Optional Program for Pre-Tax Contributions - Tax sheltering of members' mandatory retirement contributions to NHRS is an optional feature of NHRS participation for political subdivision employers, such as counties, school districts, towns and other units of local government.  Internal Revenue Code Section 414(h)(2) provides that, if certain conditions are met, retirement contributions designated as employee contributions are treated as employer contributions if the contributions are "picked up" by the employer through a reduction in the employee’s cash salary.  Such contributions, referred to as “pre-tax contributions”, are deducted from the employee's wages and treated as tax-deferred employer contributions for Federal income tax purposes.  In other words, the NHRS member does not pay Federal income tax on the pre-tax contributions until those amounts are distributed to the member by NHRS either through a retirement pension or lump sum payment (Political subdivision employers include cities)

NHRS Law

NHRS law states, in pertinent part:

RSA 100-A:16 METHOD OF FINANCING

I. Member Annuity Savings Fund

(e) With respect to all employees of an employer, such employer may pick up the employee contributions required by this section for all compensation earned after July 1, 1983; and the contributions so picked up shall be treated as employer contributions in determining federal tax treatment under the United States Internal Revenue Code; … these contributions shall not be included as gross income of the employee until such time as they are distributed or made available. The employer shall pay these employee contributions from the same source of funds which is used in paying earnings to the employee. The employer may pick up these contributions by a reduction in the cash salary of the employee. Employee contributions picked up shall be treated for all purposes of this section in the same manner and to the same extent as employee contributions made prior to the date picked up.

Adoption of Tax Shelter Program 

Any NHRS-participating political subdivision employer may adopt the Tax Shelter Program (Program), resulting in its employees’ NHRS mandatory retirement contributions being treated as pre-tax contributions.  Adoption of the Program may only be accomplished by formal action of the governing body of the political subdivision and must be evidenced by a contemporaneous written document, such as minutes of a meeting, a resolution or an ordinance.  The formal action must provide that the contributions on behalf of a specific class(es) of employees of the employer, although designated as employee contributions, will be paid by the employer in lieu of employee contributions.  Further, the formal action by the employer must specify that all NHRS contributing members in the specific class(es) must participate in the Program.  Individual members may not opt into or out of the Program.  NOTE:  The Tax Shelter Program may not be elected retroactively; i.e., contributions related to compensation earned prior to adoption of the Program by the political subdivision’s governing body and acknowledgement by NHRS may not be treated as pre-tax contributions. 

NHRS Procedure to Participate in the Program: If the governing body of a political subdivision has chosen to participate in the Program, a Tax Shelter Election Form For Political Subdivision Employers (NHRS 13) (Election) must be completed and submitted to the NHRS office by the employer, together with a copy of the written document evidencing formal adoption of the Program.  The Election form will be acknowledged by NHRS in the month that the employer’s participation in the Program is scheduled to take effect.  A photocopy of the acknowledged Election form will be returned by NHRS and must be received by the employer’s governing body before the employer may assume that the Election was received by NHRS and is in effect.  If the photocopy is not received by the first of the month when participation in the Program is to begin, the governing body must contact NHRS.  Again, remember that contributions related to compensation earned prior to adoption of the Program by the political subdivision’s governing body and acknowledgement by NHRS may not be treated as pre-tax contributions. 

More than One Classification of NHRS Members: If the employer has more than one classification of NHRS members (Employee, Fire, Police and/or Teacher), the employer may elect the tax shelter program for one or more classifications and not the other(s). However, a separate Election form must be submitted to NHRS for each member classification to which the Program is to apply.  For example, if an employer elects the Program for its Employees, Teachers and Police Officers, three separate Election forms must be completed and submitted to NHRS for acknowledgement.  In the future, if the governing body of the same employer adopts the Program for its Firefighters, a fourth Election form must be filed with NHRS.

No Withdrawal from the Program: At the present time there is no statutory provision permitting a political subdivision which has adopted the Program to withdraw from participation at a later date. 

Tax Advice: The NHRS does not provide tax advice.  A tax advisor or the Internal Revenue Service should be consulted if an employer or member needs more detailed information regarding the taxability of annuities and refunds related to pre-tax contributions.