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Defined Benefit Plan


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Can a governmental entity establish a defined benefit plan which is qualified under code section 401(a) if the plan covers only emplloyees who retired prior to the establishment of the plan?

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1.401-1(b)(4):

"A plan is for the exclusive benefit of employees or their beneficiaries even though it may cover former employees as well as present employees and employees who are temporarily on leave, as, for example, in the Armed Forces of the United States. A plan covering only former employees may qualify under section 401(a) if it complies with the provisions of section 401(a)(3)(B), with respect to coverage, and section 401(a)(4), with respect to contributions and benefits, as applied to all of the former employees."

It is not clear to me that the above allows a plan initially to cover only former employees, although I can't think of a reason a plan should not be able initially to cover only former employees.

My understanding is that the IRS recently refused to approve as qualified a plan that was only funded with leave cash outs at termination of employment. The IRS might have viewed this as not qualified because it was a severance pay plan and not a retirement plan, and so maybe this is not relevant to your question.

Revenue Ruling 73-238 prohibits benefit credits for former employees for periods after termination of employment, but this does not prohibit benefit credits for former employees for periods of employment.

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Guest compliance

My concern is that the intent of the governmental entity is that the participation in the plan will be limited to a fixed population...only those individuals who had terminated employment prior to the establishment of the plan. Therefore, my feeling is that it would fail to meet the basic requirement of the regulations that a qualiied plan be established to provide benefits for employees and their beneficiaries. Any additional thoughts?

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As cited by Everett, a plan can cover only former employees if it meets 401(a)(3) which references the minimum participation rules of 410. Under 1.410(b)-2©(2) a plan covering former employees satisfies 410(b) only if "under all of the relevant facts and circumstances (including the group of nonexcludable former employees not benefitting under the plan), the group of former employees benefitting under the plan does not discriminate signficantly in favor of highly compensated former employees."

Now, government plans are generally subject to the Pre-ERISA non-discrimination rules and I can't opine whether this would be a problem under those standards.

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IRC 401(a)(5)(G) provides that governmental pension plans are exempt from the participation rules of IRC 401(a)(3) and non discrimination rules of 401(a)(4). The conference report to the 1997 tax act states that govt plans will be exempt from the minimum participation and non discrimination rules.

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