager Director of Personnel & Purchasing - ( .... ~.,,~ .T~ r, .R ,~~V _Pi!: "",N:it, n~r~"\t-4~:__t!!~,,I_.':iI::l~m ,'~J,$J/.!<>,~H,,,,,,,,,~,,,,,,,, > MEMORANDUM TO: Members of Dublin City Council FROM: Timothy C. Hansley, City Manager /~ SUBJECT: PERS "pick Up" (Salary Reduction Method) DATE: January 14, 1993 J:ltI:TI:ATED BY: David L. Harding, Director of Personnel & Purchasing Attached for your consideration is Ordinance No. 5-93 authorizing the City to implement a PERS (Public Employee's Retirement System) "pick Up" - "Salary Reduction Method" pursuant to section 414 (H) (2) of the Internal Revenue Code. Attached to Ordinance No. 5-93 as "Exhibit A" is a description of the concept of the "pick Up", the "Salary Reduction Method" , implementation and reporting requirements, and other associated details. The concept of a "pick Up" is not new as the Internal Revenue Code has permitted Public Employers to implement such programs for some time. Many other local governmental jurisdictions in the Central Ohio area as well as statewide have implemented such programs. The essence of the "Salary Reduction Method" of "pick Up" is the deferral of federal and state income taxes on the employees portion of the statutorily required contribution to the Public Employee Retirement System of Ohio. The mechanics of this "pick Up" program are explained both in sections 2 and 3 of Ordinance No. 5-93 and "Exhibit A" as attached. It should be emphasized that, as identified in Ordinance No. 5-93, implementation of the "Salary Reduction Method" of "pick Up" requires no additional financial contribution on the part of the City. In addition, it should be noted that Elected Officials are eligible for this "Pick Up" program. If Council desires, as a group, to participate in this program, Section 2. of Ordinance No. 5-93 would need to be amended to include Elected Officials. The Division of Personnel & Purchasing has systematically surveyed employees of the City regarding their preferences concerning the "pick Up" program and the results reflected overwhelming support for implementation of the program. In light of the positive employee relations impact associated with the program together with the fact that the program can be implemented at no additional financial cost to the City, Staff recommends that Council authorize the city to proceed with implementation of the program by adopting Ordinance No. 5-93. Attachments --~~,~".~.~ .+.~.~~~",-;..=..,~.--- - , "EXHIBIT A" EMPLOYER PICK-UP U S Internal Revenue Code (IRe) makes it possible for an employer to pay employee contributions to PERS in lieu of contributions by employees. This technique is known as employer pick-up. The IRe provides that picked-up contributions to a qualified pension plan such as PERS are non-taxable to the employee until such time as the contributions are received as a refund or as retirement benefits. 1. Methods There are two methods of employer pick-up: the Fringe Benefit Method or the Salary Reduction Method. The consequence of either method of employer pick-up is there are no federal and state income taxes withheldtroin the 'picked-up contribution and this same contribution will not be reported on the employee's IRS Form W-2. a. Frinae Benefit Method The Fringe Benefit Method is used when an increase in salary is to be applied as a pick-up of the retirement contribution. For example. assume that an employer grants a 5 percent pay increase for its employees and the employer specifies the increase is to be used to pick-up 5 percent of the employee's retirement contribution. Under these circumstances there would be no change in an employees' gross pay, but instead of having 8.5 percent withheld for PERS, 3.5 percent would be withheld from an employee's earnings and the net result is a 5 percent increase in take-home pay. In the case of an individual receiving $1,000 each month, the retirement deduction withheld would be $35 rather than $85 which was withheld before the pay increase. Under the Fringe Benefit Method, a 5 percent pay increase means a direct 5 percent increase in take-home pay. Under the Fringe Benefit Method the final average salary is not increased by the amount of the picked-up contributions. Elected officials are not eligible to participate in a Fringe Benefit Pick-Up Plan. [Ohio Attorney General Opinion 84-036] ~ b. Salarv Reduction Me~od ;I'~' Again, look at the example of $1,000 a month salary. The salary would be made up of a cash salary to the individual of $915 on which regular federal and state tax would be withheld and a picked-up employee contribution to PERS of $85. 1...,,, Accordinq to an IRS Private Letter Rulina. plans usina the Salary Reduction Method must actuallv reduce salaries. It is the reduced sala which is reported on W-2 forms. otherwise the employees would be sub'ect to double taxation. The onlv direct costs to the emplover associated with the alary uctlon et od are the administration costs of the pian. If the Salary Reduction Method of pick-up is used, the basis for calculating deferred compensation payments under Section 457 of the Internal Revenue Code must be reduced by the amount of the picked-up contributions. The consequence of either method of employer pick-up is that there are no federal and state income taxes withheld from the picked-up contribution and this same contribution will not be reported on the employee's W-2. 2. Plan Implementation To implement a pick-up plan with PERS, a department must send a copy of the plan description (ordinance or resolution) and a cover letter stating the date upon which the employer intends to commence picking-up contributions to PERS. This information must be sent to PERS so that the validity of the plan may be assessed and the funds may be accounted for on the proper tax basis. ~ , To begin a pick-up plan it is necessary for an emplover to establish the plan bv ordinance or resolution. The plan must state whether all employees or only certain classes are included. The plan also must meet the requirements of IRS Revenue Rulings 81-35 and 81-36. The IRS requires the following language from these two Revenue Rulings be incorporated into the plan: 1) the emolover must soecifv that the contributions. althouah desianated as emolovee contributions. are beina oaid bv the emolover in lieu of contributions bv the emolovee: and 2) the emolovee must not have the ootion of choosina to receive the contributed amounts directlv instead of havina them oaid bv the emolover to the oension olan. Upon receipt of a copy of the plan and the cover letter, PERS will review the plan's compliance with specifications of Internal Revenue Code Section 414(h)(2) and Revenue Rulings 81-35 and 81-36. If, after this review, PERS determines that the plan does not meet the specifications as required above, PERS reserves the right to require the employer to secure a Private Letter Ruling from the IRS confirming the plan meets the specifications of IRC Section 414(h)(2) and Revenue Rulings 81-35 and 81-36. Requests for a Private Letter Ruling should be sent to: Employee 0""" Plans Technical Branch, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224. An employer. cannot rely on our acceptance of a plan for assurance that the plan meets all IRS requirements under federal law. When PERS receives a copy of this documentation, a separate employer number will be assigned for reporting the picked-up contributions. This will enable PERS to account for the picked-up contributions when reporting to IRS upon a distribution. 3. Reporting Reporting requirements for a pick-up plan may be obtained from PERS. The complexity of these procedures varies with the method of pick-up used and whether all or part of the employees are participating in the pick-up plan. Any changes - in the pick-up plan after implementation must be given to PERS 30 days prior to the effective date of such changes. I If an employer is currently on a pre-list basis and goes to a pick-up plan, we will continue to pre-write monthly reports. In the case of an employer reporting by magnetic media, both the regularly deducted and the picked-up contributions can be reported on the same tape or diskette. However, it is necessary that a trailer record be established following each code on the tape or diskette. 4. Items Affecting Employees If the employer implements a pick-up plan, the designated employee picked-up contributions are paid by the employer to PERS and are credited to an employee's account. In the event of service termination, these contributions are available for refund to the employee, along with any member-paid contributions, in the usual manner. ""'M'The picked-up contributions will be reported to the Internal Revenue Service on Form 1099R as taxable income for the ~ax year in which the refund was made. This taxable income will be subject to a 20% federal withholding tax deduction unless the employee elects a direct trustee to trustee transfer. Special tax provisions may be applicable to the reporting of this income. The taxable portion of a refund is subject to a 10 percent excise tax if the employee is younger than age 55. If over 59 1/2 the employee may qualify for the five year averaging provision. Recipients rec6;ving a monthly benefit from PERS and beneficiaries receiving a distribution resulting from the death of an employee will not be subject to the 10 percent excise tax. The employee may choose to "roll over" the taxable portion of a refund into an IRA or another qualified plan, thereby avoiding the 10 percent excise tax. The 20% Federal income tax withholding can be avoided only by a direct trustee to trustee transfer to an IRA or other qualified plan. For an employee who retires, the employee's retirement cost excludes the amount of the employer picked-up employee contributions. Generally, the effect will be that recipients will pay taxes on a larger part of their monthly benefit; the tax- free part of the monthly benefit, which is based on the member's retirement cost, will be smaller. Questions or requests for additional information should be addressed to Rebecca Arnott, 2n East Town Street, Columbus, Ohio 43215 or by phone at (614) 466-7113.