R-320 - 12/08/1981 - IMRF - Resolutions Supporting Documents t444A 4°rn3ao
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r ILLINOIS MUNICIPAL RETI ENT qua ®
100 SOUTH WACKER DRIVE • CHICAGO,ILLINOIS Tel t3121
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Board of Trustees
Alban J.Wanks.President • JVMS L MJtiNhorn,Yo•Presklest v J. F. ItF.Srcn • a Rabat J.C1191••• e NMre4n J.1-41P10910 I•Gerald J.$tMs Jr. s KiRrsth L Taylor
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GENERAL MIEM&IRANDUM �
NUMBER: 232 i p
DATE: November 3, 1981
TO: Authorized Agents of Employee IMRF Contributions �!
SUBJECT: Employer Payment ("Pickup")
SUPERSEDING: General Memorandum No. 229, August 24, 1981
This memorandum (superseding General Memorandum No. 229) explains the application of
Thi lament,
Bill 3635, (Public Act 81-1536, Ill . Revised Stat191979, 1980tCp�lativetSupplement, j
House 8 Par. approved December Ch. 108 1/2, ar. 7-173.2) which was slpPar may elect to pay on behalf of the employee the
on or' after.January 1, 1982, any employer
1/2% employee contributions to IMRF and designate as employer contributions for t the
4r p
anyposes Section 414(h)this Uelec States Internal h el shall have Illinois s
employer who mattes this election shall continue lM�to withhold Federal and Illinois income
taxes n he 4 1/2% IMRF contributions unti one have btas ncan of
Internal Rev'n rucint that
ee as these contribut �ut shor ma e ava na' e to m. , as
e . ier un suc a ru n at- � � '
o er o is sta em. o ees rece v
L ewer
I. IRS RULING
i Revenue Service ruling applies only. o IMRF members who are required to
The Internal ut are not
i n IMRF. It does not apply to members who had the o tioon�.,
participate ea Tted officials and tit hos itai em lovees_u It plan
required, to join IMRF, i.e. paid picked-up) P
that ed part of the staff employee eestareuincludab includable employer srincome of the employees
when made b IMRF will be axe Y
when made but will be taxable when distributed as retirement pension or lump sum pay-
ments.
It is our understanding that the Internal Reemployee nue Service has serious reservations
whether or not an employer paid (picked p) optional
em to ees qualify for tax deferment under Section 414(hIn frthe InternainRevenuenCode.
Therefore, a favorable ruling may not be fS
respect to optional members,
it would be necessary for an IMRF employer which has
optional members to request such a ruling. The IMRF staff would be pleased to assist
in preparation of the request. !
II. GENERAL EFFECT OF EMPLOYER PAYMENT P LAN TO QUALIFIED EMPLOYEES �!
The effect the em loyer paid (pickup) plan will be to increas Iheoemployee members'
current net of p t (after tax) wages by deferring payment Federal ent of the
4 1/2% IMRF employee contributions until such imeasrthese contributions areipaido to
the employees in the form of a pension separation
the employees' beneficiaries. The contributions will be exempt from Illinois Income
Tax and under current law will not be taxed when paid in the form of pensionoyeen'�.
separation refunds or death benefits.
It should be emphasized that the empl
IMRF benefits and the amount of employers' tributions to IMRF will not be cha g
-Nor-
a .
III. HOW THE EMPLOYER PAT PLAN IS APPLIED TO MANDATORMBERS
Under the plan the employer no longer pays the employees gross wages and then
deducts 4 1/2% for the IMRF contributions, but rather pays the employee an
amount equal to his wages minus the 4 1/2% deduction, and deposits the 4 1/2%
directly with IMRF. House Bill 3635 requires that the plan:
A. Must apply to all of IMRF members of an employer, i.e. all of the employees
reported to IMRF by that employer.
B. Must apply to the en tires 4 1/2% IMRF employee contribution.
C. Must begin for a full month; it cannot begin with only a part of a month's
payroll.
D. Applies only to regular IMLF contributions, not additional voluntary
contributions.
The following example illustrates haw the employer payment (pickup) increases the
employees' take home pad made on the present employee salary without cost to the
employer..
Example of Comparative Effect of Employer "Pickup Plan"
Married Employee (with 2 children) Earning $1,000/mo.
(Using Current Tax Tables and Precentage Method)
NOW
(Without kup Plan") With "Pickup Plan"
Earnings Amount reported to IMRF $1,000.00 $1,000.00
Gross Income (for income tax purposes) 1 ,000.00 955.00
65.91 59.04
Federal Withholding 65.91 15.54
State Withholding 1 ,000.00 1,000.00
Social Security Wages 66.50 66.50
Social Security Withholding 45.00 "Picked-u by employer
Net Contribution 3�-B�! 3. 2
Net
Increase to employee $ 8.00
You will note that the employer paid (pickup) plan does not:
1 . Require any additional total payment by the employer.
2. Does not represent a 4 1/2% increase to employees.
3. Does not change the earnings reported to IMRF.
Iv. HOW THE EMPLOYER PAYMENT PLAN IS APPLIED TO OPTIONAL MEMBERS (ELECTED OFFICIALS
AND CITY HOSPITAL EMPLOYEES)
If an employer with optional members adopts the employer payment (pickup) plan,
Federal and Illinois income tax withholding must be continued on their 4 1/2%
employee contributions for optional members. This withholding must continue
p
until one
IMRF employer obtains a ruling that the plan qualifies for tax
deferment for optional members under Section 414(h) of the Internal Revenue Cod .
rules that optional members cannot qualify, then they will not be covered
If s
under pickup plan. If IRS rules at a later date that the optional members
do qualify for tax deferment under Section 414(h), then withholding will no longer
be required on the 4 1/2% contributions, and on the W-2 issued for the year the,
taxable wages should be reduced y 4 1/2% c ibutions picked up so the
employee can claim any over-withholding on the 1�t 040 tax return.
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. t iNg ILLINOIS MUNICIPAL RETIREMENT FUND !1
100 SOUTH 9M/4CKER WIVE « CHICAGO. ILLINOIS 80®Oi i
GENERAL. MEMORANDUM NUMBER: 232
V. EMPLOYER FUNDING
not rmitted to use h as a
The
employers electing this plan are not contr but ons, ut must pay �� of the ,I
revenue source. for these employer !e
same fund as employees' compensation is paid.
VI. SOCIAL SECURITY
d by designating the employee contributions as 4 lo2erc;mid ias
pf vid dlin t s gts Y
provided in the. .suggested reso�l�alo5e�uri�Y�a9es this toeaSecu elthe
Security aoa�peou
butions will. be included as S
base. If you adopt the plan in aft,�eother l/2��emploYee will
contribations.toln order to
as to Social Security treatment o
be advised of the treatment under any ofthertmethodcitlwoouldrieyneecessaryrtooprepare j
a request for ruling and submit it to
VII. HOW TO I MPL EMENT PLAN
An employer wishing to implement the employer payment of employee contributions should
take the following action:
1. The governing body should adopt a resolution implementing the plan.
The resolution should specify the month the plan begins (not before
January 1, 1982). We suggest you use the form enclosed.
2. The resolution should be adopted at least 60 days priorctoothehe
effective date of the plan so IMRF can have proper
adoption.
3. IMRF must be notified at least 45 days prior to the effective date so
that necessary reporting changes can be implemented. The notice shall
include a certified copy of the resolution adopting the plan.
VIII. PAYROLL AND REPORTING PROCEDURES y
Upon notification that an employer has adopted the employer general, plan, IMRF l, the payroll
ay
will issue instructions in regard to IMRF reporting.
records and procedures will require:
A. Mandatory Members
The payroll records must reflect .
1 . Amount subject to Federal and Illinois income tax. ij
2. Amount of Earnings reported to IMRF.
3. Amount of Social Security (FICA) wages.
The Social Security ( )
FICA wages up to the wage base will be the same as Item I
2 if you use the suggested form of resolution.
.3®
‘Over-
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B. Optional Members
Employers must continue withholding Federal and Illinois income taxes on the
optional 4 1/2% IMRF contributions until one IMRF employer shall have obtained ;
a favorable income tax ruling in regard to these members.
Employers with both mandatory fordeacl�it�1 are! identify them separately on institute
different payroll procedures type
reports to IMRF.
It is important that employers recognize that proper accounting controls must be
established so that the correct amount of earnings will be reported to IMRF and
proper income tax withholdings made. Adoption of the plan will place additional
administrative tasks upon the payroll department. An employer should be sure
that its payroll department and/or data processing department or service bureau
are prepared before adopting the plan.
VIIII. ADVANTAGES AND DISADVANTAGES
In general, career employees who retire at or near age 65 and do not take another
job after retirement can be expected to pay less tax under the employer paid (pickup)
plan. Presumably they will be in a lower tax bracket after retirement because of
reduced income and additional personal exemptions at age 65 and thereafter. However,
the actual tax advantage is difficult to estimate since other income, future tax
changes, inflation, spouse's income, etc. may all affect the tax liability.
Some employees will not benefit from the plan. Those employees working a few years
and leaving to go to another job may pay more tax in the year they receive their
separation refund because the tax on several years contributions would be payable
in one year. A low paid employee with many dependents may presently be in a lower;
tax bracket now than he will be upon retirement with no dependents. Employees dra:-
F pension before age 65 and taking another job may also pay more tax. The
Ong an IMR p How-
ever, now is normally tax free until recovery of the employee contributionse
ever, under the employer paid plan, the pension would be taxable earlier and the
employee may be in a higher tax bracket with the pension and other employment incoMe
combined than when working under IMRF.
Currently, if the employee dies before retirement, the employee contributions
returned as a part of death benefit are not subject to Federal Income Tax.
Under the paid plan these contributions would be subject to tax and the
beneficiarys tax bracket as compared to that of the employee will determine if
the tax liability is lesser or greater.
Because the tax advantage of the employer paid (pickup) plan varies depending
upon the present and future circumstances Of a particular employee, IMRF cannot
advise you whether your adoption of the plan will be of benefit to a particular
employee or your employees generally. We urge you and your employees to consider
the plan carefully before adopting it. Employees should be advised that while not reduce
the pickup as�income tax apliabi liabilities, depending upon the�irnpersonalacircumstances
their ultimate
and possible future changes in tax laws.
X. INCOME TAX INFORMATION
We have prepared a detailed memorandum setting forth the Federal and Illinois Income
Tax treatment which is available upon request. If you employ residents of Iowa,
Indiana, Kentucky or Wisconsin who are not subject to Illinois Income Tax, you
should contact taxing authorities in the State of residence to determine the
applicability of their income tax laws to an employer paid (pickup) plan.
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MUNICIPAL ar -*,DINT PUN D !' •
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Copies of the IRS riling received hy Iti ' are available upon rest.
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pl+ewrse esi first the INS picky ► pl try i dii�i'ere i tb�
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Reti .x..•` i e t pickup of 0elY a portion of the 4 1/ % core irsns.
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1(,::,,,VILLAGE OF AK BROOK
1200 OAK BROOK ROAD
OAK BROOK, ILLINOIS
e54-2220 j
November 23, 1981 i'
MEMO TO: President and Board of Trustees
1I
5t$JBCT: Employer Payment (Pickup) Of Employee EMU Contribution i�
RICO) 1D*TION That the Village Board pass and approve the 1
Resolution which is attached for the employer
paid (pick up) employee contribution.
iii
The attached General Memorandum from the Illinois Municipal Retirement Fund clearly
describes the modification under House Bill 3635 which was approved December 19, i
i
1980.
This Bill provided that any time after January 1, 1982 an employer may elect to
pay,on behalf of the employee the 4-1/21 employee contribution to INRF and desig-
:sate the a as employer contributions for the purpose of Section 414(h) of the it
United States Internal Revenue Code.
This Bill provided that Federal and State income tax should continue to be withheld
favorable was received from I*F as an employer of
on that t until a �avo�t
its staff employees received the ruling dated October 14, 1981. This will permit
the :employee a contribution to the IMF to be treated as deferred income and elimin-
ate the State and Federal tax payment on that portion of the employee income which
is being set aside under the mandatory State statutes for retirement.
Section 3 on the second gage
of the memorandum dated November 3, 1981 gives a clear 1I
demonstration of the impact of this change and indicates the increase in the employee
take-hie pay which represents approximately 1E. This percentage will vary depending
upon the status of the employee and the tax tables and percentages withheld. It
will not increase the cost to the Village of Oak Brook other than modifications to
our payroll reporting system.
I have reviewed this matter with Trustee Listecki who has indicated that the matter
be placed on the Board agenda for Board action at the December 8, 198L Board
Ming.
ctf a tted,
, ‘ Ili 1k
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VIII ° Bsn
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411 411 .
VILLA= OF OAK WOK X -3- 8, 1981
g. ION IZ/NG TEE VILLAGE OF OAK BROOK TO PICKUP
'CONTRIBUTIONS RE /BBD IT III =INNS PENSION CODE MATING TO TIM ILLINOIS
MUNICIPALRETI
Trustee Lieteckt moved - *acceded by Trustee Mato ..
To approve Resolution R-320 as promoted and waive the full reading thereof.
Roll call vote: Ayes; Trustees trrns, Listecki, Philip, Rush, Watson and Nays: None So ordered.
President Cars absest.
I. Camcellatioa of ar lhaetiea
Ordinance 0-260, approved February 26, 1980, established the second. third amid
fourth Itemisy of each moth as the official Ming dates.
Trustee Philip moved - samoded by Trustee Listecki ...
To establish the earned and fourth of each noeth as the official
meeting dates sad that the Village Attor be 'authorised to prepare the
required ordinal/co.
Voice vote.: Ayes: Trustees Cosgrove, Uri*,
Lietecki, Philip, and Matson.
Bays: Trustee Rush
Motion carried. So ordered.
IV. FINANCIAL
A. Iasvestmsat
Trustee lush moved - *acceded by Trustee Listecki ...
To approve sad ratify the folloariag /sweetmeat from the Mater Fond:
One federally secured certificate of deposit in the aeoumt of $291,207.81 to
mature at Freedom Federal and Loam on May 31, 1982 at 11.752 (182 days).
Roll call vote: Ayes: Trustees Lois, Listecki, Philip, Rush, Matson and Canagreve.
Nuys Nose So ordered.
President Coarse absent.
Trustee Rush moved - secomded by Trustee Philip ...
To approve and ratify the following investment from the Sports Core Bond Fond
(Bond & Interest Account):
One federally secured certificate deposit 31, 1982 at $25,249.77
77 to
mature at Freedom Federal Savings and Loan n
Roll call vote: Ayes: Trusstees Uric, Listecki, Philip, h,So ordered. Compere.
Mays: None
President Cerro absent.
E. Treasurer's Report
Trustee Bush moved - seconded by Trustee Philip .,.
To approve the Treasurer's Cash and Investseat Report for the month of November,
1981 as presented.
VILLAGE OF OAK BROOK MM US -3- December 8, 1981
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VILLAGE OF OAK BROOK
1200 OAR BROOK ROAD
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OAK BROOK. ILLINOIS
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