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When privately-sposored qualified plans become governmental . . .


Übernerd

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Governmental plans are exempt from various ERISA and IRC vesting and funding rules. But what if a plan starts out private, then becomes governmental--to what extent do the ERISA and IRC vesting and funding rules "carry over"? E.g., assume that a privately-sponsored qualified pension plan neither provided § 203(a)(3)(B) service notices nor the alternative actuarial increases when participants beyond normal retirement age continued working. Then a governmental entity obtains the private sponsor and restates the plan as a qualified governmental plan.

If the plan had remained a private plan, retiring participants would be entitled to the actuarially-increased benefit (because of the failure to provide notices); but, per § 411(e), a governmental plan is exempt from the 411 rules. Does the fact that the participant accrued most of his benefit under a private plan impose any requirements on the governmental plan, or is the governmental plan relieved of such responsibility once the plan becomes governmental?

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The ADEA applies to governmental plans the requirements in IRC § 411 you want to avoid, so conversion of the plan from a private to a governmental plan will not help.

Aren't the vesting and benefit accrual rules separable in this context, though? That is, the plan at issue does provide for continued benefit accrual beyond normal retirement age, which arguably satisfies the ADEA requirements. The question remains, though, whether the plan must also provide the actuarial increase (because of its failure, when it was an ERISA plan to provide the § 203(a)(3)(B) notices). The actuarial increase requirement is a vesting rule, which seems separate from the benefit accrual rule the ADEA extended to govt. plans. In that context, it seems like the plan's current status as governmental is still relevant.

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You're right. My prior post is wrong.

I assume the facts you're dealing with are that the amount of the actuarial increase for a plan year after normal retirement age is greater than the accrual for the year, and you are wondering whether the plan still owes the excess of the actuarial increase over the normal accrual.

Your question might be controlled by the plan document. My starting assumption before reading the plan document would be that any excess of the actuarial increase over the normal accrual for periods before the plan became a governmental plan would be part of the accrued benefit the plan must pay, and that no future excesses would accrue after the plan became a governmental plan. Some thought would need to be given to how to deal with the excesses for the plan year the plan became a govermental plan, if that was mid-year.

The plan document might provide more benefits than this. If the plan document provides the greater of the actuarial increase or the normal accrual, excesses would continue to accrue until the plan is amended to eliminate future accrual of the excesses. Whether the plan could be amended to eliminate these future accruals depends on collective bargaining agreements and whether the participants have a right under contract or state law to continue the present terms of the plan through their retirement.

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Unfortunately, the plan document provides for neither the § 203(a)(3)(B) notice nor any actuarial increase. Several years ago, the plan's actuary spotted the lack of a notice provision and, to comply with ERISA, sua sponte began including the actuarial increase in benefit statements to all employees working beyond normal retirement age (which is 55 in this plan, so the amounts at issue are considerable).

The Plan did have a favorable determination letter, but it probably isn't worth much in this context. I think we're left with the underlying law, and the lingering question of whether the now-governmental plan must pay actuarial increases that, while not provided for in the earlier plan document, were nonetheless arguably required under ERISA and the IRC. The transferor sposor having since been dissolved, the buck would ultimately stop with the new, governmental sponsor.

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It seems to me that ERISA requires payment of the actuarial increases, but only for periods before the plan became a governmental plan. One thought is you might find some way to conclude that the liability is not a liability of the plan or of the current plan sponsor, for example because the liability was a liability of the transferring sponsor or of the plan administrator before the transfer, rather than an obligation of the plan.

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As been discussed in previous posts, a public employer cannot elect to be covered by ERISA. Therefore a public employer cannot be sued for a violation of a benefit accrual required under ERISA in federal court. Under state law the Govt sponsor would only be obligated to provide the benefits provided under the plan. The govt sponsor would not be obligated to provide benefits that would have been required under ERISA to be credited under the predecessor plan unless the govt entity assumed such a liability under the terms of the acquisition.

mjb

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I'm more uncertain than mbozek that the plan is not liable for the actuarial increases before the plan became a governmental plan. This might depend on whether the ERISA obligation to provide the actuarial increases, where not provided in the plan document, was the obligation of the plan or of the obligation of the employer. If the obligation of the plan, a state judge might give a hostile reception to the assertion that the plan's accrued benefit obligations immediately before the transfer didn't survive the transfer because not provided in the plan document. I haven't done the work required to speculate whether, under ERISA, the obligation to provide the actuarial increases here was an obligation of the plan.

Whether the obligation survived the transfer might be controlled by documents outside the plan document or by legal authority. This might be covered by the acquisition agreement, and might be covered by a state statute dealing with, for example, the transfer of employees to a governmental unit. Here is Oregon we have such a statute, and it deals explicitly with retirement benefits.

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The only reason to have this discussion is if participants are claiming benefits based on failure to comply with ERISA. Otherwise the employer can pay benefits under the plan because that is all the plan formula provides. It is highly unlikly that a state court would impose liability on a govt entity for benefits imposed under a law that does not apply to a govt employer.

mjb

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Thank you, mbozek and Mr. Moreland--this discussion continues to be helpful. I thought I would note that we received today an informal opinion from an IRS employee, addressing both the general question (are qualification failures occuring when a plan is non-governmental erased when the plan becomes governmental?) and the specific question (regarding failure to comply with suspension-of-benefit rules). The gist of the response to both questions was, such failures are not erased when the plan becomes governmental, and must be addressed by the new, governmental sponsor. Unfortunately, the response addressed neither the effect of the plan's inability to elect ERISA coverage nor potential state-law claims, but merely the qualification question. Nor was any law cited; as I said, this was merely an opinion (though a rather firm one).

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The reason the IRS did not give you any citations is because neither of the provisions cited above apply to public employer plans. So the letter is worthless from a legal standpoint. Also the IRS does not audit many public plans and the auditor would not have the ERISA/ IRC provisions on his checklist. In any event if the IRS attempts to enforce the additonal benefits the plan sponsor has the right to ask for a letter explaining how the IRC requires a public employer to provide benefits which are required only under private employer plans under ERISA.

mjb

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