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Entering content frameProcedure documentation Savings Plans Under IRC Section 414(h)(2) 

Use

Section 414(h)(2) of the Internal Revenue Code (IRC) deals with the pick-up of contributions by an employer. Specifically, the Section provides contributions, made under a plan (a government plan) that are picked-up by the employing unit, such contributions are treated as employer contributions. As a result, the contributions are made pre-tax and exempt from income tax requirements until distributed to the employee. The contributions, however, continue to be subject to FICA taxes.

Example

A simplified example below shows how the change should be handled. The figures in the example are for illustration only. Income tax was computed for a married individual claiming one dependent, filing jointly.

Payroll items

EE [under 414(h)(2)]

EE [w/o 414(h)(2)]

Gross pay

$25,000

$25,000

Picked-up contribution

$1,500

$0

EE-deduction

$0

$1,500

Taxable wages

$23,500

$23,500

State and Federal tax

$3,057

$3,057

FICA and Medicare

$1,913

$1,913

Net pay

$18,530

$18,530

The only difference in the two cases above is that the employee is still able to make contributions up to the EE contribution limit, for example, $10,500 for 402(g) limit, since the $1,500 contribution is picked-up by the employer and is not included in the EE contribution amounts. Notice that in the example above the $1,500 is not subject to income tax, it is however subject to FICA and medicare tax.

Procedure

The following configuration recommendations for a 457 plan and a 403(b) plan that fit the 414(h)(2) requirement, are:

  • For 457 plans, it is recommended that one special plan be configured for the employer picked-up portion only. In this plan setup, there are no employer contributions allowed because the EE contribution works like an employer picked-up. Record the employer picked-up amount in infotype 0169 by entering the deduction number or percentage of the based salary. Change the process class of the ER pick-up wage type so that the amount is not be aggregated into the total EE contribution amount. Since the contribution limit of a 457 savings plan is the lesser of (1) $8,000, or (2) 33% (1/3) of includible compensation, (25% of total compensation) including EE and ER contributions, the combined limit mechanism in the SAP system calculates the correct YTD contributed amount and stops the contribution when the contribution limit is reached.
  • For 403(b) plans, as for 457 savings plans, it is recommended that one special plan be configured for the employer picked-up portion only and EE contributions should be done by different plans. No employer contribution is allowed in the ER picked-up plan setup. Since the 402(g) limit is the only limit that is affected by IRC, section 414(h)(2), the only configuration difference is that no
402G entry is required in the combined limit configuration for the plan, so the ER picked-up amount is not counted into the total EE contribution amount. The rest of the steps are the same as for 457 plans.
  • If combining 403(b) and 457, follow the steps for 457 and 403(b) setup above.
  • Step-by-Step Procedures for 414(h)(2) Plans

    1. Set up a savings plan - 457 or 403(b) for ER picked-up contributions by following the normal benefits procedures in the IMG. In this plan, no ER contribution is allowed.
    2. If the ER picked-up should be considered in the 403(b) limits calculation, add the entry
    3. 415C in the combined contributions (Access the IMG and choose: Personnel management ® Benefits ® Plans ® Savings Plans ® Combined contributions).
    4. Deselect the culmulation class 10 of the WT for EE contributions in the plan so that the ER picked-up is not accumulated to WT /110 (Total EE contributions).
    5. Set up another savings plan (457 or 403(b) for EE or ER match (or both) in the IMG as in step 1.
    6. If the organization also administers 403(b) plans, set the following two entries,
    7. 402G and 415C , in combined limits. Access the (IMG and choose: Personnel management ® Benefits ® Plans ® Savings Plans ® Combined contributions).

      Result

      To comply with the IRC - 414(h)(2) can be done through configuration without any coding changes. However, there are some drawbacks; firstly, the ER pick-up is actually handled as EE contribution in the system (infotype 0169) so employers would need to record the contribution amount or percentage for each individual employee who receives the contribution. Secondly, because it's recorded as EE contribution, you cannot have contributions based on the percentage of EE contributions. Finally, the picked-up contribution is not aggregated to the total employer contribution wage type /109 in the payroll process unless schema changes are made specifically for this purpose.

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