Payroll Reporting Issues for Government Entities

Payroll Reporting Issues
for Government Entities
January 27, 2012

Certified Public Accountants & Business Advisors

Overview of topics covered
 Recent Changes
 Common Errors
 Compensation/Worker Misclassification
 1099 Reporting Issues
 Overview of Tax Advantaged Health Plans
 Taxability of Fringe Benefits

2 © 2012 Sikich LLP. All rights reserved.


Payroll Tax Cut Temporarily
Extended into 2012
 Employee paid social security taxes
will remain at 4.2% through February
29, 2012. 2% savings for employees
continue.
 Revised employment tax forms will
be issued.

© 2012 Sikich LLP. All rights reserved.


Temporary Payroll Tax Cut
Continuation Act of 2011
 The Act also provides for a “recapture” provision which
applies to employees earning more than $18,350 in
the first 2 months of 2012.

 Imposes an additional income tax on these higher-
income employees in an amount equal to 2% of wages
received during the two months. (The social security
wage base for 2012 is $110,100 and $18,350
represents two months of the full year amount).

 Recapture tax will be paid by employee in 2013 when
income tax return is filed. Additional information to be
issued.


New Limits for 2012

 Mileage rates for business travel
• 2011 $.51 through 6/30/11
• 2011 $.555 7/1/11 through 12/31/11
• 2012 $.555 (no change from 2011 rate)



New Limits for 2012 (continued)
 401(k) /403(b)/457(b) Plans
• 2011 $16,500
• 2012 $17,000
 Catch up amounts
• 2011 $5,500
• 2012 $5,500
 Eligible Compensation
• 2011 $245,000
• 2012 $250,000


New Limits for 2012 (continued)

 Simple Plans
• 2011 $11,500
• 2012 $11,500
 Catch up amounts (simple)
• 2011 $2,500
• 2012 $2,500



Reporting and Taxability of
Health Insurance
 In order to exclude premiums from income
the covered participant must be an
employee or meet the definition of a
dependent.
• Domestic partners and civil unions do NOT
currently qualify as dependents
• Imputed income must be calculated on any
employer provided premiums
• Not eligible for pre-tax savings under
Section 125 Plan if not a dependent


Taxation of Young Adult Dependent
Coverage
 Health Care Reform Act made change
effective 3/30/10 that coverage to adult
children who as of the end of the year
have not turned age 27 will NOT result
in imputed income to the employee.

 Prior to 3/30/10 imputed income should
be determined.



Health Insurance coverage for
Retirees
 If coverage is provided to all retirees
without an option to receive cash then
coverage is not taxable

 If employee could have received cash in
lieu of the coverage then the coverage is
taxable all in the year when the amount
was available to them. The future years
coverage will all be taxed earlier than
when received. Revenue Ruling 75-539


How to calculate the premium
includable in gross income?
 No formal IRS guidance is available
 PLR 9603011 and PLR 200339001 –
provide guidance for domestic partners
and civil unions (non-dependents)
 Both conclude “excess of the fair market
value of the group medical coverage
provided over the amount paid by the
employee for such coverage is includible
in gross income of the employee”


How to calculate the premium
includable in gross income?
 Under Reg. Sec. 1.61-21(b)(2) fair
market value is determined on the basis
of the amount that an individual would
have to pay for the particular fringe
benefit in an arm’s-length transaction –
the fair market value of the group
medical coverage



How do you determine fair market
value?
 Any reasonable method for calculating
fair market value may be used:
• Actuarial computation by insurance
provider
• Greater of increase in incremental cost
• COBRA premium for self-only coverage



Health Insurance Reporting on
Form W-2
 Health Care Reform law added a requirement to report
aggregate cost of employer provided health coverage.

 Coverage does NOT become taxable, just for disclosure
purposes and most likely to prepare for future years when
excise taxes and mandatory coverage become effective.

 IRS recently announced that this will NOT be required for
2011 to allow employers more time to prepare and receive
additional IRS guidance.

 The 2011 W-2 instructions list a code DD for Box 12 to
report for those employers who elect to provide early.


Form W-2
Transition Rules:

• IRS announced that this will not be required
until 2012 (reported in 2013) for large
employers (250 or more employees)

• For small employers (less than 250
employees) until 2013 (2014 reporting).



Form W-2
• Additional Resources:
• See Notices 2011-28 and 2012-9 for
most recent guidance
• FAQ on IRS website under the ACA
pages of www.irs.gov or link:
http://www.irs.gov/newsroom/article/0,,id=23
• IRS presented webinar on topic see:
http://www.irsvideos.gov/Webinars



Nondiscrimination Rules for
Health Plans
 Health Care Reform Act extended
nondiscrimination rules to fully insured plans,
previously only applied to self-insured plans.

 If health plan does not retain grandfathered status
need to ensure that employer provided coverage
amounts do not discriminate in favor of higher
paid employed.

 Until guidance is issued IRS will not assess
penalties. Watch for further developments in this
area.


IRS Audit Activities

 IRS is devoting a significant amount of
its examination resources to the
Employment Tax National Research
Program (ETNRP).

 ETNRP is a three year program to
identify sources of under reported
income and employment taxes or non-
filing of required returns.


ETNRP
 IRS will examine 500 governmental
entities selected at random.

 First 90 entities were reviewed in 2010
and results should be issued shortly.

 Second 180 entities were selected for
review in 2011.

 Additional 230 entities will be selected in
19
2012.


ETNRP (Cont.d)
 Includes review of:
• Compliance with information return &
reporting requirements
• Compliance with worker classification
(i.e. 1099 or W-2 reporting)
• Compliance with provisions of public
entity Section 218 agreements
• Compliance with taxability of fringe
benefits



Common Errors Noted by IRS with
Payroll Reporting
 Totals shown on Forms 941 do not
reconcile with totals on Forms W-2 and
W-3, or between these forms and
accounting records.

 Forms W-9 and W-4 are not being used
or are not being updated when
necessary.


Payroll Reporting (cont.d)

 Failure to backup withhold on payments
to vendors when required.

 Failure to correctly complete or file
Forms 1099.

 Failure to apply accountable plan rules
to reimbursements and allowances.


 Incorrect or missing employment tax
deposits.

 Failure to follow electronic filing
requirements.

 Treatment of certain groups of workers
as independent contractors, rather than
as employees.


 Failure to include taxable noncash
benefits in employee wages.

 Failure to correctly apply withholding
rules to election workers and public
officials.

 For public employers IRS now has self
assessment checklist available on their
website. © 2012 Sikich LLP. All rights reserved.


Perform Year-end Reconciliation Before
Filing W-2’s and 941’s

 The SSA will compare the 941 gross wage
totals to Form W-3 totals for:

• Social Security and Medicare wages
• Income tax withholding
• Advanced earned income credit

 Reconcile before you file to avoid notices



Generally your wages should reconcile as follows:

 Box 1 wages on Form W-2

 Plus employer pick-up amounts (govt employers)

 Plus: 401(k), 403(b) and 457 contributions

 Should equal Medicare and/or Social Security
wages (W-2 boxes 3 and 5)




 If wages on Forms W-2, W-3 and 941
do not match, you should determine that
the reasons are valid and retain
documentation in the event you are
questioned by the IRS or SSA.



Form 1099-Misc Reporting
 Originally included in Health Care Reform
Act to include corporations in the
requirements for 1099-Misc reporting
 New rules have been repealed so
corporations continue to be exempt from
1099-misc filing unless an exception applies
such as:
• Attorneys
• Medical expenses



1099-Misc Issues
 Make sure to obtain W-9 for all
payments for services to ensure you
have documentation of type of
organization

 Upon audit IRS will want to review and
can impose penalties for failure to file
1099-Misc and require back up
withholding at a rate of 28%


1099-Misc Changes-1099-K Filing

 2011 1099-Misc instructions state that
payments made with a credit card must
now be reported on 1099-K by the
payment settlement entity.

 Payments reported by the settlement
entity are NOT required to be reported
on form 1099-Misc reported by the
payor


Other 1099 topics
 Grant Payments
• Payments > $600 should be on 1099-G
• Taxable unless excluded in federal legislation
• Welfare type payments are often excluded
• Inform recipient of 1099-G reporting upon
issuance of grant

 Elected and Appointed Officials
• Generally should be treated as employees not
paid on Form 1099 (per IRS Public Outreach
guide page 6)



Information return penalties in 2011
 The Small Business Jobs Protection Act (SBJA)
substantially increases the penalties for failure to
file correct and timely information returns and
payee statements.

 For example, previously penalty of $50/payee
statement up to maximum of $100,000. New rules
increase maximum to $1,500,000 plus inflationary
adjustments.

 Increased employment tax audits coupled with
larger penalties create the “perfect storm” for
employment tax audit assessments.


TIPRA 3% Withholding Repealed

 The Tax Increase Prevention and
Reconciliation Act of 2005 (TIPRA) added a
provision to required entities making payments
to a person providing property or services to
deduct and withhold 3% tax from the payment.
Set to become effective in 2013.

 The Job Creation Act of 2011 repealed the
TIPRA 3% withholding requirement.



Payroll and Compensation Under Fire:
What you Need to Know

 Agencies (DOL, IRS) continue to focus on:

• Employee Classification

• Overtime Payment

• Independent Contractors

• Interns



FLSA Compliance

 DOL has added new investigators for
wage and hour

 DOL is expected to be “very active”

 DOL collections of back wages are up
dramatically over the past decade

 Class action cases have increased four
fold since 1997


FLSA Compliance

 At least 75% of employers are not in
compliance with the Fair Labor
Standards Act – might actually be
closer to 95%



Employee Misclassification

 U.S. Government Accountability Office
reports there are at least 10 million
workers in the U.S. who are classified
as independent contractors

 Labor Department estimates up to 30%
of companies nationwide have
misclassified employees




 Employers are liable for:
• Payment of back taxes
• Unpaid Social Security/Medicare
contributions
• Unpaid unemployment insurance
• Unpaid workers compensation
premiums
• Penalties and interest



State Level Initiatives

 11 states have signed on with the DOL

• Goal is to prevent, detect and remedy
employee misclassification

• Illinois is one of the 11 states



DOL/IRS to Coordinate on

 IRS and DOL sign Memorandum of
Understanding

 Result = increased number of
employment tax audits = boost in
compliance and increase in revenues



IRS Voluntary Classification
Settlement Program
 Initiative allows businesses to become
compliant with worker classification
requirements at significantly reduced
penalty rates



Settlement Program – Eligibility
 Employer must have consistently treated a
group of workers as non-employees in the
past and filed appropriate 1099 forms for
those workers during past 3 years

 No current dispute between employer and
IRS or applicable state agency

 Going forward, employers must agree to treat
as employees any workers they previously
misclassified as independent contractors


Settlement Program - Benefits
 Employer will pay only 10% of employment
tax liability

 Employer is not required to pay interest or
penalties

 Employer will not be subject to
employment tax audit regarding worker
classification issues



IRS Voluntary Classification Settlement
Program – Risks of not Participating
 IRS can force non-compliant employers
to pay the appropriate employment
taxes in full for several years

 Significant interest and monetary
penalties



Participation in IRS Voluntary
Settlement Program
 Submit an application (Form 8952) to
the IRS at least 60 days from the date
on which employer wants to begin
treating misclassified workers as
employees



IRS Webinar

 On February 15, 2012 1pm CST IRS
is hosting a webinar on worker
classification

 Register at www.irs.gov and go to the
governmental entities page



Why you Need to be Concerned

 Fair Labor Standards Act

 Illinois Minimum Wage Act

 Illinois Wage Payment and Collection Act

 Immigration Regulation and Control Act

 Lilly Ledbetter Fair Pay Act



Exempt vs. Non-Exempt
 Hourly pay equals non-exempt

 Responsibilities determine status

 Title/payment type don’t determine status

 Duties test

• Relative importance of exempt duties

• Amount of time spent performing exempt work

• Relative freedom from direct supervision


Independent Contractors

 Tests for Independent contractors include:

• Behavioral control

• Financial control

• Type of relationship



Independent Contractors
 Make decisions re: how work is done

 Not required to abide by organization’s policies/procedures

 Can hire/fire their own employees

 Do not work on the organization’s premises; make own schedules

 Use own tools/equipment/materials

 Engaged by many firms

 Cannot be disciplined or dismissed

 Paid per contractual arrangement


Unpaid Interns

 Must be a structured educational
experience

 For the benefit of the intern

 No promise of a job



Records Retention
 At least three years
• Payroll records
• Collective bargaining agreements
• Sales/purchase records

 At least two years
• Wage computation records

 Records must be available for inspection



Four Most Common Mistakes

 Failure to have a good system in place

 Failure to properly record hours worked

 Falling down on technical issues

 Failure to calculate overtime properly



To Do List
 Ensure you are following specific record keeping
requirements for non-exempt employees

 Have job descriptions for all positions for
classification purposes

 Have a process for classifying positions and follow
it consistently

 Maintain accurate pay records

 Watch for improperly docked pay


To Do List

 Make sure you are paying overtime correctly

 Don’t allow non-exempt employees to work
through lunch periods

 Maintain all time records for NE employees

 Have safe harbor policies in place



Tax Advantaged Health Plan
Options

 Flexible Spending Accounts-FSA’s

 Health Reimbursement Accounts-HRA’s

 Health Savings Accounts-HSA’s



Cafeteria Plans-FSA’s
 Pay for certain benefits pre-tax-typically EE paid
• Before FICA and Medicare
• Before Federal and State taxes

 Saves employer matching FICA taxes!

 Not includible in compensation for IMRF (unless
resolution adopted)

 Benefits
• Health, dental and other insurance premiums
• Un-reimbursed medical expenses
• Dependent care expenses


Cafeteria plan requirements
 Must have WRITTEN PLAN DOCUMENT

 Plan may need to be updated if
amendments have not been made in
several years.

 IMRF amendment required to include
contributions as IMRF eligible wages



Cafeteria plan changes
 Effective January 1, 2011
• Over-the-counter drugs are no longer qualified for
purposes of the distributions/reimbursements
under HSA’s, health FSA’s, and HRA’s, EXCEPT
for prescription medicines and insulin. The new
rules establish a more detailed and rigorous
standard to qualify as a cafeteria plan.

 Effective January 1, 2013
• Contributions in a health FSA is limited to $2,500
per year, indexed for inflation after 2013.



Health Reimbursement Accounts-HRA’s
 Health Reimbursement Accounts-HRA’s
• Employer Funded-NO EMPLOYEE
CONTRIBUTIONS
• Can be funded or unfunded
• Can choose to carryover unused amounts to
future years
• Distributions are not taxable if used for
qualifying medical expenses



Health Savings Accounts
 Health Savings Accounts-HSA’s
• Employer OR Employee Funded
• Must be funded
• Unused amounts are carried over since it
if funded in individual accounts similar to
IRA’s but for medical expenses
• Distributions are not taxable if used for
qualifying medical expenses



HSA’s (Cont.d)
 Must have high deductible health insurance plan
• Minimum deductible of $1,200 for 2012 for individual
with out-of-pocket expenses of no more than $6,050
or $2,400 family deductible with total annual out-of-
pocket expenses of no more than $12,100

 Must not be covered by any other plans
• Includes HRA and FSA with limited exceptions



HSA’s
 Health Savings Accounts-HSA’s (Cont.d)
• Allowable contributions up to $3,100 for 2012
or $6,250 for family regardless of policy
deductible

 Catch up contributions allowed for
individuals age 55 or older-$1,000 for 2012



W-2 Reporting
 Flexible Spending Accounts-FSA’s
• Insurance premiums: not required to report on W-2
exclude from all boxes on W-2 (use code DD if
electing to report early)
• Medical expenses: same as insurance premiums
• Dependent Care: exclude from all taxable items on
W-2, however must also include in Box 10-
dependent care benefits
o IRS uses this box to match up to amounts reported on
Form 2441 on Form 1040



W-2 Reporting
 Health Reimbursement Accounts-HRA’s
• These are employer contributions and therefore
not reportable on Form W-2
• Think of as other employer paid insurance
premiums



W-2 Reporting
 Health Savings Accounts-HSA’s
• Employee contributions
o Employee contributions are excluded from taxable
income box 1 and state income taxable wages
o If the employer has a cafeteria plan which includes
these benefits then the employee contributions are
also exempt from social security and Medicare.
o Report employee contributions in box 12 with a
code W if paid through a cafeteria plan.
o Employees may also contribute on their own and
report contributions on their 1040 to receive tax
benefit.



W-2 Reporting
 Health Savings Accounts-HSA’s
• Employer contributions
o Employer contributions are excluded from all boxes on
W-2
o Report employer contributions in box 12 with a code W.
o IRS uses box 12 code W to calculate total allowable
contributions as reported on the individual’s 1040



Reporting of Fringe Benefits
 Generally all amounts paid to
employees are taxable
• Federal and state income taxes
• Employment taxes

 Unless excludable under IRS code

 Cash payments are taxable regardless
of amount.


Checklist of Non-payroll
Compensation
 Advances
 Flat rate auto allowances
 Unsubstantiated business expense or in
excess of government approved limits
 Group term life insurance >$50,000
 Disability pay-taxable portion
 Reimbursed employee moving
expenses



Compensation
 Personal use of company vehicle
 Cash achievement awards
 Compensation bonuses/Holiday bonuses
 Employer paid dues for country club or use
of athletic facilities or golf course
• No additional cost services rules
 Employer paid supplements to military pay
 Employees’ taxes paid by employer



Compensation (cont.d)

 Seasonal tickets to entertainment or
sporting events for personal use.

 Uniform allowances for uniforms that are
(a) not required as a condition of
employment or (b) street wearable.

 Educational assistance over $5,250 unless
qualifies as working condition fringe
benefit.


Fringe Benefit Exclusions
 De Minimis Fringe
• Small value
• Any cash paid is NOT de minimis and therefore taxable to the
employee

 Qualified Transportation Fringe
• Pre-tax deductions available for: Commuter transportation,
transit passes, and qualified parking

 Qualified Employee Discount

 Working condition Fringe
• Substantiated expenses
• Use of property or service related to employer’s business

72  No Additional Cost Service © 2012 Sikich LLP. All rights reserved.


Examples of Working Condition
Fringes

 Job-related magazine subscriptions
 Professional dues
 Job-related education
 Business travel and entertainment
 Business use of company vehicle
 Employer provided retirement advice



No Additional Cost Services

 IRS newsletter from 2004 addresses issues
relating to taxation of employer provided:
• Golf Courses
• Athletic Centers
• Park District Courses
• Discounts on merchandise



No Additional Cost Services
 Employee must be in the same line of
business as the “free service”

 In addition to there being no additional
cost, there also must be no foregone
revenue.

 Employer should have policy to prevent
any foregone revenue.


Employer Provided Vehicles

 Personal use is taxable unless de minimis
• Daily commuting is NOT de minimis

 Exception for qualified non-personal use
vehicle
• Defined in IRC Regulation 1.274-5T-Some examples:
o Clearly marked police and fire vehicles
o Unmarked vehicles used by law enforcement officers.
Officers must be authorized to carry a firearm, execute
search warrants and make arrests.

• IRS FAQ on website states “ A police or fire vehicle is
clearly marked if it has insignia or words which make it
clear that it is a police or fire vehicle. A marking on a
license plate is not a clear marking for this purpose.”



 Final regulation issued 5/19/10

• Clearly marked police or fire officer vehicles
are treated as qualified non-personal use
vehicles if the following conditions apply:

o The employee must be on call at all times

o The employee must be required to use the vehicle
for commuting

o The employer must prohibit personal use (other
than commuting) for travel outside the officer’s or
firefighter’s jurisdiction.


 Final regulation issued 5/19/10:

• Adds “public safety officer vehicle” to the qualified
non-personal use vehicle exclusion.

• A clearly marked public safety officer vehicle is a
vehicle owned or leased by a governmental unit or
any agency or instrumentality that is required to be
used for commuting by a public safety officer.

• A public safety vehicle is “clearly marked” if,
through painted insignia or words, it is readily
apparent that the vehicle is a public safety officer
vehicle.


 Final regulation issued 5/19/10:

• A public safety officer is an individual serving
a public agency in an official capacity, with or
without compensation, as a:
o Law enforcement officer, with power of arrest,
authority to carry firearms, and execute search
warrants.
o Firefighter
o Chaplain or
o Member of rescue squad or ambulance crew.




 Public Safety Officer (cont.d)
• Any federal, state or local government public
safety officer who meets the on-call and
commuting requirements above, and uses a
clearly-marked government owned or leased
vehicle in the course of his or her duties, is
excepted from the substantiation requirements.



 Three methods available to calculate
personal use (IRS Publication 15-B, page
24 or Public Outreach guide page 8 & 9):
• Automobile lease value
• Commuting rule
• Cents-per-mile rule



Car Allowances
 Taxable unless accountable plan used

 Accountable plan requires periodic
reporting of expenses
• Standard mileage rate or
• Actual vehicle expenses

 Allowance> actual expenses is either
taxable or must be returned to employer



Employee Cell Phones
 IRS recently announced that if cell phones are
provided to employees for non compensatory
business reasons it will not be taxable to the
employee and detailed records no longer need to be
maintained.
 Examples of substantial business reasons:
• Need to contact employee at all times for work-related
emergencies
• Requirement that the employee be available to speak
with clients at times when the employee is away from
the office.
• Need to speak with clients located in other time zones
at times outside the employee’s normal work day.
 See IRS Notice 2011-72



Uniforms and Work Clothes

 Should be under an accountable plan

 Clothing must be worn as a condition of
employment.

 Those clothes are not suitable for everyday
wear.




 Examples who may deduct cost:
delivery workers, firefighters, health care
workers, law enforcement officers, letter
carriers, professional athletes, and
transportation workers.

 Clothing worn by plain clothes officers
would not be deductible even if a result
of a union negotiated contract.



 Protective clothing: An employee can
deduct the cost of protective clothing
required in his/her work such as safety
shoes or boots, safety glasses, hard
hats, and work gloves.



Educational Programs
 Job-related educational expenses are tax
free to employee if:
• Required by employer or law to maintain
current job skills
• Maintains or improves skills required for
present work

 Not tax-free if:
• Education is needed to meet minimum job
requirements
• Education qualifies employee for a new trade or
business



Educational Assistance Programs

 Provides for tax free educational
assistance up to $5,250/year.
 Includes graduate courses.
 Must have written plan document.
 Must offer plan on nondiscriminatory
basis once written guidelines are
established in document.



Group-Term Life Insurance
 Can exclude from income the cost up to
$50,000 of group-term life insurance

 IRS determined cost for coverage in excess
of $50,000 is includable as wages

 IRS Pub 15-B includes the table to
determine taxable income

 Not subject to income tax withholding

 Is subject to FICA and Medicare taxes


Taxability of Worker’s
Compensation Benefits
 Paid under worker’s comp law of state
• Excludable from income, Social Security & Medicare
taxes

 Paid “in the nature of” Worker’s Compensation
Act
• May be subject to employment taxes for the first 6
months
• IRS Pub 15-A/IRS Federal State Guide Pub 963



Taxability of Worker’s
Compensation Benefits
 Disability retirement payments not in the
line of duty are subject to the rules for
federal income tax withholding from
pension and annuities
 Payments based on age of employee,
length of service, or prior contributions are
not payments in the nature of workers’
compensation.
 These payments are reported on Form
1099-R.


Pick-Up Contribution Elections
(Govt Employers)
 Generally amounts withheld from employee
paychecks need to be after tax unless there is
an IRS code section allowing pre-tax treatment

 For pension contributions, in order to be pre-tax
the employer must elect to “pick-up” the
contributions

 The IRS provides in Section 414(h)(2) pretax
pension contributions if certain conditions are
met


Pick-Up Contribution Elections
 In Revenue Ruling 2006-43 the IRS stated
that in order for a contribution to a qualified
plan to be treated as pick-up by the
employer the following must occur:
• The employer must take formal action to elect to
pick-up the contribution and the action must apply
prospectively and be evidenced in writing, i.e., in a
resolution, ordinance or minutes of a meeting
• The participant must not have the right to opt out of
the “pick-up” or the right to receive the amounts
directly in lieu of having them paid into the plan



Taxability of Pensions

 The taxability of the pension depends
on the source of the funds being
contributed to the Fund

 There are various types of
contributions:
• Employer contributions
• Employee required contributions
• Employee elected contributions for purchase of
prior service credit


 Employer contributions-will be taxable to
participant when pension received as
employee did not pay tax on receipt of
contribution
 Employee required contributions
• If pick-up contribution made, contributions were
made on a pretax basis so pension will be
taxable upon receipt
• If no pick-up contribution made a portion of the
pension will not be taxable as recovery of after
tax contributions



 Employee elected contributions for
purchase of prior service credit
• Revenue Ruling 2006-43 states that in order to
qualify as a pick-up contribution the arrangement
must “not permit a participating employee from and
after the date of the “pick-up” to have cash or
deferred election right (within the meaning of Section
1.401(k)-1(a)(3)) with respect to designated
employee contributions. Thus, for example,
participating employees must not be permitted to opt
out of the “pick-up,” or to receive the contributed
amounts directly instead of having them paid by the
employing unit to the plan.”



 Employee elected contribution for purchase
of prior service credit – source of funds:

• Payroll deductions - Rev Ruling 2006-43 any
payroll deductions made to purchase prior
service credits should be treated on a POST
tax basis and basis should be tracked as with
other after tax contributions to the Fund

• Rollover from a pretax account (such as IRA) -
Contributions would be treated as pretax and
amount taxable upon distribution


 Employee elected contribution for purchase
of prior service credit – source of funds
(cont.d):
• Lump sum payment - treated as post tax
payment and basis should be tracked and
amount would not be taxable upon distribution



Useful References
 IRS website - www.irs.gov/govt

 IRS Public Outreach Guide

 IRS Pub 15-A-Employer’s Supplemental Tax
Guide

 IRS Pub 15-B-Employer’s Guide to Fringe
Benefits

 Taxable Fringe Benefit Guide-IRS website

 IRS Pub 963- Joint Publication with Social
Security


Useful References

 www.dol.gov – Department of Labor
Website
 www.state.il.us/agency/idol/ - Illinois
Department of Labor


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Contact Information:

Karen S. Sanchez, CPA, QPA
Partner-in-Charge
Human Resources and Employee Benefits
1415 W Diehl Road, Suite 400
Naperville, IL 60563
Phone (630) 566-8519
Email: ksanchez@sikich.com

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