401(a) benefit for public school employee in Texas

[Guest Zaggie]

What section of the IRS code shows the exception that allows a school district to pay an employee (in this case the superintendent) a sum of money into a 401(a) account and not make this available to other employees?

[Carol V. Calhoun]

The first source is Code section 401(a)(5)(G), which reads as follows:

(G) State and local governmental plans.--Paragraphs (3) and (4) shall not apply to a governmental plan (within the meaning of section 414(d)) maintained by a State or local government or political subdivision thereof (or agency or instrumentality thereof).

Code section 401(a)(3) and (4) are the paragraphs that impose the rules that prevent benefits under most nongovernmental plans from discriminating in favor of highly compensated employees.

The second source is Code section 410©(1)(A), which reads as follows:

(1) The provisions of this section (other than paragraph (2) of this subsection) shall not apply to--(A) a governmental plan (within the meaning of section 414(d)), ....

Code section 410 is the section that imposes the rules that prevent coverage under most nongovernmental plans from discriminating in favor of highly compensated employees.

The third source is Code section 401(a)(26)(H), which reads as follows:

(H) Exception for state and local governmental plans.--This paragraph shall not apply to a governmental plan (within the meaning of section 414(d)) maintained by a State or local government or political subdivision thereof (or agency or instrumentality thereof).

Code section 401(a)(26) is the paragraph that imposes the rules that prevent most nongovernmental defined benefit plans from covering less than (i) 50 employees of the employer, or (ii) the greater of--(I) 40 percent of all employees of the employer, or (II) 2 employees (or if there is only 1 employee, such employee).

Together, these three sources permit a state or local government plan to cover only one employee, even if that employee is a highly compensated employee, without providing comparable benefits to other employees under any other plan, so long as this is permissible under applicable state and local law.

[mbozek]

Z are you asking (1) can a district give cash to an employee which can be contributed by the employee to a plan (2) can the district allow the supt to make employee contributions to the plan but not any other employees or (3) ican the district pay the employee's contribution directly to the plan ?

[Guest Zaggie]

mbozek, this is a qualified contribution to the super only into a 401(a) plan. Carol, if you also are receiving this reply I need to know if a plan document is required or just an agreement between the school district and the super. The super is 53 and will retire in 3 years and begin taking his Teachers Retirement System pension at that time. Will there be any IRS penalties if he takes a distribution at that time? Thanks for your help.

Gary Haack

[Carol V. Calhoun]

A written plan document is required. See Treas. Reg. § 1.401-1(a)(2), which states as follows:

A qualified pension, profit-sharing, or stock bonus plan is a definite written program ...

Thus, a qualified plan must always be written.

If the superintendent receives the money after having both (a) attained age 55, and (B) terminated employment, it will be subject to income taxes, but not to the additional tax on early distributions. IRC section 72(t)(2)(A)(v).