Carol V. Calhoun

I would say that if you amended in 1992, you are stuck with the lower limits. (It is the terms of the plan in 1993 that govern.) Obviously, there is an unfairness in penalizing those who made the most efforts to comply, but Congress basically decided to live with that to resolve some state constitutional issues.

The issue is whether a state's regulation of all assets held by, or in a grantor trust for, a charitable organization would be preempted in the case of a particular grantor trust that provided the measurement of benefits under an unfunded plan. I would think it very difficult to argue that although ERISA treated the assets as not being part of the plan for regulatory purposes, regulation of them would still be treated as regulation of an employee benefit plan for ERISA preemption purposes. (In Barrowclough v. Kidder Peabody, the issue was the construction and enforcement of something defined under ERISA as a plan, albeit a plan ERISA chose not to regulate, and the issue of whether a rabbi trust is part of the plan never arose.) I suppose we'll have to wait for a court decision to know the answer to this one.

The issue you have here is that although neither ERISA nor the Internal Revenue Code requires you to comply with a QDRO, ERISA does not preempt any state laws regarding domestic relations orders in the case of governmental plans. Thus, the issue would be whether the laws establishing your plan (either directly, or by permitting the adoption of a suitable plan document) would take priority over the domestic relations laws--a question that would be determined entirely under state law. As a practical matter, what we normally do is to write back to whoever sent the order, and either say that the plan can't comply (citing whatever state statute or plan provision prohibits alienation of benefits) or that the plan needs more guidance before it can comply. Even if there is already an order out there, in most instances the order can be amended. And in general, a domestic relations attorney would prefer to work with you to come up with a reasonable order than to try to get involved in litigation with the plan.

The service provider is absolutely incorrect. As you suggest, the exclusive benefit requirement would prohibit, not require, payment of the benefit to the City. I'm a little bewildered as to how to counter the service provider's argument. It's sort of like someone who reads a sentence saying, "The sky is blue," and interprets this as meaning that the sky is orange--how do you prove the common meaning of words? In this case, how do you prove that a requirement that there be a trust for the exclusive benefit of employees does not mean that trust assets must be paid to the employer? However, you might at least cite some recent private letter rulings, e.g., Private Letter Rulings 200205007 (October 23, 2001), 200145006 and 200144007 (July 31, 2001), and 200131011 (April 26, 2001) for the proposition that it is permissible to have a benefit paid to a beneficiary in the event of the employee's death. And thanks for the kind comments about the Governmental Plans Answer Book!

Elective contributions to 401(k) and 403(B) plans are aggregated in applying the limits on elective deferrals of section 402(g). However, unless the 401(a) plan is a grandfathered 401(k) plan, this would not be a concern. Elective contributions to a 457(B) plan are no longer aggregated with elective contributions to a 401(a) or 403(B) plan for purposes of the 402(g) limit. (A glitch in EGTRRA which caused the compensation base for 457(B) plan purposes to be reduced by elective contributions has now been rectified by the Job Creation and Worker Assistance Act of 2002.) For section 415 purposes, contributions to a 401(a) plan, a 403(B) plan, and a 457(B) plan of the same governmental employer are never aggregated (although if a governmental employee has a separate business which has a 401(a) plan, 403(B) contributions on behalf of that employee must be aggregated with contributions to the business's 401(a) plan for 415© purposes.

State laws would not be preempted, because ERISA would not treat the assets as plan assets. (That's the only way the plan could be considered "unfunded.") But the state laws you would be concerned with would therefore not be those governing plan investments, but those governing investments of the employer. In some instances, state laws limit the types of investments charitable corporations can make.

I haven't seen cases on this. But I seriously doubt that courts would be terribly sympathetic. In the first place, the bankruptcy preferences are pretty mechanical, so sympathy wouldn't really help. Also, because these plans cover only the most highly compensated employees, a court might be inclined to believe that the participant was in part responsible for the bankruptcy. Thus, to the extent the court's sympathies played a part, I would see it as being more likely to be negative than positive.

A 457(f) plan is not subject to QDRO rules. Thus, it might have to comply with a QDRO that would not apply to other plans, but the employee would be taxed (for both income and FICA purposes) as though s/he had received a distribution if one were made to an alternate payee. The only question on FICA would be whether the distribution would have been subject to FICA if made to the employee. Presumably, an amount could not be subject to a QDRO if it were not vested, and if it were vested, it should already have been subject to FICA taxes under 3121(v).

Because the money is in theory the property of the separate employers, I cannot see that there would be a problem, so long as each employer has a separate share and there is separate accounting for each. The only real constraint would be to make sure that the investments, accounting, etc. were permissible for tax-exempt organizations under the laws of your state.

The fact that the state PERS does not treat these as employer contributions should not preclude a pick-up within the meaning of federal law, but you would have to look at any restrictions under applicable state law or the PERS plan document. Section 414(h)(2) came into being at a time when Congress was trying to tighten up the law to keep employees from arguing that mandatory employee contributions were not constructively received, and therefore were not includible in income for federal tax purposes. It responded by passing section 414(h), which generally provides that an employee may not treat a contribution as an employer contribution if the plan calls it an employee contribution. However, state and local governments made the argument that unlike private employers, they had no ability to modify their plan documents to call the contributions "employer" contributions, even if in fact the employer was paying them. To deal with this issue, section 414(h)(2) permits state and local governments to treat even those mandatory contributions called "employee" contributions under the plan document as employer contributions, so long as the employer, not necessarily the plan, takes the necessary action. With regard to the applicability of restrictions under applicable state law or the PERS plan document, we actually went through this many years back, at at time when the Virginia Retirement Systems had no provision for employer pick-ups. We represented a local jurisdiction that wanted to pick up employer contributions, but was concerned that if it did, such contributions would be subject to the plan's vesting schedule as employer contributions, rather than being 100% vested as employee contributions were. The member of the Virginia attorney general's office with responsibility for VRS confirmed that contributions could be treated as paid by the employee for Virginia purposes, even if they were technically "employer" contributions under federal law. Obviously, other states might take a different view, but this was at least helpful in the case of Virginia employers.

The bill text and Joint Committee on Taxation explanation of the portions relating to pension funding and EGTRRA technical corrections affecting benefits are now available by clicking here.

The bill text and Joint Committee on Taxation explanation of the portions of the bill relating to pension funding and EGTRRA technical corrections affecting benefits are now available by clicking here.

The bill text and Joint Committee on Taxation explanation of the portions relating to pension funding and EGTRRA technical corrections affecting benefits are now available by clicking here.

It would be very difficult, if not impossible, for a private corporation to adopt a DROP plan. Such an employer would have to work around the ERISA restrictions on back-loading of benefits. It would also have to make sure that the plan, as a whole, did not discriminate in favor of highly compensated employees. I have not seen one that has found a way around these constraints.

Also, ERISA preemption does not extend to governmental plans. Thus, with respect to governmental 457 plans, state law may actually prohibit the higher contributions, not just impose state taxes on them.

You really have to look at the state law involved. The problem is that some state laws independently define a 457 plan, for example, as one that does not allow contributions over the old limits. Thus, if additional contributions (up to the new federal limits) are made, it could take away the state tax law benefit not only for the additional contributions, but for the plan as a whole.

I think you would have to look at applicable state and local law. However, in order to constitute a 414(h) pick-up, the salary reduction would have to either be mandatory, or irrevocable once the employee made it. Thus, failing to reduce the employee's salary would in effect result in paying an employee more than the salary to which s/he was entitled. Unless the extra payment was ratified by the body with authority to set employees' salaries, it would presumably be out of compliance with law. Again, you would have to look at state or local law to determine what actions would be required, and by whom, in order to recoup the excess. As a practical matter, most governmental entities end up giving the employee some reasonable period to repay if the error was not the employee's fault.

In the context of a governmental plan, the assignment and alienation rules do not apply, so in theory a plan could provide for division of benefits pursuant to a settlement agreement. However, if this were done, the agreement would not be a domestic relations order for federal tax purposes, so the employee (not the alternate payee) would be taxed on the distribution. As a practical matter, it has been my experience that either applicable state or local law or the plan document always requires a court order, rather than just a settlement agreement ratified by the parties. However, a Final Judgment of Dissolution of Marriage/Marital Settlement Agreement can be a domestic relations order if it is issued by a court or incorporated by reference into a court order (which would typically be the case).

Anyone who is interested in this topic may want to check out the American Benefits Council's fact sheet on "State Tax Conformity with Retirement Provisions of EGTRRA Federal Tax Law."

If the third-party administrator is paying claims without adequate documentation, you run the risk of the entire arrangement being treated as a nonaccountable expense reimbursement arrangement. In that case, all of the amounts paid to employees, not just those that exceeded their actual expenses, would be includible on their Forms W-2.

ALI-ABA puts on a course called "Retirement, Deferred Compensation, and Welfare Plans of Tax-Exempt and Governmental Employers," which typically deals extensively with 403(B) issues, in Washington, DC each September. You can still see the program for this past year's conference (which was supposed to be in September but got postponed until December due to September 11) at http://www.ali-aba.org/aliaba/CG003.HTM

I'm making the assumption here that you are with the insurance company writing the annuity contract, as opposed to the employer maintaining the plan. Presumably, whatever contract you write would have to be approved by your state insurance commission? I don't know whether you can get any information on forms of contracts which have been approved in your state. If you want to see the 403(B) audit guidelines, they are available by clicking here. However, they were issued in May, 1999, and have not yet been updated for EGTRRA. Alternatively, you might want to look at Publication 571, which was recently updated for EGTRRA. But in either case, remember that you are developing only the contract for the investment medium, not the plan document. Thus, matters such as who is covered, whether there are employer contributions, etc., would typically be covered by the employer adopting the 403(B) arrangement, not by you. What you need to do is to make sure that the contract terms do not cause the employer to be unable to comply with 403(B).

In all the cases I've seen, the employer either pays the daycare provider directly, or reimburses the employee only for documented expenses. Thus, there is no adjustment necessary, because reimbursed expenses are always equal to documented expenses. The deduction from the employee's paycheck should not be adjusted, even if actual expenses are less than anticipated.

Why would you need to adjust W-2 income for this? If the employee set aside a specific amount for dependent care under a properly constructed cafeteria plan, that amount is excluded from W-2 income. If the employee then fails to have enough expenses to use up that money, he or she will lose the money, so this situation would not require an amendment of the W-2. Was there some kind of error in reporting this initially?

Unlike the limits applicable to 403(B) and 401(k) elective contributions, the limit for 457(B) plans applies to the aggregate of employer and elective contributions. Some governmental entitities get around this issue by having only the elective contributions made to the 457(B) plan, and having the employer match made to a separate 401(a) or 403(B) plan.