Carol V. Calhoun

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.

Thanks for the confirmation, PensionPro. That was my reading as well. However, given that another law firm had drafted a VCP submission that discussed only the tax issue (and didn't even mention 415(n)), I was basically looking for a sanity check.

The only operational failure I can see is that the contributions were not treated as participant contributions for purposes of 415(n), and therefore a few participants violated the five-year limit on the purchase of nonqualified service credit. My concern is whether using EPCRS for that failure (which affects only a few participants) would clean up the withholding issue as to all participants. The description of the effects of a successful VCP are that it maintains the qualification of the plan, but the applicable revenue procedure doesn't suggest it would also provide relief for any other tax issues.

Has anyone had experience with whether the IRS is willing to allow the VCP program to be used for something that is not a qualification issue? In the situation I'm looking at, employees were permitted to choose at retirement whether to have accumulated leave contributed to a defined benefit plan or to receive it in cash. The employer erroneously believed that in the case of the employees who chose the contribution, it would be a pretax contribution. The employer therefore did not withhold taxes on the contributions. Having now received legal advice that such contributions would be after-tax, it is attempting to fix the situation for past years. Reading through Rev. Proc. 2013-12, I cannot see a way that VCP can be used to remedy a provision which is not disqualifying, but which caused unanticipated adverse tax consequences. However, I entered this matter late, after another firm had already prepared a draft VCP submission. I therefore want to be very sure of my ground before I talk to the client.

What we have had our clients do is to provide in our plan document that if the maximum limits would otherwise be violated, benefits under the outside plan are to be cut back before benefits under the 403(b) plan. Then in the salary reduction agreement, we have had the employee certify that if there is an outside plan, the employee will ensure that benefits are appropriately limited so as not to cause a violation when the plans are aggregated. So far, at least, we have never had the IRS demand anything else if those precautions were followed.

Typically, you would count service with both entities for eligibility and vesting purposes, but merely allow participation in whichever plan(s) the employee's current employer maintained. So, for example, an employee who moved from the Trust Authority to the hospital would cease to participate in the 457 and 401(a) (although s/he would continue to have a deferred benefit in those plans) and begin participating in the 403(b). At retirement or other distribution event, the employee would have a benefit from all three plans.

The only difference between a 403(b) and a 403(b)(7) is that a regular 403(b) is invested in an annuity, while a 403(b)(7) is invested in a custodial account which in turn invests in a mutual fund. There are also some tax differences (e.g., penalties on excess contributions to a 403(b)(7), but not to a regular 403(b)). But otherwise, the requirements are the same.

Dave, it was authored April 30, 2012. (That date was apparently stamped at the top, not typed in, so it didn't appear when I converted the thing from PDF to HTML, but I've now added it.)

I've just gotten hold of some internal IRS guidance on the application of vesting requirements to plans governed by section 411(e)(2). While the guidance was primarily directed toward governmental plans, it indicates that it would also be applicable to church plans. For anyone who is interested, I've put a copy up at this link.

We've had some discussion here in the past regarding what vesting requirements applied to qualified governmental plans. The confusion arises because Code section 411(e)(2) says that governmental plans are required to comply with pre-ERISA section 401(a)(4) and (7), but Code section 401(a)(5)(G) says that 401(a)(4) does not apply to a governmental plan. I've now gotten a copy of an internal IRS directive on the subject, and have posted a copy of it at this link. Essentially, it is applying pre-ERISA section 401(a)(4) to the vesting standards of governmental plans, notwithstanding section 401(a)(5)(G). My analysis of the guidance can be found at this link.

If the plan is nongovernmental the whole $30,000 must be included on the W-2, and is taxed, if the $10,000 pension contribution is stated in the plan to be an employee contribution. This is true even though the employee never actually receives it and indeed has no way to receive it.

If the plan is not governmental, pick-ups are irrelevant regardless of any other factors. You need to look at Internal Revenue Code section 414(h)(2). Rule for nongovernmental employers: If the plan calls a contribution an employee contribution, it is after-tax, regardless of any other factors. Internal Revenue Code section 414(h). Rule for governmental employers: Income tax: Contribution is "picked up," and therefore pretax for income tax purposes, only if three requirements are met: a) the plan calls a contribution an employee contribution, b) the employer agrees to pay it, and c) the contribution is nonelective. "Nonelective" means that the employee either a) has no option as to whether the salary reduction will occur, or b) has only a one-time option as to whether the salary reduction will occur upon initial hire or initial participation in any plan of the employer. The employer can pay the contribution a) in addition to wages, or b) via salary reduction. As you suggest, salary reduction means that although the employee is nominally paid $30,000, only $20,000 appears on the W-2 after reduction by the $10,000 pension contribution. FICA tax: A picked-up contribution is exempt from FICA tax only if in addition to the three requirements of #1, above, the employer pays the contribution in addition to wages, not via salary reduction. So in our example above, FICA taxes would be due unless the employee received the full $30,000, and the employer paid the $10,000 contribution in addition to that. While all governmental entities are tax-exempt, not all tax-exempt entities are governmental. A 401(a) trust, a charitable organization, and many other entities are tax-exempt, but not necessarily governmental.

"Pick-ups" apply only to governmental plans. Under Code section 414(h), the general rule is that any contribution that the plan calls an "employee" contribution is after-tax. Section 414(h)(2) (the "pick-up" provision) provides an exception that allows an employee contribution to a governmental plan (and only a governmental plan) to be treated as an employer contribution (and therefore made pretax) if certain requirements are met. As to your examples: In Example 1, you are correct that the contribution is subject to both income and FICA taxes. In Examples 2 and 3, the contribution is not subject to income taxes (assuming that the employee has no option to receive the amount in cash instead of having it contributed to the plan). However, because the contribution reduces the employee's salary, it is subject to FICA taxes. As an alternative, the employer could simply agree to pay B a salary of $20,000, and to pay the $10,000 contribution without a salary reduction. In that case, the contribution would be free of both income and FICA taxes. Clearly, the economic effect is identical to that described in 2 and 3, so it might at first blush appear incomprehensible that the tax consequences would be different. However, the thinking seems to be that the employer can go either way, but must pick one, so that an employee cannot get the benefit of reduced FICA taxes now and then argue years later that Social Security benefits should be based on the full unreduced salary.

Yes, I actually dealt at length with those uncertainties in my article.