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Staff Report PREPARED BY: LISA VELASCO Human Resources Director Reviewed by: Town Manager, Assistant Town Manager, Town Attorney, and Finance Director 110 E. Main Street Los Gatos, CA 95030 ● 408-354-6832 www.losgatosca.gov TOWN OF LOS GATOS COUNCIL AGENDA REPORT MEETING DATE: 08/15/2017 ITEM NO: 5 DATE: AUGUST 7, 2017 TO: MAYOR AND TOWN COUNCIL FROM: LAUREL PREVETTI, TOWN MANAGER SUBJECT: APPROVE A CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM (CALPERS) RESOLUTION TO TAX DEFER MEMBER PAID CONTRIBUTIONS – IRC 414(H)(2) EMPLOYER PICK-UP FOR TOWN OF LOS GATOS ELECTED OFFICIALS RECOMMENDATION: Approve a California Public Employees’ Retirement System (CalPERS) resolution to tax defer member paid contributions – IRC 414(h)(2) employer pick-up for Town of Los Gatos Elected Officials. BACKGROUND: The Town of Los Gatos currently pays for the employee pension contribution, as well as the employer contribution, for Town Council Members. Under California Public Employees’ Retirement Law, employers may pay some or all of the required employee pension contributions for identified employee groups. This is known as employer paid member contributions (EPMC). The Pension Reform Act of 2013 (PEPRA) created a two-tier membership within CalPERS resulting in Classic members and PEPRA members. Classic members were enrolled and actively contributing to CalPERS before January 1, 2013 and PEPRA members, in general, joined a CalPERS retirement plan for the first time on or after January 1, 2013. Pension reform prohibits employer paid member contributions (EPMC) for PEPRA members employed by public agencies unless an employer’s existing Memorandum of Understanding PAGE 2 OF 3 SUBJECT: APPROVE A RESOLUTION TO TAX DEFER MEMBER PAID CONTRIBUTIONS – IRC 414(H)(2) EMPLOYER PICK-UP FOR TOWN OF LOS GATOS ELECTED OFFICIALS DATE: AUGUST 15, 2017 S:\COUNCIL REPORTS\2017\08-15-17\CalPERS\Staff Report-CalPERS Resolution FINAL.docx 8/10/2017 12:55 PM LV BACKGROUND (Cont’d): (MOU) would be impaired by this restriction. Town Council Members are categorized as Elected Officials and therefore are not members of a bargaining group covered by an MOU. CalPERS recently enhanced its membership reporting database and identified two Town of Los Gatos Council Members as PEPRA members. After consultation with CalPERS, a final determination was made that the two Council Members must pay the pension contributions through payroll deductions. DISCUSSION: The provisions of PEPRA related to EPMC, and particularly to Elected Officials, has been an unclear provision of the Act since it requires MOU impairment but Elected Officials are not covered by an MOU. Although PEPRA took effect in 2013, CalPERS just recently enhanced the functionality of its myCalPERS database to identify discrepancies related to membership and corresponding benefits. The Town was recently advised by CalPERS that the two Council Members in the PEPRA category should have been paying the employee pension contribution of 6.75% from Council stipend since their optional election of CalPERS membership. Both Council Members have been notified and will reimburse the Town for all employee contributions paid on their behalf. The total amount to be repaid is $511.32. Beginning with the pay date of August 18, 2017, the employee contribution of 6.75% will be deducted from each Council Member’s stipend and paid directly to CalPERS. A benefit that employers can provide to their employees at no cost to the employer or employee is Internal Revenue Code (IRC) section 414(h)(2), commonly referred to as Employer Pick-Up. Under this provision, employees pay their own member contributions from reportable compensation and defer state and federal income taxes on the member contributions. This is a benefit that is provided to all other Town employees through resolutions that were approved by Council and filed with CalPERS. The CalPERS template resolution (Attachment 1), if approved, would allow Elected Officials under PEPRA to contribute 6.75% of their semi-monthly stipend to CalPERS on a pre-tax basis. The relevant Town of Los Gatos information has been inserted within the grey fields of the template. CalPERS template documents do not allow for editing or the creation of a clean document without highlights and instructions. PAGE 3 OF 3 SUBJECT: APPROVE A RESOLUTION TO TAX DEFER MEMBER PAID CONTRIBUTIONS – IRC 414(H)(2) EMPLOYER PICK-UP FOR TOWN OF LOS GATOS ELECTED OFFICIALS DATE: AUGUST 15, 2017 S:\COUNCIL REPORTS\2017\08-15-17\CalPERS\Staff Report-CalPERS Resolution FINAL.docx 8/10/2017 12:55 PM LV CONCLUSION: As a result of pension reform that requires PEPRA members to pay the employee pension contribution, staff is requesting Council approval of a CalPERS resolution (Attachment 1) to permit future payroll deduction payments on a pre -tax basis. COORDINATION: This report was coordinated with the Finance Department. FISCAL IMPACT: Elimination of EPMC for PEPRA Council Members results in an annual cost savings to the Town of $121.50 per Council Member. If the resolution is approved, the Town will recognize federal and state tax savings for the portion of the stipend that is paid by Elected Officials to CalPERS on a pre-tax basis. ENVIRONMENTAL ASSESSMENT: This is not a project defined under CEQA, and no further action is required. Attachments: 1. Resolution to Tax Defer Member Paid Contributions – IRC 414(h)(2) Employer Pick-Up