Susan L

Luissha, any chance this is a governmental employer and a government affiliated trust? If so, I have a few follow-up questions, but little advice. These look like the wild west to me.

fmsinc, not to hijack this exchange (your response is excellent), but have you heard anything about whether OPM will process COAPs in view of the massive federal government downsizing underway? I'm guessing helping ex-spouses of military is not high on anybody's list and, given an opportunity, which I would imagine they'll find, OPM may decide to file all pending COAPs in the trash bin?

Peter Gulia, I've been so immersed in governmental pension plans, I sort of forget about that other world of non-governmental non-pension plans. My question arises in the context of a traditional defined benefit, non-ERISA, governmental plan that is set forth in state statute and is intended to be qualified under IRC 401(a) et seq. Specifically, I can't seem to nail down whether the plan could pay out an annuity for life (or joint lives of spouse and member) starting at, say, age 54, when the member is still employed, so there's been no separation from service. Assume for this purpose that the plan's NRA is age 50 and we can show that that age is reasonably representative of the typical retirement age for this industry (firefighters). On these facts, would the member avoid having to pay the 10% excise tax for early distribution and, generally, is this permitted? I think so, but would love a second opinion.

If the benefit is distributed as an annuity for life, can it begin any time, even if the employee is still employed, without the employee incurring a 10% early distribution excise tax under Code section 72(t)?

It's the CODA part that's the problem.

Isn't that a CODA (it's voluntary and will reduce pay) and not permitted under the IRS guidance related to the pick-up requirements of 414(h)?

Must a COAP be a stand-alone court order like a QDRO? Or could the provisions be incorporated as a section in the divorce judgment and decree?

Carol and Peter, as an attorney who has worked on pension statutes for the past seven years, I wholeheartedly agree with your responses (and the others, for that matter). I have heard that one law firm that has made a name for itself in the public pension plans arena has advised a governmental pension plan that it does not have to pay out an RMD if the member does not elect to receive it for the reason that the plan does not have a normal benefit form. I much prefer Carol's approach of picking a normal benefit form and paying out the RMD. If the IRS were to audit the member who did not receive the RMD and assessed an excise tax, I'm not sure how this would play out vis a vis the pension plan that did not pay out the RMD.

Peter, thank you! I had not seen this Rev. Rul. and it is much more understandable than more recent guidance. Any thoughts on how we'd apply this guidance to a defined benefit plan (no accounts, one pool of assets, very overfunded, and an age 50 early retirement)?

Can the assets of a qualified governmental retirement plan (defined benefit or defined contribution) be used to pay premiums for insurance to provide welfare benefits for active public employees? I am aware of 401(h) for retiree medical and 402(l) for retired public safety officers, but can this be done for actives? If your answer is "up to the amount allowed under the incidental benefit rule," do you know where I can find an understandable summary of that rule? Thanks!

One follow-up question: if the participant terminated employment this year, 2021, can his first RMD be paid in 2022, no later than April 1, 2022?

Do the same rules re full vesting upon plan termination or partial termination and 5 years until forfeiture apply to a defined benefit plan?

Also, I would think that the plan sponsor would still need to make sure that its contributions are not discriminatory in the non-tax code sense of the word, such as discrimination on the basis of protected status. Age, marital status, race, so many other categories under both state and federal law would need to be taken into account. What a set up for disaster.

Thank you all for this thoughtful and helpful exchange of responses. My apologies for not mentioning that this is a governmental plan. We have about 500 governmental retirement plans run by firefighters. For most of the plans, the assets are invested as one single pooled account. Some plans, however, split the assets into two separate accounts, the actives are more aggressively invested and the deferred are invested in safer investments. Participant-direction of investments is not permitted. (Mr. Hatlee, you have inferred correctly.) The real concern is that a few plans don't allocate investment earnings at all to the accounts of deferred vested members or pay interest on the deferred accounts at a fixed rate (such as 3%)--really weird outcome there when the overall earnings on the assets are less than the fixed rate. The plans don't allow distributions until age 50. EBECatty's response about a pre-approved governmental plan allowing different methods for allocating earnings is very interesting. It does make me think there must be some sort of IRS guidance on that. I will check the pre-ERISA requirements, which is also a great suggestion, Mr. Rigby. If anybody has any other comments on the IRS' position on this, I would greatly appreciate hearing from you.

I agree, but is there anything that I could cite to as authority? This is for a governmental plan, so it's not subject to ERISA fiduciary duty statutes.

Can a profit sharing plan not allocate investments earnings and losses to the accounts of deferred vested former employees? Is there any authority you can cite to?

Thanks, all, for these helpful responses. I'll report back after I contact the couple of trade groups mentioned by Bob.

CuseFan, very much appreciate these responses. Could you also tell me if the COLA-giving clients are in any particular business or industry? Anything in common, geographically or size or anything else? I know the energy sector used to have pretty generous benefits, including COLAs, but don't know where things are on this topic today.

The question is whether there are any private sector defined benefit plans that still provide for COLAs on retiree pensions. For research we're doing in the public sector, I'm trying to determine if there are any private sector defined benefit plans that still provide ad hoc COLAs. This would be known anecdotally or perhaps through a resource that provides data on plan features such as COLAs. I know it's a long shot, but I was thinking that actuaries or their firms, who do lots of annual actuarial valuations for private sector defined benefit plans would have a sense of the prevalence of retiree pension COLAs.

Are you aware of any private sector defined benefit plans, not including multiemployer plans, that still occasionally provide for an ad hoc cost of living increase of retiree pension payments? Or do you know any resource for researching this question? Thanks for any assistance you can provide.

Also, wouldn't a plan amendment that requires the certification protect the plan administrator who needs to decide whether or not to do the required 20% withholding on the distribution?

But your second question needs an answer! "Are Governmental DC".. (or DB for that matter) ... "ever audited?" I'll add to that and ask: Has an enforcement action by the IRS as a result of an audit of a governmental plan ever been challenged in court and maybe a judicial decision rendered?

It would be helpful to take a look at the actuarial assumptions used in each valuation. Governmental pension plans use a relatively high investment rate of return assumption (i.e., the discount rate) while private consulting actuaries will likely use lower return assumptions, such as those used by DB plans in the private sector. Granted, the court will decide, but the court will hopefully listen to arguments: arguments in favor of one value versus the other may depend on how successfully the attorneys can rationalize or pick apart the assumptions used (and explain them).

In the meantime (as we wait for guidance), there's Rev. Rul. 89-49, 1989-1 C.B. 117, which is summarized in one publication as follows: Factors to be considered include the degree of control the federal or state government has over the organization’s everyday operations, whether there is specific legislation creating the organization, the source of funds for the organization, the manner in which the organization’s operating officials are selected, and whether the governmental unit involved considers the organization’s employees to be its own employees. A plan is not considered a governmental plan merely because the sponsoring organization has a relationship with a governmental unit or some quasi-governmental power.

Not only charter schools. We're aware of governmental plans that cover employees of public sector unions and employees of associations for cities, counties, etc., which I would consider non-governmental employers. Not sure how the private employers deal with having many of their employees covered by a governmental plan. On the public sector side, the employers pay employer contributions to the governmental plans for these employees, and deduct employee contributions from pay that is paid to the governmental plans. Still trying to understand the issues under the Tax Code for the governmental plans. There seems to be zero tolerance at the IRS for governmental plans covering non-governmental employees, so apparently this has more to do with no IRS enforcement in the public sector than anything else. Good to see these comments.