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Spinoff of govt. plan. Who is sponsor?


david rigby
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Govt. ER (a unit of a county government) sponsors a traditional DB plan. County is "selliing" the function to a non-profit organization (a university). The county will retain the plan. EEs will be employed by a division of the non-profit. EEs will cease benefit service accruals but will get the benefit of future salary increases while employed with this division (but not if they transfer to any other division of the non-profit). EEs will continue to earn service for vesting and eligibility under the same rules, while employed by that division.

1. Is this going to be a termination of employment? If so, EEs may be able to continue working and receive a benefit. This is especially a problem due to a very generous early retirement provision. EEs are already talking about it. If so, is there any way to avoid this problem? I don't think that we can amend the definition of "Employer" to include the non-profit because that would "muck up" the "governmental" status of the plan.

2. Since this is plan is not subject to IRC 411, there should be no problem with a "partial termination". Is that correct?

3. What else am I forgetting?

Thanks.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Guest CVCalhoun

  1. Under federal rules, you could probably simply define the transfer to the new organization as not being a distributable event. Nothing in the Internal Revenue Code ("Code") requires that you provide for distributions upon termination of employment. And because this is a governmental plan, employees have no vested right under federal law to any particular timing and/or form of distribution. But see 3, below.
  2. The "partial termination" rules are an IRS interpretation of Code section 401(a)(7). Section 411(e)(2) provides that governmental plans are not subject to current section 411, but must comply with pre-ERISA section 401(a)(7). Even before ERISA, full vesting was required under section 401(a)(7) in the event of plan termination. Thus, you may well need to deal with the partial termination rules. (For more on which Code qualification rules do and do not apply to governmental plans, along with citations, you can click here.)
  3. The major issue I would see in this transaction is that in approximately two-thirds of the states, courts have held that routine state constitutional provisions prohibiting the impairment of contracts preclude a governmental plan from cutting back on even future benefit accruals to existing employees. This is actually a much stronger vesting rule than Code section 411, which merely prohibits cutting back on existing accruals. Because governmental plans are not subject to ERISA preemption of state law, it is important to consider state as well as federal law issues.
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Guest Ralph Amadio

In the transfer from one governmental organization to another, utilizing a "not for profit", certain issues need to be clarified before assuming anything.

I would check with legal counsel as to the relationship with the university (if it is a public University), to determine whether the university may simply have a close enough relationship to take over the plan as a governmental plan of its new instrumentality, as they have been permissive in the past with issues such as 403(B). A private letter ruling might be helpful here. Good luck.

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Sorry I was not more specific.

With respect to Ralph's comment, the university is not a public one.

With respect to Carol's comment, the plan is not being altered (except to recognize future compensation with the university). Rather, the employees will no longer be employed by the county so their accrual service will automatically be frozen. Carol, does this take care of the problem in your point (3)?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Guest CVCalhoun

Well, the issues when a governmental employer is converted to nongovernmental or vice versa are even less clear than the ones which occur in the context of an ongoing governmental plan. Don't know whether a court would take the position that a transfer of an employee to a new employer, but in an identical position with an employer which was carrying out the same functions as the old one, would avoid issue 3--and I doubt that there is any authority on that one.

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