4.16 Section 414(h) Tax Deferral of IMRF Member Contributions

IMRF member contributions Members who participate in the Regular Plan contribute 4.50% of salary toward a future IMRF pension: 3.75% for the member and 0.75% for a surviving spouse pension. Members who participate in the SLEP plan contribute 7.50% of salary (on and after June 1, 2006) toward a future SLEP pension: 6.75% for the member and 0.75% for a surviving spouse pension. Before June 1, 2006, SLEP members contributed 6.50 percent of salary; 5.75 percent for the member and 0.75 percent for a surviving spouse pension. Members in the ECO plan contribute 7.50 of salary toward a future ECO pension: 6.75% for the member and 0.75% for a surviving spouse pension. are not subject to federal income tax until they are returned to the member or to the member’s beneficiary(ies) as a separation refund A member can receive a separation refund-a return of all his/her member contributions without interest-under certain conditions. If a member takes a refund, the member forfeits all of the service credit he/she earned., pension Also known as an annuity. An IMRF pension is paid as long as the member lives. It is increased by 3% of the original amount each year. A member must have at least eight years of service credit and be age 55 to apply for an IMRF pension under the Regular and ECO plans. A member must be age 50 and have at least 20 years of SLEP service credit to apply for a SLEP pension., or death benefit. This postponement of federal income tax is achieved by designating the 4.50% Regular (7.50% SLEP on and after June 1, 2006, 7.50% ECO) member contributions as ”employer paid” contributions for the purpose of the Internal Revenue Code Section 414(h) Under Section 414(h) of the Internal Revenue Code, members make their contributions to IMRF on a tax-deferred basis. The member does not pay either federal or Illinois income tax on the money used to pay the contributions. A member’s contributions will be subject to federal income tax, but not to Illinois income tax, when he or she receives them as a refund or as a pension or when the member’s beneficiary(ies) receives them as a death benefit. This tax treatment is provided under the 414(h) tax deferral plan effective July 1, 1984, for all IMRF employers and adopted earlier by some employers. If a member made contributions before his or her employer adopted a 414(h) plan, those contributions were taxed at the time the member made them. They are not taxable when the member receives them as a refund or pension or when the member’s beneficiary(ies) receives them as a death benefit..

The terminology of this tax treatment often leads to confusion. Because the Internal Revenue Code refers to this tax deferral as ”employer pickup,” some individuals assume that the employer A unit of government that joins IMRF. is paying the contributions. This assumption is incorrect. The contributions are not paid by the employer but are deducted from the member’s gross salary. They are only designated ”employer pickup” for federal income tax deferral.

Current Illinois income tax law follows the federal rules regarding the 414(h) tax deferral. In addition, benefits paid by IMRF are not subject to Illinois state income tax. Therefore, the 4.50% Regular (7.50% SLEP on and after June 1, 2006,  7.50% ECO) member contribution is exempt from Illinois income tax because no tax is required when the contributions are made or when the benefit is paid.

For more information, see the topics below:

1. Income Tax Withholding Under the 414(h) Tax Deferral Plan

2. W-2 Reporting Under the 414(h) Tax Deferral Plan

3. IMRF and Social Security/Medicare Reporting Under the 414(h) Tax Deferral Plan