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401(k) for federal "instrumentality"


Guest Kathleen Meagher
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Guest Kathleen Meagher

I have a client that is a 501©(3) organization established under federal law as a funding agent to receive and administer grants for research on behalf of a federal agency. I think there's a good chance this makes the 501©(3) organization a "goverment instrumentality" for purposes of ERISA and the tax qualification rules. But....

can this organization have a 401(k) plan? My first reaction was no, because it was a governmental plan, but when I read 401(k) more carefully, I found its prohibition on estabishing 401(k) plans extends only to state and local governments and their agencies and instrumentalities. I believe federal employees have a 401(k) plan, but I think that may have been established before the prohibition was adopted. Does anyone have any information or opinions about whether or not my client can establish a new 401(k) plan?

(If so, it looks like this client may be one of the only employers that could have a 401(k), a 403(B) and a rank-and-file 457 plan! But I'm not recommending they do that.)

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Guest CVCalhoun

Actually, I think it is even better than you think. Not only are federal government plans exempt from the prohibition on establishing new 401(k) plans, but they are exempt from the section 457 limitations. At the same time, they are subject to the provisions exempting governmental plans from ERISA. Thus, a federal governmental instrumentality could have a 401(k) plan and a 403(B) plan. And it could have an unfunded deferred compensation plan for all of its employees (not just select management or highly compensated employees) which neither was subject to the $7,500 limit of section 457 nor reduced the contributions which could be made to the other two plans.

This is, by the way, part of a general trend of exempting plans of the federal government from practically all of the rules applicable to other plans. (And far be it from me to suggest that this occurs because everyone who gets to vote on the issue participates in a federal government plan! :) )

One sidelight on this is that the legislation which exempted state and local governmental plans from the nondiscrimination rules did not apply to federal governmental plans. It is unclear whether the IRS will be attempting to enforce the nondiscrimination rules with respect to such plans, however. For an article discussing what effects the nondiscrimination rules would have for governmental plans, you can click here

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