Deferral of Plan Contributions: Federal
Contributions to the ORP are tax-deferred. This means that participants do not pay current income tax on the contributions when they are remitted to the plan and credited to their account.
The contributions and their related investment earnings are subject to regular income tax when drawn from the plan and paid directly to the participant. Hence, the contributions and investment earnings that grow in a participant’s account are “tax-deferred”. The income tax is deferred to a later date.
The Employer “Pick-Up”: Employee Plan Contributions are tax-deferred under the “Employer Pick-Up” which is described in Internal Revenue Code Section 414(h)(2). This means that, for the IRS’ purposes, the Employee contribution is “picked-up” by the participant’s employer; essentially making it an “Employer” plan contribution.
In spite of the confusion this can cause, this is the only approach that can be used to make the Employee Contribution tax-deferred in a plan like the ORP, which is sponsored by a government employer and operates under Internal Revenue Code Section 401(a).