School Districts Must Document Employee Pre-Tax Contributions to MPSERS
School Advisor, 2006 Issue No. 3 

Background

Most school district employees participate in the Michigan Public School Employee Retirement System (MPSERS). These days, most MPSERS participants are required to make employee pre-tax member investment plan (MIP) contributions. The IRS has determined that some districts are unable to show that they have formally adopted the required documentation that will allow employee retirement plan contributions to be paid on a pre-tax basis. In order to avoid having to penalize districts and employees, the IRS has issued Revenue Ruling 2006-43 that it gives school districts time to fulfill the formal documentation requirement.

What Is a Pre-Tax “Pick Up” Contribution?

Unique to governmental entities, Internal Revenue Code Section 414(h) allows governmental entities, including public school districts, to “pick up” required employee contributions. The pick up essentially treats the contributions as employer contributions for income tax purposes, making these contributions pre-tax (although contributions are generally subject to FICA). However, in order to allow contributions to be picked up, school districts, through board resolution or similar action, must document the treatment using language and wording that the IRS expects to be used. Since the IRS recognizes confusion may exist, to the extent a school district has consistently treated contributions as pre-tax, the district has until January 1, 2009 to properly document the pick up contribution, which will then be given retroactive applicability.

Generally, three types of employee pre-tax pick up contributions have been identified for public school districts:

• MIP
• TDP (Tax Deferred Payment), which allows for the purchase of service credit on a payroll deduction basis
• MIP buy-back to enter the member investment program

Required pre-tax pick up documentation must cover each of these three contribution types.

What to Do and When to Do It

As a practical matter, most districts have probably appropriately adopted and documented the pick up elections. However, now that the IRS has brought the issue to the fore front, should your district be examined, the IRS is not likely to be sympathetic if you cannot locate proper documentation. Inadequate documentation could lead to the IRS treating contributions as after-tax, resulting in additional taxable income to employees and reporting penalties to school districts.

• We encourage districts to locate their pick up documentation and have it reviewed for compliance with IRS guidance. Your district may have three separate resolutions or other documentation formats, one for each of the three contribution types. The MIP resolution would likely have been adopted in 1986, in advance of the January 1, 1987 effective date. The TDP and repayment to reinstate cancelled service credit resolution would likely have been adopted in 1997 or early 1998, in advance of the July 1, 1998 effective date. The MIP buy back would likely have been adopted in mid to late 1999 in advance of the 1999 window to enter the MIP program.
• If documentation can not be found, the state of Michigan Office of Retirement Services (ORS) has indicated that they may be able to provide districts with a copy of their documentation. Please review your files before calling. ORS is currently undertaking an important project to electronically scan old district files, which is expected to be completed by March 2007. Electronically scanned files will be much easier to access. Therefore, ORS requests that you wait until March of 2007 to request document copies.