Carol V. Calhoun

IRS confirms that "Universal availability ... applies to each common-law entity separately rather than grouping controlled groups together."

One way of getting around this issue is to have the matching contributions made to a 401(a) plan, instead of to the 457(b) plan. That way, the employer contribution would not be counted toward the limit.

As to the 457(b) plan: How tough would it be to add something to the 457(b) plan to say something like, "This plan covers individuals treated by [Employer] as leased to [XYZ subsidiary], regardless of whether such individuals are later determined to be common law employees of [XYZ subsidiary]"? That would seem to be the cleanest approach. However, unlike in the 401(a) context, 457(b) doesn't have a specific requirement that a plan be operated in accordance with its terms. At most, this would be a contractual requirement. And I can't see that employees would object to receiving more benefits than the plan arguably provided. As to the 403(b) plan: I think including the employees is going to be risky, no matter how you do it. And designating them as "co-employees" would likely make the situation worse, not better.

I can't really see how participation in the 457 plans would be an issue. Outside of a governmental context, section 457(b) is a limitation, not an enhancement, of what could otherwise be provided in the way of deferred compensation. If the IRS recharacterized the employees as being employed by the for-profit, then as to them, the plan would merely be a nonqualified deferred compensation plan. Since both a 457 plan and a nonqualified deferred compensation plan must be limited to a select group of highly compensated and management employees in order to avoid ERISA issues, I cannot see how the recharacterization would be a problem (assuming that the requirements of 409A are met, since a 457(b) plan but not other kinds of deferred comp plans are exempt from 409A). I'd be more concerned about their participation in the 403(b) plan. If the IRS were to take the position that the employees in question were common law employees of the LLC, their participation in the 403(b) could be an issue. And participation in a 403(b) by individuals employed by an ineligible employer is a hot-button audit issue.

No plan is required to file for a determination letter. However, given the complexity of the law today, no lawyer I know is ever willing to give an opinion that a plan is qualified. And the consequences of disqualification are potentially serious, even in the case of a governmental plan. (Although deductions and trust taxation are not an issue, they still need to worry about employer withholding obligations and tax consequences to participants.) I suspect that what the lawyer meant to say is, a) it is highly advisable to have a determination letter, and b) if they are going to get a determination letter, Rev Proc. 2007-44 requires them either to get it in Cycle C (before January 31 of this year) or during Cycle E. But why is this question on the 403(b) Plans, Accounts or Annuities board? A determination letter would apply to a 401(a) plan, not a 403(b)?

PPA provided some guidance, since amplified by Advance Notice of Proposed Rulemaking REG-133223-08, as to when an Indian tribal government would be considered "governmental," but still did not provide any basis for treating it as a "state or local government." Certain tribal governments have, in the past, maintained Section 457(b) plans for their employees, on the theory that they should be considered state or local governments. However, as far as I can make out, none of them have sought an IRS ruling. The only instance in which an instrumentality of an Indian tribal government can clearly have a 457(b) plan is if it is also an organization exempt from tax under one of the provisions of section 501© (e.g., a school or hospital exempt under section 501©(3)). However, remember that section 457(b) is primarily a limitation, not an enhancement, on the deferred compensation that an organization can provide. An Indian tribal government, unlike a state or local government, can have a 401(k) plan. And an arm or instrumentality of Indian tribal government that qualified as "governmental" (and thus exempt from ERISA's funding standards) could always provide an unfunded deferred compensation arrangement for any or all of its employees, without being bound by the limitations of section 457(b). Even an instrumentality that was considered "commercial" could have an unfunded deferred compensation arrangement for a select group of management and highly compensated employees that was not bound by the limitations of section 457(b).

No, i haven't seen an instance of this. I suspect that it is one of many areas relating to governmental plans in which there just isn't case law.

I can't comment on most of this. But it is entirely possible to have a governmental entity in the same controlled group with a non-governmental entity. In Alley v. Resolution Trust Corporation, 984 F.2d 1201 (D.C.Cir. 1993), the court analyzed whether the Federal Asset Disposition Association (FADA), a savings and loan association established by the Federal Home Loan Bank Board, was a Federal instrument ality for governmental plan purposes. Its analysis focused on the employment relationship between the entity and its employees. In looking at the employer-employee relationship, the Alley court concluded that FADA functioned more like a private enterprise than a governmental agency in the area of its employment relations. “Measured by the terms and conditions of their employment, FADA personnel far more closely resembled private sector employees than they did government workers. Like employees of ‘ordinary’ Federally chartered S&Ls, FADA’s employees were outside the civil service system, and were not subject to the personnel rules or restrictions on salaries and benefits imposed generally on Federal employees." This decision was quoted with approval in the Advance Notice of Proposed Rulemaking regarding governmental plans.

Provided that local law doesn't impose any limitations, they can have as many 457 plans as they want, so long as no individual contributes more than the maximum to all plans combined. The question is whether it makes sense to do so. If Nationwide's products are a better investment, can they just fold the one existing participant into the new plan? There may be reasons not to (e.g., the old plan has substantial fees for early withdrawal), but it's worth considering. And if the problem is substantial early withdrawal fees, they should at least make sure the new contract doesn't have similar provisions. Having a bunch of different contracts, because there is never any way to move money from a poor investment to a better one without substantial fees, is both an administrative nightmare and an invitation to participant litigation.

One thing to remember is that because the Treasury Department and Internal Revenue Service recognize marriages that are legal where performed (as opposed to where the couple lives), a couple in Colorado that has a civil union can go to any of the 15 (soon to be 16) states or the District of Columbia that allows same-sex marriage, or to any of the Indian tribal governments that does, and get married there. By so doing, the couple would secure numerous rights beyond those granted by an employer's plans. Under the circumstances, it would seem to me unlikely that a couple would undertake the expense of litigation in order to secure coverage under an employee health plan rather than just going to another state and getting married there. Litigation would be far more likely in the case of a retirement plan or retiree health plan, as the couple might need to prove a marriage for past years (rather than just a current marriage) in order to secure benefits. Also, you have to think about what cause of action a couple could assert. Federal law does not require spousal coverage under a health plan (and will not, even when the Affordable Care Act is fully effective). And it does not contain any prohibition on discrimination based on sexual orientation. Thus, it is hard to think of a federal cause of action even if an employer simply said that it would not extend health benefits to same-sex spouses at all. Excluding "spouses in everything but name" should carry even less risk. Some state laws do prohibit discrimination based on sexual orientation. (Obviously, an employer would have to be concerned about such laws only if it had operations in one of those states.) However, if the plan is covered by ERISA, there could be an issue as to whether ERISA preempts such laws as applied to employee benefit plans. In effect, the couple could not force the employer to cover them under the health plan, but would have to argue that the discrimination consisted in providing lower total compensation (counting wages plus benefits) than would have been provided to a similarly situated opposite-sex couple. And again, such an argument would be weakened if they have the option of securing benefits by getting married in another state.

Alas, I have not. My sense is that the particular client erred not only in filing the unnecessary Forms 990 in the first place, but in neglecting to respond to the IRS's initial notices. However, I haven't yet been able to get the Power of Attorney form I need from them in order to pursue this at the IRS.

How can a participant refuse or fail to make contributions to the plan? In a pick-up arrangement, they are taken directly from the participant's wages, without any action by the participant.

No. However, if a contract permits a life annuity, a married participant cannot be permitted to elect it without the consent of the spouse. mbozek, do you think the old rulings survived the addition of section 401(a)(27), which permits a 401(a) profit-sharing plan to provide for contributions not based on profits, but requires the plan document to specify that it is a profit-sharing plan? Obviously, this section is not by its terms applicable to 403(b) plans. But I'm wondering whether it has modified the definition of "profit-sharing plan" to the point that even a 403(b) plan that provides for fixed contributions could be a profit-sharing plan, if the plan document says it is.

Treas. Reg. § 1.401(a)-20 says that, "to the extent that [ERISA] section 205 covers section 403(b) contracts and custodial accounts they are treated as section 401(a) plans [for purposes of the J&S requirement]." ERISA section 205 (29 USC § 1055) states as follows: Thus, if an ERISA 403(b) plan is set up as a money purchase plan, it must provide for a J&S. If it is set up as a profit-sharing plan and provides that a participant's nonforfeitable accrued benefit is payable to the spouse, it is not subject to the J&S requirement unless the participant elects a life annuity or to the extent that the 403(b) is a direct or indirect transferee of a plan with a J&S requirement.

I don't believe that governmental 403(b) plans are required to, but I always advise that they do as a matter of self-preservation. Section 414(p) does not by its terms require anything. Instead, it is an exception to section 401(a)(13), which otherwise precludes assignment and alienation of benefits. Section 401(a)(13) is not applicable to governmental plans, due to the last sentence of section 401(a) (following 401(a)(37)). Thus, section 414(p), as applied to governmental plans, neither requires a governmental plan to abide by a QDRO nor prevents it from complying with a domestic relations order that is not a QDRO. The only part of section 414(p) applicable to governmental plans is section 414(p)(11), which states that if a governmental plan complies with a domestic relations order (whether or not it is a QDRO), the distribution of benefits will be taxed as though it had been made pursuant to a QDRO. The complicating factor is that ERISA does not preempt state law as applied to governmental plans. Thus, if an order is issued pursuant to state domestic relations law, even if it would not qualify as a QDRO, the plan has no defense against complying with it, unless it can show that its own plan terms are also a matter of state law, and preclude compliance. It can often be difficult to determine whether the terms of a governmental plan are part of state law, if they are not actually embodied in a state statute. However, our experience is that if the plan terms impose requirements on domestic relations orders comparable to those that would be required for a QDRO in the case of a private plan, domestic relations judges and parties to domestic relations matters are inclined to comply with them. If the plan contains no references to domestic relations orders, it can be much more difficult to avoid the issuance of a domestic relations order that could be difficult for a plan to interpret or comply with.

The client is right. The 457(b) deferrals are reported on the W-2, but they are not "wages, tips and other income," because they are excluded from income by 457(b).

I could have sworn I'd seen something about this on one of these boards recently, but the search function is not finding it. Governmental VEBA gets a ruling that it is exempt under 501©(9). It then proceeds, for reasons best known to itself, to file Forms 990. (Rev. Proc. 95-48 says a governmental plan does not have to file Forms 990.) At a certain point, plan then fails to file Forms 990 for a couple of years. IRS automatically revokes 501©(9) status. When plan complains, IRS says that because status has been revoked, plan needs to file for reinstatement and to request a retroactive reinstatement for reasonable cause and, at the same time, refile for the exemption status. Given that the plan was never required to file Forms 990 in the first place, is there some way of getting an automatic revocation revoked? Just to add to the complications, plan in fact filed a new Form 1024 back in March. Two weeks after the filing, plan got a notice saying IRS would be back to them with any questions within 90 days. IRS has not gotten back to them. All calls to the IRS (before the shutdown) resulted in 60-90 minute waits, after which the plan just gave up. Does anyone have the number of an actual human one can contact (once the shutdown is over) to determine the status of a Form 1024?

I did a chart dealing with this, which you can find at this link. Is there something else you wanted to know?

@My 2 Cents: Yes, this is what I meant. The Code (even with Obamacare) does not require covering spouses, and does not contain any prohibition on favoring some spouses over others. In some instances, depending on the factual situation, excluding same-sex spouses may result in prohibited discrimination (e.g., in favor of highly compensated employees, or based on age, race, etc.). But outside of those situations, the question is going to be a) whether there is a state law prohibiting discrimination based on sexual orientation, and if so, whether it is preempted by ERISA, and b) in the case of a governmental employer, whether the Fourteenth Amendment prohibits discrimination based on sexual orientation. For anyone who is interested, I have a chart of what changes DOMA requires (divided into sections for ERISA-covered employers, governmental employers, and church employers) at this link.

My sense is that a lot of employers are waiting to see what the IRS does about retroactivity issues before issuing any kind of general letter to employees. For example, if the employer allows for pretax payment of premiums for spousal health insurance, employees can normally opt in outside of the open enrollment period only if they have had some kind of change in family status. It's not at all clear right now what you can do about an employee who has been married since 2009, but who was precluded from obtaining spousal coverage during the last open enrollment period because his marriage wasn't recognized back then. Moreover, the kind of letter you would issue would depend a lot on what the employer has been doing before now, so there is not one size fits all "sample" letter. For example, if the employer has already been providing domestic partner benefits, it may just need to know which of the "domestic partners" are legally married so that it can straighten out their taxes. The letter it would need would be very different from the kind of letter needed if the employer is just beginning to provide spousal coverage to employees in same-sex marriages. And of course, some employers may still not want to provide coverage to same-sex spouses. While they have to provide certain rights (e.g., the QJSA and QPSA in a qualified pension plan), it is not clear that health insurance coverage must be extended to same-sex spouses even if the employer otherwise extends such coverage to spouses. If the employer is attempting to do the minimum required by law, it may not want to issue any kind of general letter to employees until it figures out exactly what the requirements are.

Has anyone considered the issue of what to do with refunds from a 403(b) plan? The situation is that a vendor (TIAA-CREF) is recalculating its fees retroactively, and is paying the employer (a governmental entity) the excess of the fee originally paid over the fee calculated based on the new rate structure. The employer is trying to determine whether the refund can be used to pay administrative expenses of the plan (in this case, expenses of the bid process for selecting vendors), or must be allocated to employees. The plan is a deferral-only plan. The plan document provides that deferrals are to be invested in annuities/custodial accounts as soon as administratively practicable. There is no provision for the payment of administrative expenses. And there is no provision for the receipt of any amount other than deferrals. In theory, it seems to me that the employer should never be given the refund in the first place, because the amount is in effect a distribution from an annuity that is supposed to be owned by the employee. However, crediting employee accounts is not one of the options offered by TIAA-CREF. However, given that the refunds are going to be made, what does the employer do now? Can it argue that using the money for the bid process is using it for the benefit of employees (because the bid process is basically about getting the best investment options for employees)? Or must it contribute the refund to the accounts of those employees in the TIAA-CREF products?

It seems to me that the "deferral only" plan could be a non-ERISA plan. The penultimate paragraph of the AO states that a plan will not be forced into ERISA merely because the employer maintains another plan that is subject to ERISA. No distinction is made in the AO between another plan that has matching contributions and one that does not. The issue in the AO seemed to be that an employer match of contributions to Plan 1 (even if the match was made to Plan 2) constituted excessive "employer involvement" in Plan 1. That issue would not be present if contributions to Plan 1 were not matched.

Are the matched deferrals made to the ERISA plan (Plan 1), or the other plan (Plan 2)? It seems to me that you could have Plan 1 which provides for employee deferrals that are matched by the employer, and Plan 2 which provides for unmatched deferrals. However, if deferrals to Plan 2 receive a match in Plan 1, I'd agree there is a problem.

I have never seen installment distributions (or indeed any deferral beyond the date of vesting) included for tax purposes. I have very occasionally seen installment distributions by employers who follow the "tin cup" theory--that it is embarrassing to an organization, and potentially harmful to its ability to attract donations, if a former high-level executive ends up on welfare or otherwise obviously in poverty. Thus, the employer may wish to ensure that the executive cannot spend all the money up front, and end up without resources later in life. In such instances, there is commonly a first-year distribution to cover the tax owed, followed by annual distributions of the remaining amount. Of course, in such an instance, the installment form of payments is not subject to employee election.

Governmental plans are not subject to current section 401(a)(4) or 401(a)(5), which regulate nondiscrimination in the compensation taken into account for benefits purposes. The only nondiscrimination testing applicable to governmental plans is section 411(e)(2), which provides that for vesting purposes, governmental plans are subject to pre-ERISA section 401(a)(4). Pre-ERISA section 401(a)(4) prohibited discrimination in favor of "officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees," but did not include the section 414(s) definition of highly compensated employee. Thus, section 414(s) has no application to governmental plans.