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I am curious how others generally regard state occupational licensing boards.  In our state, we have several such boards that are creatures of statute--basically established and set up by specific state law without any other official organizing or corporate documents (i.e., they do not have any articles of incorporation or other formal tax-exempt or non-profit status).  Most of the time, they are operated by an appointed Board (appointed by a mix of state legislators and the governor) but the appointed Board and entity really act fairly autonomously on day-to-day operations.  While their budget / funds are sort of run through the state, they are all derived by (and thus limited by) the fees raised from the licensed profession / group.

Current client has previously-established 401(k) plan but is moving to a new record keeper who is questioning whether the entity is eligible to establish a 401(k) plan as they are arguably an agency or instrumentality of state government.  On the other hand, we are aware of other similarly-situated licensing Boards with 401(k) plans who, like our client, apparently were able to set up 401(k) plans without anybody questioning.  It's unclear whether others believe they had some basis for claiming they were not an agency or instrumentality.  While there are a few items that may weigh in favor of non-agency or non-instrumentality status, taken as a whole the facts and circumstances would seem to point toward such boards being barred from sponsoring 401(k) plans.

How are such boards generally classified / addressed in various states.  If the Board cannot establish a 401(k) and also seemingly cannot qualify for a 403(b) plan and has been told it is ineligible to participate in the state's grandfathered 401(k) plan, is there some other cash or deferred arrangement typically available?

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Thanks.  In this particular case, the establishment of their 401(k) plan is pretty recent and so does not qualify for grandfathering.  Our state has a grandfathered 401(k) plan (which the Board has been told it is not eligible to participate in) and a few of the other similar occupational licensing boards do have grandfathered 401(k) plans.  There are other boards though that have set up 401(k)s well after grandfathering expired.  None, however, seem to have a clear basis for having done so--at least as best we can tell without digging in so much that it may cause problems for other plans.

The new record keeper says they basically just need a letter or other support documenting that the client has investigated and determined it qualifies.  While we can somewhat selectively go through the list of relevant factors based on prior guidance and make a reasoned argument for their eligibility, I'm not sure the greater weight really supports that.  Not sure how likely it is that the IRS would challenge this but . . . .

Am just thinking similar boards must exist in many states.

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Interesting question but I think you are going to need legal advice from the state attorney general's office or the attorney for the board itself. 

The better question would be whether other licensing boards in the same state provide retirement benefits.  But I would first look under state law to see if the licensing board was given the authority to establish a retirement plan.  Without that, I would be dubious of any conclusion to the contrary. 

Consider too that there might be a requirement under state law or GASB that the board's pension arrangement be audited.  That might be headache right there that no one wants to deal with. 

While practices in other states might be illuminating, you would need to examine the particular facts and circumstances of your licensing board in light of applicable state law to come to a reasoned conclusion. 

Good question and good luck. 

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Thanks.  In this particular case, the authorizing statute is silent on the ability to establish a retirement plan--doesn't say they can or they cannot.  Other similarly situated boards with similarly silent authorizing statutes have established 401(k) plans as well.  Our client is reluctant to press them on what their advisors have told them (if anything) in connection with establishing those as they don't want to open up can of worms although that may be most helpful or illuminating.  In our case, the plan has already been created so the audit thing is not really a driver at this stage.  Nobody from the state has undertaken an audit or suggested that is required apart from what might be required if it were to have over 100 participants.  I agree what our particular state says or does with respect to this particular entity and others like it may be pretty determinative but would still be interested in knowing if other states' boards typically are treated as governmental or not for such purposes if others have experience with this just to have that perspective.  Thanks.

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Remember that grandfathering is based on whether the employer had any 401(k) plan as of the relevant date, not on whether the particular 401(k) plan existed on that date. So, for example, if the state had a 401(k) plan on the relevant date, and the board could be treated as part of the same "employer" as the state (even though the board never participated in the state plan), the board would be entitled to set up a new 401(k) plan now. (Idaho, for example, managed to set up a plan for the state and all its localities, based on a single agency having had a plan by the grandfather date.) Given the vagaries of what constitutes the employer at the governmental level, some boards may simply be taking the position that they are part of the same employer as the state, and thus entitled to set up new 401(k) plans if the state has a grandfathered plan. 

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Carol,

Thanks very much.  That is a helpful distinction to know.  It would seem unfair to me to swoop these plans up in the state / governmental classification then expressly deny them broad grandfathering protection.  Do you know if the IRS would provide a ruling on whether a board or agency is covered by prior grandfathering in a case like this?  (My loose understanding is the IRS stopped ruling on governmental agency / instrumentality determinations with the release of the proposed regulations but maybe the grandfathering issue is slightly different--although it seems to necessarily pull in the agency / instrumentality question.)  I'm not sure the Board would necessarily want to go to the time and expense of seeking a ruling but think it would be helpful to know whether that is even possible.  Part of our problem, especially given the vagaries you note, is that we have record keepers and providers who rightfully need clarification but there doesn't seem to be anybody in a clear position to rule on this issue.

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Unfortunately, it appears that the IRS will no longer issue rulings on whether a governmental entity is part of the same "employer" as another part of the state or local government.  The best we've got is Private Letter Ruling 200028042, which allowed the state of Idaho and all of its localities to be treated as part of a single employer, and thus to adopt a 401(k) plan based on the State Department of Health and Welfare having a grandfathered 401(k) plan.  However, I have heard rumors that at least some IRS personnel think that ruling went too far, although it has never been revoked.

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Thanks.  I'm not sure if the fact they aren't ruling is good or bad--while that doesn't permit receiving a definite ruling, I suppose it also means we could reasonably tell whomever that we are unable to get a ruling on the issue from the IRS and so save the time and expense (and potential adverse outcome) associated with a request.

I guess as a practical matter I wonder how much risk there is of a governmental Board maintaining its own 401(k) plan on the extended grandfather position.  The record keeper asking for support doesn't seem too concerned so long as they have some reasoned basis from the group or its outside counsel that they can put in their file as supporting the Board's ability to sponsor....

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