Carol V. Calhoun

First, it is quite common for a defined benefit plan to prohibit employee contributions. In the private sector, it is actually fairly unusual to find a defined benefit plan that permits them. Second, a pick-up technically refers to a situation in which an employer pays a contribution referred to in the plan as an employee contribution. So if there is no provision in a plan for employee contributions, technically there is no pick-up. If the plan provides for employer contributions beyond those mandated, the employer could make such contributions (and might be able to reduce employees' salary to reflect this). However, most defined benefit plans that preclude employee contributions also make no provision for employer contributions beyond the mandated amount. As the name suggests, a defined benefit plan typically provides a benefit that is defined in the plan, and mandates employer (and in some instances, employee) contributions to fund that benefit. If that basic structure is followed, additional employer contributions would not create any corresponding increase in the benefits provided to employees, and thus no employer would make them. If a defined benefit is to accept additional employer or employee contributions to increase employee benefits under the plan, it needs to provide explicitly for such contributions, and specify how they will increase the benefits of employees (e.g., are they allocated to a separate account for each employee, or do they provide for a percentage increase in the defined benefit for each employee?), in order to avoid issues with the definitely determinable benefits rule.

For anyone who is interested, my article on the above topic can be found at this link.

No governmental plan is subject to ERISA 203. What this sentence is doing is using "governmental plans and non-electing church plans" as examples of plans not subject to ERISA 203, not saying that some are and some aren't.

Yes, it can be rolled over to an inherited IRA. However, this will not eliminate required minimum distribution requirements, so the beneficiary (if not a spouse) will need either to start taking distributions within one year or to take a complete distribution from the IRA within 5 years.

In theory, a 457(b) for a nongovernmental tax-exempt is never "invested." That is because under ERISA, such a plan must be an unfunded plan. While in some instances, a trust is set up to measure the benefits, such a trust must be subject to the claims of the employer's creditors, and is therefore considered an employer investment, not a plan investment. As such, it can be invested in any investment which would be permissible for the employer.

Treas. Reg. section 1.403(b)-5(b) is the operative provision. Short answer: all employees outside of the excluded groups must have the same opportunity to make pretax and Roth contributions, but there is no nondiscrimination testing of the actual amounts contributed by HCEs versus others.

Alas, the domain registration for erisaadvisoryopinions.com expired, and the opinion in question doesn't seem to be available elsewhere on the Web.

This actually comes up a lot, and while I don't have a citation off the top of my head, my understanding is that a plan is considered "of the employer" if the employer contributes to it (via salary reductions or otherwise), even if the plan is administered at the statewide level. Certainly, this was the approach the IRS took years ago when we asked about maximum contributions to a 403(b) plan (back before the repeal of section 415(e)), and the IRS required us to take into account the employer's contributions to a statewide DB plan.

An employer can exclude from salary reductions under its 403(b) plan employees who are eligible to make contributions under the employer's 401(k) plan. §1.403(b)-5(b)(4)(ii)(B). Thus, if all employees can participate in either the 403(b) plan or the 401(k) plan, you shouldn't have a problem. The only issue I would see would be if the 401(k) provided for exclusion of some employees who were ineligible for the 403(b), but did not fall within one of the permissible exceptions to the 403(b) universal availability rule.

So long as the insurance company has transferred the contracts to the employees, that should work. The only issue we've seen in this instance is that if the contracts were initially set up under a group contract, it may be difficult to get the insurance company to do the necessary paperwork to make them individual contracts.

You are correct. A fully insured plan (private or governmental) need not have a trust. The only concern would be to make sure that the group annuity contract or custodial arrangement meets any fiduciary requirements imposed by state law or Internal Revenue Code section 401(a)(2) or 503. For example, who would be responsible for moving money from the contract to a different one if the issuer were in such financial trouble that there was a risk of it not paying benefits under the contract?

You would need to incorporate the limits applicable to that plan with respect to all participants. However, in the case of eligible participants, the limit would be the lesser of a) the normal limit under 401(a)(17), or b) the amount of compensation that was taken into account (for purposes of determining a participant's benefit) under the plan on July 1, 1993. The reason you can't limit 401(a)(17) to noneligible employees is that if the plan is amended after July 1, 1993 to increase the compensation taken into account, even the benefits of eligible employees will potentially be limited.

I assume you're referring to 403(b)s in the private sector? A public school is pretty much stuck with 403(b) or 457(b), unless there is a grandfathered 401(k).

I think you can treat it as having gone away, under either of two theories. One is that the merged plan is the continuation of both merging plans. The other is that a plan that has no more assets or liabilities can be treated as no longer existing. The issue we've had with 403(b)s is that it can be difficult to figure out whether they have distributed all of their assets, particularly if the insurer is unwilling to break up the group annuity contract to issue individual annuities. But I don't think the IRS or DOL has any issue with a plan no longer being maintained once it has demonstrably ceased to have assets, as in your situation.

It is actually unclear whether an ITG can maintain a 457 plan. 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. Advance Notice of Proposed Rulemaking REG-133223-08, filed with the Federal Register on November 7, 2011, [72 Fed. Reg. 69188 (Nov. 8, 2011)] describes the rules the Treasury Department considers proposing relating to the determination of whether a plan of an Indian tribal government is a governmental plan within the meaning of Section 414(d) and contains an appendix that includes a draft notice of proposed rulemaking on which the Treasury Department invites comments from the public. However, it deals only with the issue of whether an ITG is "governmental," not whether it is a "state or local government." Note that in most respects, section 457 represents a limit on what could otherwise be deferred, not an enhanced benefit. A governmental employer that is not permitted to have a 457 plan could have an unfunded nonqualified deferred compensation plan that could allow for unlimited deferrals, rather than being limited to the $17,500 that could be deferred under a 457 plan. Because a government is not subject to ERISA, such a plan would not have to be limited to highly compensated and management employees, the way an unfunded deferred compensation plan for a private employer would. The only disadvantages of such a plan over a governmental 457 plan would be that it could not allow rollovers and could not be funded. However, in the case of an ITG, the uncertainty over whether a 457 plan is permissible means that whatever approach you take carries risks. If you attempt to adopt a 457 plan, and it is found not to be a 457 plan, the fact that it is funded could cause negative tax consequences for participants. If you attempt to adopt an unfunded deferred compensation plan outside of 457, and 457 is found to apply, then 457(f) could cause negative tax consequences to participants. By contrast, it is clear that an ITG can have a 414(h) pick-up feature, as section 414(h) explicitly states as follows: Of course, unlike a 457 plan, a pick-up arrangement cannot allow for employees to change the amount of their contributions from year to year.

It looks like I've already been heard from here indirectly. Here's a brief synopsis: If a retirement system is an integral part of government, it is exempt from all tax, including on UBIT. If a retirement system is an instrumentality of government, its income is excluded from federal income tax under IRC 115 to the extent the income is derived from an essential governmental function and accrues to a State or political subdivision. Whether a retirement system should be considered an integral part of government or an instrumentality is in itself a muddy area, with private letter rulings taking opposite positions on what seem to be nearly identical facts. To add to the confusion, in General Counsel Memorandum 34476 (Apr. 9, 1971), the IRS concluded that “when a state agency or instrumentality elects to be exempt under section 501, we believe that it should be subject to the burdens as well as the benefits of subchapter F” (emphasis added). In General Counsel Memorandum 36876 (Sept. 30, 1976), the IRS again held “that when a state agency or instrumentality qualifies for and elects exemption under section 501, it is subject to the burdens as well as the benefits of subchapter F” (emphasis added). In both cases, the entity was found to be subject to UBIT. The questions, therefore, are a) whether these old GCMs remain the position of the IRS, and b) whether a a retirement system that has qualified status (which in theory makes it exempt under 501) would similarly lose its exemption from UBIT. One complicating factor, of course, is that in theory, qualified status under 401(a) is not "elected," but simply occurs if the plan meets the requirements of 401(a). When we looked at this some time back, we could not find any public retirement systems that were actually paying UBIT. However, they were quite split as to whether they thought they were subject to it. Some took the position that they were completely exempt. Some avoided all investments that could produce UBTI, believing that they were subject to UBIT. Some were taking a middle ground, avoiding directly commercial activity as potentially "not derived from an exempt governmental function," but taking the position that other investments were exempted by 115 even if they produced what would be UBIT in the case of a nongovernmental tax-exempt.

Yeah, on the OP's question, if you want an individual determination letter, you can use either Cycle C or Cycle E. Here's the link. If you want to switch to a preapproved plan, you'll need to look at what type of plan you've got (defined contribution or defined benefit) to determine when you need to do something.

Just to clarify, the period to submit Mass Submitter defined contribution plans was February 1, 2011 through October 31, 2011. The period to submit Non-Mass Submitter Sponsors and Practitioners, Word-for-Word Identical Adopters, and M&P Minor Modifier Placeholder Applications for defined contribution plans was February 1, 2011 through January 31, 2012. For defined benefit plans, the relevant dates are February 1, 2013 through October 31, 2013 (Mass Submitter) and February 1, 2013 through January 31, 2014 (everyone else). Rev. Proc. 2007-44.

Yes, it does.

For a governmental 401(a), there are no shareholders, and discrimination in favor of officers or highly compensated employees would be irrelevant. Governmental plans are explicitly exempted from nondiscrimination rules.

At least for the statewide systems, there is a page on my site that will show you the plans for each state. Here's a link.

Why would contributions (picked up or otherwise) to a DC plan be tested under 415(b)? That section applies only to DB plans. There is a special rule that employee contributions to a DB plan that are assigned to a separate account are separately tested under 415© (and the benefit generated by them is excluded from the benefit subject to the 415(b) limits). But there is no rule that would make employer contributions (picked up or otherwise) to a DC plan subject to the 415(b) limit.

Thanks, all! I was getting lost in the multiple cross-references.

This is an off the wall question, but I'm kind of going around in circles trying to figure out an answer. A plan participant named a tax-exempt organization as a beneficiary. The plan paid the distribution as a lump sum. Since it was an eligible rollover distribution, the plan withheld at a 20% rate. The tax-exempt would (obviously) like to get the withheld money back. First question: Should the plan have withheld? While it might be common sense that a distribution to a tax-exempt entity should not be subject to withholding, I'm not finding any exception to the 20% withholding requirement for tax-exempt payees, either in section 3405 or the regulations thereunder. Second question: Now that the plan has withheld, what should the tax-exempt do? Since they don't file income tax returns, what form would they use to file a claim for refund under these circumstances. Has anyone here dealt with such a situation?

All I know is that my inbox is full with people asking when my chart will be updated for the 2011 limits. At this point, I'm saying they won't change for 2011, but with a footnote saying that is only a projection. I'm seriously hoping we'll get an actual IRS announcement soon!