Employer Option for Pre-tax Contributions
NHRS-participating political subdivision employers (cities, counties, school districts, towns, and other units of local government) have the option of deducting NHRS members’ mandatory retirement contributions on a pre-tax basis. Tax sheltering contributions, by deducting them on a pre-tax basis, allows NHRS members to delay paying Federal Income Tax on contributions until the funds are distributed to the member through an NHRS pension or lump sum payment.
Internal Revenue Code Requirements
Tax sheltering of members' mandatory NHRS contributions is allowed per Internal Revenue Code (IRC) Section 414(h)(2). That section of the IRC provides that, if certain conditions are met, retirement contributions designated as employee contributions are treated as employer contributions, provided that the employer is submitting the employee contributions in exchange for the employee taking a reduction in pay equal to the amount of the contributions paid by the employer. These 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.
Procedure to Participate in Tax Sheltering Program (Program)
The governing body of any NHRS-participating political subdivision employer may elect to participate in the Program. To participate, formal action by the governing body must be evidenced in a written document, such as minutes of a meeting, a resolution, or an ordinance. The document must provide that the contributions on behalf of all member classifications (Employee, Teacher, Police, and Fire), although designated as employee contributions, will be treated as if paid by the employer. The Tax Sheltering Program must apply to all member classifications working for the employer.
If the governing body of a political subdivision has chosen to participate in the Program, a single Tax Shelter Election Form for Political Subdivision Employers (NHRS 13) must be completed and submitted to NHRS. Once the employer has elected to participate in the Program, any future new member classifications will automatically be covered by the tax-sheltering election. A copy of the written document evidencing formal election of the Program must accompany the Election Form.
NHRS will acknowledge the Election Form prior to the effective date of the employer’s participation in the Program. A copy of the acknowledged Election Form will be returned to the employer by NHRS; the employer should not assume that the election is in effect until this copy is received from NHRS. If the copy is not received by the first of the month when participation in the Program is scheduled to take effect, NHRS must be contacted.
The Program may not be applied retroactively. Contributions made prior to the employer’s election of the Program, and prior to the acknowledgement by NHRS, will not be treated as pre-tax contributions.
No Withdrawal from the Program
At the present time, there is no statutory provision permitting a political subdivision employer who has elected to participate in the Program to withdraw at a later date.
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.
NHRS-participating political subdivision employers with additional questions about this Program should contact an NHRS representative at (603) 410-3681.