## Facts

- Illinois funded its Judges’ Retirement System through a traditional employee-contribution method: amounts were withheld from judges’ salaries and included in current taxable income.
- Federal tax law distinguished employee contributions (taxed currently) from employer contributions (generally not taxed until pension benefits are paid).
- Congress later authorized governmental employers to “pick up” contributions, allowing amounts treated as employee contributions under state law to be treated as employer contributions for federal tax purposes going forward.
- Illinois enacted a post-1981 “pick-up” provision for the Judges’ Retirement System.
- Judge Snyder Howell, an Illinois state judge, paid federal income tax on pre-1981 salary-withheld retirement contributions.
- After the pick-up statute took effect, Howell sought a refund, arguing the later pick-up retroactively converted pre-1981 employee contributions into employer contributions for federal tax purposes.
- The IRS denied the refund, and Howell sued in federal district court for a tax refund.

## Issues

1. Whether Illinois’s post-1981 “pick-up” of judges’ retirement contributions retroactively reclassified pre-1981 salary-withheld contributions as employer contributions for federal income tax purposes, entitling Howell to a refund.
2. Whether federal tax characterization of pension contributions turns on the employer’s designation and treatment at the time the contributions are made.

## Decision

- The Seventh Circuit affirmed judgment for the United States.
- The court held the pick-up mechanism operated prospectively only.
- Pre-1981 contributions, designated and treated as employee contributions when made, remained taxable as such; Howell was not entitled to a refund.

## Legal Principles

- Federal tax treatment of pension contributions depends on how the employer structures and designates the contributions at the time they are made (employee contributions included in current income versus employer contributions taxed upon benefit payout).
- Statutory provisions authorizing favorable tax treatment for governmental “pick-up” arrangements apply prospectively absent clear congressional authorization for retroactive recharacterization.
- Contributions made through salary withholding bear the hallmarks of employee contributions for federal tax purposes; later state action cannot reclassify previously withheld and taxed amounts to undo prior-year tax consequences.

## Conclusion

Illinois’s post-1981 pick-up arrangement changed the federal tax treatment of future retirement contributions but did not retroactively convert pre-1981, salary-withheld employee contributions into employer contributions; the taxes paid on those earlier amounts were properly due and refundable relief was unavailable.


Howell v. United States, 775 F.2d 887 (7th Cir. 1985)