TN 24 (11-09)
Internal Revenue Code (IRC) Section 414(h)(2) provides that for any plan established
by a governmental unit, where the contributions of employing units are designated
employee contributions, but the employer “picks up” the contributions, the contributions
are treated as employer contributions.
For the employee contributions to be deemed picked up by the employer and therefore
to be characterized as “employer contributions”, certain tests must be met. A series
of rulings by the IRS established that only amounts that the governmental employer
pays but does not withhold or otherwise offset from the employee’s salary are considered
employer contributions, and are therefore excludable from gross income.
For Social Security purposes the contributions must be paid not only by the employer,
but also with employer funds in order to be excluded from wages for Social Security