Employers have been allowed to defer member retirement contributions from federal income tax since September 1, 1984 (See RCW 41.04.440-455). The taxes can be deferred because participating employers pay (or "pick up") the member's contributions to the retirement system and then recover the amount by deducting it from the member's gross pay.
Mandatory versus Optional Participation
Deferral of federal income taxes on member contributions is mandatory for some employers, optional for others. The following employers are required by state law to participate in tax deferral:
- State agencies
- School districts
- Community and technical colleges
- Educational service districts
- The Office of the Administrator for the Courts
All other employers may choose to participate in the deferral of taxes on member contributions. Though participation is optional, you must notify DRS of your intent to begin deferral. For information about the required notification to DRS, see Establishing Nontaxed Status below.
Deferring federal income taxes on member contributions entails additional financial responsibility for employers. Because contributions are based on the reported compensation, the employer must "pick up" the required member and employer contributions and pay this amount to DRS. If retroactive contributions are due, the employer is responsible for forwarding the contributions on behalf of the employee and having the employee reimburse the employer for the picked up contributions.
Establishing Nontaxed Status
If you are an employer for whom tax deferral is optional and you decide to participate, you must comply with the following requirements:
- You must treat contributions the same way for all members of a specific retirement system-deducting contributions from gross income before calculating the federal income tax liability. (An individual member may not choose to make required contributions on after-tax dollars.)
- If you have members enrolled in several retirement systems, you may treat contributions differently for each system. If you employ PERS members and LEOFF members, the PERS members may participate while the LEOFF members may not, or vice versa.
- You must notify DRS in writing of your intent to participate. The letter should reach DRS 45 days before the first day of the calendar month in which you wish to implement tax-deferred contributions. Your letter should include:
- the name and reporting group number of all systems affected;
- the name of the person in your organization whom DRS should contact if more information is necessary;
- the month and year that the deferred status is to begin; and
- the signature of an authorized representative of your agency or organization.
Mail your letter of notification to:
Employer Support Services
Department of Retirement Systems
P.O. Box 48380
Olympia, WA 98504-8380
DRS will send you a letter of confirmation and instructions for transmittal reporting.
Before implementation, as a courtesy to your members, you should provide them with a complete explanation of the effects of the change. DRS will enclose explanatory material with your letter of confirmation. If you need more information, DRS suggests you contact a tax advisor.
Your payroll department should be notified the taxes will be deferred on member retirement contributions; i.e., contributions will be deducted from gross pay before federal income taxes are calculated. You should ensure the information is properly reported to the Internal Revenue Service (IRS) and W-2 forms reflect the tax-deferred status.
Once you have started tax-deferred contributions, you may choose to end your tax-deferred status at any time. You may begin or end only once in a 12-month period, and you must provide at least 45 days notice to DRS prior to the change in status.