Understanding Employer Pickup 50-338c, 1/19/E Todays agenda - PDF document

STATE TEACHERS RETIREMENT SYSTEM OF OHIO Understanding Employer Pickup On-Demand Version Understanding Employer Pickup 50-338c, 1/19/E Today’s agenda Review five key items 1. Define employer pickup 2. Explain the types of pickup 3. Discuss the possible member groups 4. Review proper calculation of pickup for member contributions due to STRS Ohio 5. Specify the requirements for adopting or modifying a pickup plan employer_education@strsoh.org 1

STATE TEACHERS RETIREMENT SYSTEM OF OHIO Understanding Employer Pickup On-Demand Version What is pickup? Pickup is the term used to describe the process of withholding member contributions on a pretax basis. Rules for pickup The following conditions apply: • The employer must specify that contributions, although designated as member contributions, are being paid by the employer in lieu of the member; • The member must not be given the option of choosing to receive the amounts directly instead of having them paid by the employer to STRS Ohio; and • Pickup plans cannot be retroactive. employer_education@strsoh.org 2

STATE TEACHERS RETIREMENT SYSTEM OF OHIO Understanding Employer Pickup On-Demand Version Three types of pickup 1. Salary reduction pickup 2. Fringe benefit pickup not included in compensation 3. Fringe benefit pickup included in compensation (pickup-on-pickup) Three recognized employee groups K–12 College and Employers University Employers Teachers Teaching Faculty Administrators Administrative Faculty Superintendents Presidents employer_education@strsoh.org 3

STATE TEACHERS RETIREMENT SYSTEM OF OHIO Understanding Employer Pickup On-Demand Version Do all members of a group have to have the same type of pickup plan? No, the type and percentage of pickup can vary within a group as long as the total percentage of all pickup plans is the same for each member within that group. Comparing types of pickup Salary Reduction Fringe Benefit Pickup Not Fringe Benefit Pickup Included in Pickup Included in Compensation Compensation (Pickup-on-Pickup) How does it work? Member’s salary Employer agrees to pay Employer agrees to pay reduced by the member’s pretax member’s pretax contributions amount of member contributions AND considers the payment as contributions and compensation for retirement employer remits purposes pretax Who funds member Employer funds all or Employer funds all or Member contributions? a portion a portion Benefit to member? Reduced gross Further compensates Further compensates employee income for state and employee without without reducing gross income federal tax purposes reducing gross income for tax purposes AND increases for tax purposes income for retirement purposes Groups?* Teachers Administrators Superintendents/Presidents/ Administrators * While any group or individual can have any type of pickup plan, generally districts tend to grant these types of pickup to the identified groups of employees. employer_education@strsoh.org 4

STATE TEACHERS RETIREMENT SYSTEM OF OHIO Understanding Employer Pickup On-Demand Version Comparing types of pickup Salary Reduction Fringe Benefit Pickup Not Fringe Benefit Pickup Included in Pickup Included in Compensation Compensation (Pickup-on-Pickup) How does it work? Member’s salary Employer agrees to pay Employer agrees to pay reduced by the member’s pretax member’s pretax contributions amount of member contributions AND considers the payment as contributions and compensation for retirement employer remits purposes pretax Who funds member Employer funds all or Employer funds all or Member contributions? a portion a portion Benefit to member? Reduced gross Further compensates Further compensates employee income for state and employee without without reducing gross income federal tax purposes reducing gross income for tax purposes AND increases for tax purposes income for retirement purposes Groups?* Teachers Administrators Superintendents/Presidents/ Administrators * While any group or individual can have any type of pickup plan, generally districts tend to grant these types of pickup to the identified groups of employees. Comparing types of pickup Salary Reduction Fringe Benefit Pickup Not Fringe Benefit Pickup Included in Pickup Included in Compensation Compensation (Pickup-on-Pickup) How does it work? Member’s salary Employer agrees to pay Employer agrees to pay reduced by the member’s pretax member’s pretax contributions amount of member contributions AND considers the payment as contributions and compensation for retirement employer remits purposes pretax Employer funds all or Employer funds all or Who funds member Member a portion a portion contributions? Benefit to member? Reduced gross Further compensates Further compensates employee income for state and employee without without reducing gross income federal tax purposes reducing gross income for tax purposes AND increases for tax purposes income for retirement purposes Groups?* Teachers Administrators Superintendents/Presidents/ Administrators * While any group or individual can have any type of pickup plan, generally districts tend to grant these types of pickup to the identified groups of employees. employer_education@strsoh.org 5

STATE TEACHERS RETIREMENT SYSTEM OF OHIO Understanding Employer Pickup On-Demand Version How do I determine which pickup plan(s) my district or university has adopted? If you can’t find the information, please send an email to report@strsoh.org. We can provide current and historical information. Why would a district grant a fringe benefit pickup plan to an employee? Fringe benefit pickup plans, regardless of whether the pickup is included in compensation for retirement purposes, provide a way of further compensating particular employees or groups of employees. employer_education@strsoh.org 6

STATE TEACHERS RETIREMENT SYSTEM OF OHIO Understanding Employer Pickup On-Demand Version Comparing pickup types by the dollar Fringe Benefit Salary Fringe Benefit Pickup Pickup Included in Reduction Not Included in Compensation Pickup Compensation (Pickup-on-Pickup) $50,000 $50,000 $50,000. Base contract amount $7,000. $7,000 $7,000 Member contribution due ($50,000 x 14%) + (14% of $7,000) $43,000 $50,000 $50,000. Taxable state & federal income $50,000 $50,000 $57,000. Compensation for STRS Ohio purposes Comparing pickup types by the dollar Fringe Benefit Salary Fringe Benefit Pickup Pickup Included in Reduction Not Included in Compensation Pickup Compensation (Pickup-on-Pickup) $50,000 $50,000 $50,000. Base contract amount $7,000. $7,000 $7,000 Member contribution due ($50,000 x 14%) + (14% of $7,000) $43,000 $50,000 $50,000. Taxable state & federal income $50,000 $50,000 $57,000. Compensation for STRS Ohio purposes employer_education@strsoh.org 7

STATE TEACHERS RETIREMENT SYSTEM OF OHIO Understanding Employer Pickup On-Demand Version Comparing pickup types by the dollar Fringe Benefit Salary Fringe Benefit Pickup Pickup Included in Reduction Not Included in Compensation Pickup Compensation (Pickup-on-Pickup) $50,000 $50,000 $50,000. Base contract amount $7,000. $7,000 $7,000 Member contribution due ($50,000 x 14%) + (14% of $7,000) $43,000 $50,000 $50,000. Taxable state & federal income $50,000 $50,000 $57,000. Compensation for STRS Ohio purposes Properly calculating pickup-on-pickup • Full 14% pickup-on-pickup • Member contributions (14%) calculated as follows: Base contract amount (taxable state & federal income) $70,000 Member contributions paid by employer (14%) +$9,800 Earnings for STRS Ohio purposes $79,800 Total member contributions due to STRS Ohio $11,172 ($79,800 x 14% paid by employer) employer_education@strsoh.org 8

STATE TEACHERS RETIREMENT SYSTEM OF OHIO Understanding Employer Pickup On-Demand Version Properly calculating pickup-on-pickup • Full 14% pickup-on-pickup • Employer contributions (14%) calculated as follows: $79,800 Earnings for STRS Ohio purposes $11,172 Total employer contributions due to STRS Ohio ($79,800 x 14%) Comparing a pickup example by the dollar Fringe Benefit Salary Fringe Benefit Pickup Included in Reduction Pickup Not Included Compensation Pickup in Compensation (Pickup-on-Pickup) $70,000 $70,000 $70,000 Base contract amount $70,000 $70,000 $79,800 Compensation for STRS Ohio purposes $9,800 $9,800 $11,172 Member contribution due (14%) $9,800 $9,800 $11,172 Employer contribution due (14%) $9,800 $19,600 $22,344 Total contributions due from employer employer_education@strsoh.org 9