Carol V. Calhoun

The question is whether the increase in the contribution rate is done via "a direct or indirect election," or whether it happens automatically. If employees never had a chance to opt out of the increased contribution (either initially, or when the rates changed), the pick-up can be increased without jeopardizing its status as a pick-up. See Private Letter Ruling 201532036 (May 4, 2015). My understanding is that the IRS will not treat a change in rates mandated by a collective bargaining agreement as an election, unless the situation is abusive (e.g., a collective bargaining unit is set up that covers only one employee). I would be very nervous about having the change embodied in an employment agreement, however. The IRS generally takes the position that a change in an employment agreement is elective on the part of the employee. However, if the original employment agreement gave the employer the unilateral right to change the contribution (or specified that it would be changed if the rate for other employees were changed), there should not be an issue in treating the new rate as picked up. And all of this leaves aside the issue of whether the employer can change the rate of contributions, as a matter of state law. In California, for example, an employer cannot unilaterally change the level of contributions taken out of an employee's wages.

There are actually a couple of issues with that statement. The first is that although governmental plans are not required to comply with section 411, they are often required to comply with interpretations of the state or federal Constitution's impairment of contracts clause that may limit not only reduction of past benefits, but reduction of future benefit accruals with respect to existing employees. Thus, reduction of benefits to comply with 415 limits may not be possible even though 411 does not apply. The other issue is that the judgment in this case required the retroactive benefits. If an individual's annual benefit would have been $210,000, if such individual had been a participant from the beginning, I doubt the court would consider the judgment complied with if the individual ended up with a $21,000 benefit due to reductions to comply with 415(b). However, I would agree with your common sense approach. Certainly, if ECPRS applied, the overriding principle is to put the person back into the position that s/he would have been in had the employer done the right thing from the beginning. I would argue that a VCP submission is not required (because the employer complied with the plan's terms to begin with, and simply made a retroactive amendment to the plan to comply with the judgment). But I still think the spirit of the ECPRS rules is that fixing an error should not get you into trouble.

The judgment didn't discuss this at all. However, the client is not in a position to appeal the judgment. I don't know whether that question was dealt with. The client handles a lot of things internally, and just asks me questions when they get too complicated for in-house counsel. The plan is clearly governmental, so not ERISA. (I looked at ERISA regulations only because anything those regulations required would presumably not be in violation of Code qualification requirements, but it is clear that ERISA would not apply directly.) And the client is not in a position to appeal the judgment.

I don't know that there is a clear rule on this. The statute provides that the limit will not apply to eligible participants (those hired before 7/1/93) if the plan had no limit on 7/1/93, and was amended after that date to incorporate the limit with respect to noneligible participants for plan years beginning after 12/31/95 (or earlier, if the plan amendment so provides). However, in this case, the same amendment applied the limit to eligible and noneligible participants alike. I'm not sure whether you could now go back and amend that amendment, and still retain the grandfather. One thing you might want to look into, depending on the state, is whether there was any Constitutional bar to decreasing the rate of benefit accruals for existing participants. Courts in about two-thirds of the states have held that state or federal Constitutional provisions stating that “[n]o state shall enter into any…Law impairing the Obligation of Contracts” preclude cutbacks of future benefit accruals, not just existing accrued benefits, for existing employees. (The special grandfather rule for governmental plans actually exists for this reason--because many governmental plans could not constitutionally impose 401(a)(17) on their existing employees.) If your state has such a provision, you might be able to argue that the part of the amendment relating to eligible employees was void from its inception, because it violated the state or federal Constitution.

They are a governmental plan, so 410(b) was not an issue.

I think I know the answer to these questions, but I'm having a hard time finding specific citations. Facts: Employer has a defined benefit plan. It has a number of people whom it has classified as independent contractors, and thus has not included in the plan. A judgment is entered against it saying that these people are employees, and thus need to be retroactively included in the plan. (The plan specifically states that individuals who are employees but have been characterized as independent contractors by the employer are not to be included, but the judgment just blew by that argument.) Question 1: In calculating the 415(b) limit, should an individual's years of participation in the plan include the years the individual should have been included under the court's theory, or only those years in which the individual participated after the court's judgment? For example, suppose that the individual worked for 10 years before the judgment, but terminates employment a year after the judgment. Is the 415(b) limit $210,000 (reflecting the years worked for which s/he receives credit), or $21,000 (reflecting only the year following the time the individual began participation in the plan)? Common sense would appear to say that all years should be counted. This would reflect the rule for annual additions, which are counted for the year for which they are made rather than the year in which they are made. Treas. Reg. § 1.415©-1(b)(6)(ii)(A). It would also reflect the rule for back pay, that: Publication 7001, page 3. And it would be consistent with the rule of ERISA Reg. § 2530.200b-2, which treats back pay as giving rise to hours of service for the year to which it relates, not the year in which it is paid. However, I have been unable to find any direct authority dealing with the calculation of the 415(b) limit in our situation, which does not involve back pay. Question 2: Is there any obligation to go in under VCP in this situation? I can think of two arguments that VCP might be necessary: either that the plan is now being operated in a way inconsistent with its terms (because the plan terms say that the plan is not to include people characterized by the employer as independent contractors, even if they are later found to be employees) or that these individuals were erroneously excluded from the plan in prior years. However, this seems unnecessarily harsh if the failure to abide by the plan terms comes due to a judgment, and if the employer corrects the exclusion for prior years promptly after issuance of the judgment.

All contributions to a 457(b) plan are subject to FICA taxes on the later of the date contributed or the date when they become vested. No distinction is made between employer matches and employee pretax deferrals. See Code section 3121(a)(5), as modified by Code section 3121(v)(3). One way of getting around this issue is to have the employer match made to a 401(a) plan. Doing so also means that the employer contributions are not considered part of the amount subject to the $18,000 annual limit. Of course, the question is whether the employer contributions are substantial enough to make the administrative costs of setting up a different plan (if the employer does not otherwise have a 401(a) plan) worthwhile.

No. A 457(b) plan and a 401(a) plan cannot be merged. The only way money from a 457(b) can be moved to a 401(a) plan, or vice versa, is if the employees are permitted to take their distributions in cash, and instead choose to have their money rolled over to the new plan. The IRS says: Thus, an employee could get a distribution from the 457(b) plan which the employee could roll over to the 401(a) plan, but no direct merger would be possible.

Neither definition seems to reference the 1,000 hours requirement, and as you point out, it would be possible to get 1,000 hours of service in a year without meeting the plan's eligibility requirements. I would contact TIAA to ask why their document appears to be out of compliance with ERISA. Could they have believed that this was a non-ERISA plan (governmental or church plan)?

PIT Bulletin 2005-04 states as follows: Because the focus is on whether the amount is deducted from the employee's compensation, not on the type of plan to which it is contributed, an employer match should not be subject to Pennsylvania state tax. That being said, at the federal level, the employer match to a 457(b) plan is subject to the $18,000 limit on total contributions. This contrasts with a 401(k) or 403(b) plan, in which only employee deferrals are subject to the $18,000 limit. Thus, if we're talking about a governmental 457(b) plan, it may make sense to have the employee deferrals made to the 457(b) plan, but the employer match made to a 401(a) plan. Of course, this doesn't work for a 457(b) plan of a nongovernmental employer.

I can't see why a lesser limit would be a problem. A 457(b) plan is not subject to any kind of discrimination rule, so you don't have to worry about that part. And 457(b) merely states that deferrals in excess of the limits are not allowed; it doesn't require you to permit deferrals up to the limit.

Whether a $350k or $265k limit applies in the case of elective deferrals is really a moot point. The individual with compensation of $350k could defer the maximum ($18,000) even if only compensation below the 401(a)(17) limit were considered, so it really doesn't matter whether you treat his compensation as $350k or $265k. For example, suppose that the person elects to have 5% of $350k deferred. At the end of the year, he will have deferred $17,500, which is less than the lesser of a) 100% of compensation (even counting only 401(a)(17) compensation), or b) $18,000, so he's still within the limit. All he's done by stating the deferrals as 5% of compensation is a timing issue--having the deferrals taken out ratably throughout the year rather than front-loading them so he will max out as early in the year as possible. I suppose the result could be different if the plan actually limited elective deferrals to 5% of compensation for all employees. However, I have never seen a plan that limited elective deferrals to a greater extent than the statute provides. If nothing else, a limitation on the amount of elective deferrals might give rise to issues concerning whether the universal availability test was met (an issue on which I express no opinion).

So the idea is that although the employer could allow distribution of rollover amounts for any reason, it wants to limit such distributions to hardship situations? That is certainly legal. (You can always have a more restrictive distribution policy than the IRS would require.) The real question is an employee relations one. Employees always have the ability to leave their money in a prior employer's plan, or roll distributions from the prior employer's plan to an IRA instead of to your plan. If you impose substantial restrictions on distributions of rollovers from your plan, employees may be substantially less likely to roll money into your plan in the first place. Of course, the employer may or may not care about that.

I have not seen specific guidance on this issue, but I seriously doubt that the IRS would allow an employee to make any kind of election (including an election of a DROP plan) that would affect the pickup. For a long time, the IRS permitted various "one-time elections" that related only to specific compensation to be used to establish a pick-up arrangement. For example, an employee who elected to purchase service credit could be permitted to have that purchase done on a pickup basis, or an employee entering a new plan could be permitted to elect to have picked up contributions made to that new plan. However, in Rev. Rul. 2006-43, the IRS stated that a pickup cannot be a cash or deferred arrangement. Treas. Reg. 1.401(k)-1(a)(3)(v) provides as follows: Example 5 of that regulation reads as follow: Thus, any election into a picked up contribution must truly be irrevocable upon the employee's first participation in any plan of the employer, and cannot be modified even if the employer adopts a new plan. The IRS has recently reiterated the conclusions of Rev. Rul. 2006-43 in Private Letter Ruling 201425026. Based on the above analysis, I think it extremely unlikely that the IRS would permit an employee to make an election during employment that would end the pickup, even if it were for the purpose of participating in a DROP plan.

I think the employer has to be sure not to reply to any inquiries about QDROs or loans. And when considering which vendors it will deal with, it should allow only those that agree to be responsible for these matters.

The only way this works is if employees make a one-time irrevocable election when they first become eligible under any plan of the employer, and cannot later change that election. Under Treas. Reg section 1.401(k)-1(a)(3)(iv): Under Rev. Rul. 2006-43, 2006-35 IRB 329, a pick-up cannot be a cash or deferred arrangement. Thus, if employees are to have an election as to whether contributions are made, it must be a one-time irrevocable election made no later than the employee's first becoming eligible under the plan or any other plan or arrangement of the employer. See Private Letter Ruling 201532036 (August 7, 2015).

I don't see why it would be a problem, unless the changes became so frequent that they created an issue with the plan being "permanent." However, I'm curious why they would want to do this. For a governmental employer, what would be the advantage of having a money purchase plan?

No, but only because there are very few dual status public education entities. The usual reason a governmental entity seeks 501©(3) status is to be able to offer a 403(b) plan. However, since a public school or university can offer a 403(b) plan without getting 501©(3) status, few of them apply for it. That being said, a governmental plan is exempt from ERISA, regardless of whether it also has 501©(3) status, so this should not be an issue.

There are, in general, two advantages to a 403(b) plan. First, if there are only employee pretax employee contributions (no employer matching or other employer contributions), and certain Department of Labor requirements are met, the plan is not subject to ERISA and therefore escapes Form 5500 and other ERISA requirements. Second, so long as all employees are permitted to make contributions, the nondiscrimination rules do not apply, so you don't have to run ADP tests. The disadvantages of a 403(b) plan are that the fees are often higher than with a 401(k), and there are fewer providers (meaning competition is less, and it may be harder to find one with a good investment return). You'll just need to look at all the pros and cons in your situation to figure out which works best for you.

Legally, it is acceptable to exclude the employee if and only if the employee (a) currently normally works less than 20 hours per week, and (b) worked less than 1,000 hours in the preceding plan year. Of course, you would also have to look at the plan terms to make sure that they provided for the exclusion of such employees. As QDROphile suggests, excluding such employees is not particularly good plan design. Since we are talking solely about amounts deducted from an employee's pay, allowing the employee to participate provides a substantial benefit to the employee at trivial cost to the employer. However, excluding such employees is not illegal.

On October 21, 2015, the IRS issued IRS News release 2015-118, announcing the changes in pensions and benefits limits for 2016. Most limits were unchanged. An updated chart, showing these limits for 1996 to 2016, is available by clicking here.

Has anyone heard anything about when the IRS is likely to announce the new limits?

1. Plan-to-plan transfers from an eligible 457 plan to a governmental defined benefit plan for permissive service credit purchases can be made at any time, provided that the plans permit such transfers, and you do not need to be eligible for a distribution at the time the transfers are made. The trust or annuity used to hold the assets of the 457 plan would cut the check directly to the defined benefit plan. Thus, no deductions from wages would be necessary to the extent the money came from the 457 plan. Moreover, this would not be a rollover, because a rollover occurs only if you are entitled to a distribution. To the extent that the cost of the service credit purchase is greater than the amount in the 457 plan, the way to make the extra contribution pretax is to have the defined benefit plan provide for the additional benefit for you, and for your employer to contribute directly to the plan to fund the benefit. That language would have to provide that the contribution was mandatory on your employer's part, and that you could not receive the amount in cash by declining the contribution. If you simply pay for the purchase of service credit out of your wages, it would be on a post-tax basis. 2. As stated above, the movement of money from the 457 plan to the DB plan would not be a rollover, but a plan-to-plan transfer. Such a transfer is not taxable to you. However, as stated above, the contributions to the DB plan that exceed the 457 amount may or may not be pretax, depending on how they are structured. 3. The plan language needs to provide for the transactions. I'm not sure how "vague" the language is now, and whether it could be construed to cover your situation. However, for example, if it provides that purchases of service credit can occur only through payroll deduction, you'd need to have both plans amended so that the transfer from the 457 plan to the DB plan was allowed. Even if the plans already provide for plan-to-plan transfers to purchase service credit, the DB plan might need to be amended if the employer is to make contributions to fund that portion of the benefit not covered by the 457 plan.

Yes, the death benefit is taxable to the spouse, regardless of whether the employee was still employed immediately prior to death. (I'm seriously hoping that the employee was not employed after death!) Assets of a 457 plan must be held by the employer, or by a rabbi trust considered part of the assets of the employer. Thus, they do not actually fund the benefit; they merely serve as measurement of the amount of the benefit. And distributions from a 457 plan are taxable to the employee, regardless of what assets are used to measure the benefit. If the employee separates from service and is still alive, again the life insurance merely measures the amount of the benefit, and the employee is taxable on the benefit received. If the employer chooses to distribute benefits in the form of a life insurance contract, then the fair market value of that contract is taxable to the employee.

Every previous year, the IRS COLA limits have been released the same day as the Social Security limits. I'm hoping that will happen this year, but haven't seen any sign of the IRS limits yet.