Carol V. Calhoun

mbozek, My experience has been somewhat different from yours with regard to state plans and domestic relations orders. Most of the ones I have seen have some provision (which in many cases resembles the qualified domestic relations rules imposed on nongovernmental plans by ERISA) for honoring domestic relations orders. See, e.g., SC Code §§ 9-18-10(9), § 9-18-20(B)&©. When advising governmental plans, I typically tell them that if a state's domestic relations law is going to treat the retirement plan assets as part of the marital estate for purposes of determining each spouse's share, it is in the interest of the participant as well as the spouse to allow domestic relations orders. This is because the alternatives impose less flexibility in planning for both parties. Having the participant receive the money, and then turn it over to the spouse, pursuant to a property settlement note requires contact between often hostile parties for many years in the future. Alternative methods (e.g., giving the spouse the marital home in exchange for the participant getting the full retirement benefit) may be impractical if the retirement plan is the largest asset, and may in any event leave the participant with a full retirement benefit but very limited assets to live on currently. Finally, the spouse's withdrawal rights may in many instances be more favorable than the participant's. (A defined benefit plan, for example, cannot pay a participant before normal retirement date or severance of employment, but it can--if state law permits--pay a spouse much earlier than that.) This gives the spouses flexibility at a time when immediate cash needs (for lawyers, and to set up two separate households) may be high.

Thanks for sharing this news!

An employee has no ability to force a 457(B) plan to make a transfer from one contract to another, at least until the employee has a distributable event. Whether a transfer is possible depends on applicable state and local law, the plan document, and any documents establishing the various investment options.

Probably, at least in the case of a "plan" within the meaning of the Department of Labor regulations. The regulation states as follows: Code section 414(i) defines a defined contribution plan as follows: Although it might be argued that section 414(i) should be considered to apply only to 401(a) plans, the fact that the regulation considered it necessary to exclude simplified employee pensions (which are not 401(a) plans) suggests that any defined contribution plan (including a 403(B) plan) would be treated as a successor plan.It might be possible to argue that a salary-reduction-only 403(B) arrangement that met the DOL standards for not being considered a "plan" could therefore not be a "successor plan." However, I have not seen anything on this, although I have not specifically researched the issue. And before you say anything, I realize that this rule does not really make sense with regard to a 403(B) plan. The whole idea was that a distribution could not be made upon plan termination if there were another plan to which the money could be transferred. Money cannot be transferred in-service from a 401(k) plan to a 403(B) plan. But I think that the statute by its terms would treat a 403(B) plan as a successor plan.

This has been one of the most common misconceptions about the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), the 2001 pension legislation. EGTRRA allows rollovers from 403(B) plans to 401(k) plans. However, a rollover requires a distributable event (e.g., severance of employment). EGTRRA allows transfers of amounts from a 403(B) plan to a 401(a) plan (a) only if the receiving plan is a defined benefit plan (i.e., a 401(k) plan would not be an acceptable receiving plan), and (B) only for the purchase of service credit (rather narrowly defined under the statute). Thus, EGTRRA does not, contrary to what many believe, allow for a 403(B) plan to simply be converted into a 401(k) plan.

The National Council on Teacher Retirement ("NCTR") surveyed state retirement systems that serve teachers and found that 36 out of 50 use a prudence rule that is modeled on the ERISA standard. However, I would suspect that the proportion of locally run 403(B) plans that are subject to the ERISA standard is much lower. Such plans often seem to fall into a gap between trust law (which does not apply to them, because they are not structured as trusts) and state pensions law (which may not cover plans of localities at all, or may cover localities only as to their 401(a) plans).

STLGiant, Although the fiduciary standards of ERISA are often "cut and pasted" into state statutes, the penalties for violating those standards are provided by state law, not ERISA. Thus, whether an employee-participant can sue the district in State court successfully would be determined under state law. In some instances, the answer would be yes. In others, the state law might provide different penalties, or might provide governmental immunity to the district. (But see the Walker case, in which governmental immunity was held not to apply to a collectively bargained governmental plan.)

Section 403(B)(12) is not empty. It provides the nondiscrimination rules for 403(B) plans, and includes the following language: Thus, state and local governmental plans have a statutory exemption from the nondiscrimination rules of Code section 403(B)(12)(i).Governmental plans other than state and local governmental plans do not currently have a statutory exemption from nondiscrimination rules. However, they have been provided with an administrative exemption under Notice 2001-46. The exemption states as follows: Thus, if no further action is taken, governmental plans other than state and local governmental plans will become subject to 403(B)(12)(i) upon the expiration of the period described in the notice.The one exception would be with respect to the nondiscriminatory coverage rules of section 410(B), as incorporated by reference in section 403(B)(12)(i). Under section 410©, all 401(a) governmental plans (not just state and local governmental plans) are exempt from section 410(B). To the extent that section 403(B) requires that 403(B) plans comply with it would appear that a governmental 403(B) plan (which would not be subject to 410(B) even if it were described in section 401(a)) should not be subject to 410©-type requirements.

State and local governments will still be exempt from nondiscrimination rules (other than the universal coverage rule for salary reduction 403(B) contributions) after 2003. Thus, this issue would apply only for purposes of other types of governmental plans (e.g., a school run by the federal government). And I suspect that before 2003, there will be technical corrections legislation that will eliminate the nondiscrimination rules for all governmental plans.

mjb, Actually, there is now one country (the Netherlands) that does not have a separate civil unions statute, but simply allows same-sex couples to marry. Nevertheless, under the Defense of Marriage Act, such marriages are not recognized for ERISA or Internal Revenue Code purposes. The Vermont statute is a hybrid. Although a Vermont civil union is not a marriage, the Vermont statute provides that Nevertheless, a same-sex spouse is not treated as a spouse for ERISA or Code purposes, due to the Defense of Marriage Act. Even if a state were to allow same-sex couples to marry, such persons would not be treated as married for ERISA or Code purposes.Also, a domestic relations order applicable to a governmental plan need not meet the requirements for being a QDRO in order to be treated as a QDRO for purposes of taxing the participant and the alternate payee. Any domestic relations order applicable to a governmental plan is treated as though it were a QDRO for this purpose. Code section 414(p). My concern is not just with regard to the tax effects on individuals. Because my clients are all either employers or plans, I am particularly concerned about the effect on plan qualification. For example, a pension plan is not allowed to distribute benefits until the earlier of retirement or separation from service. A QDRO (in the case of a private plan) or any domestic relations order (in the case of a governmental plan) is an exception to this rule. However, if an order in favor of a domestic partner is not even a domestic relations order, does an otherwise qualified governmental pension plan jeopardize its qualified status by distributing benefits in compliance with it before the participant attains normal retirement date or separates from service? Incidentally, health coverage to a domestic partner is not taxable if the domestic partner is a dependent of the employee. Similarly, an order in favor of a domestic partner is a domestic relations order, and may even be a QDRO, if the domestic partner is a dependent of the employee. However, the definition of dependency requires, among other things, that (a) the domestic partner is financially dependent on the employee, and (B) the relationship is not in violation of local law. It does not cover a situation in which the employee has not provided at least 50% of the domestic partner's support. This contrasts with health coverage of a spouse, which is nontaxable even if the spouse does not qualify as a dependent, or a domestic relations order in favor of a spouse, which is permissible even if the spouse does not qualify as a dependent.

Just a bit of background on the possible exemption of governmental plans other than plans of state and local governments. The provision that would have exempted all governmental plans was in both the House and Senate versions of EGTRRA. There was no meaningful opposition to it in either the House or Senate. The reason that it was dropped is that a technical objection was made that a revenue bill (which EGTRRA was) could not include provisions, such as this one, that did not affect revenues. However, given that the provision is considered noncontroversial, IRS and the Treasury Department have been delaying the effective date of nondiscrimination rules for all governmental plans. Informal statements by relevant employees have suggested that these delays are based on the belief that the issue may well be made moot by future legislation.

It depends on (a) applicable state or local law, and (B) the plan language. 457s may, but are not required to, offer such options under federal law.

Links to new versions: Publication 571, Web page version Publication 571, PDF version Publication 575, Web page version Publication 575, PDF version

Links to new versions: Publication 571, Web page version Publication 571, PDF version Publication 575, Web page version Publication 575, PDF version

slt, Thanks for the follow-up!

Unfortunately, this is really a question of a state-by-state analysis of statutes. To the best of my knowledge, there simply is no single source for getting the law of all 50 states.

I think you are on the right track. Either a governmental plan or a private plan is permitted to make distributions upon the participant's attainment of "normal retirement age," even if the participant continues in service. However, in the case of a private plan, various Internal Revenue Code provisions ensure that (a) the plan itself defines what normal retirement age is, and (B) the unreduced benefit is payable at normal retirement age. Even though the provisions of section 411 do not by their terms apply to governmental plans, the question is whether you can have such a thing as a normal retirement age in a governmental plan if you do not satisfy these requirements. In other words, even if section 411 is not a qualification requirement by itself, is it a requirement if a governmental plan is to be able to make distributions before severance of employment? As with so many areas affecting governmental plans, the problem is that the qualification requirements of the Internal Revenue Code fit together for private plans, but the omission of many (though not all) of them for governmental plans makes it harder to see exactly how they would be applied.

Is this a governmental plan? What does the plan have to say about compliance with domestic relations orders? In the case of a private plan subject to ERISA, only compliance with a qualified domestic relations order is required, and a qualified domestic relations order cannot require the payment of more than the total account balance. Many state or local laws or plan documents dealing with 457 plans follow a similar approach. In any event, in most instances it is best not to try to figure out on your own what the court would have meant if it had considered this situation. You might consider notifying whoever sent you the domestic relations order of the terms of the plan and applicable law governing domestic relations orders, and that (presumably) this order does not satisfy them. At that point, it is up to the party to come up with an order that provides you with the necessary guidance.

Just a comment on the Vermont situation: the issue is that Congress specifically passed the "Defense of Marriage Act," saying that federal law (including the Internal Revenue Code) would not recognize a person of the same sex as a "spouse," even if applicable state or foreign law did. So people who come from abroad and have more than one spouse, a child spouse, a spouse who is a close relative, a person who became a spouse through forcible rape, etc., can have their marriages recognized here if such marriages were valid in their home country. However, federal law prohibits the recognition of a same-sex marriage, even if it was validly contracted in a US state or a foreign country. I'm glad Congress is out there to protect us against the real evils of the world! [Heavy sarcasm, here.] Given that statute, I'm not sure that a court would treat an order in favor of a former party to a civil union as being to "ensure that individuals satisfy their family support obligations." However, as with so much else in this area, the law is unclear.

STLGiant, there are actually more requirements for even a non-ERISA 403(B) plan than the ones you mention. (The Code section 415 limit and the age 70½ distribution requirement spring to mind.) However, to focus specifically on your question, the non-transferability requirement is theoretically an issue because it could be interpreted to prohibit transferring a contract (or a portion of one) to a former spouse, for example. However, given that ERISA-covered 403(B) plans are required to comply with qualified domestic relations orders, the transferability requirement obviously could not prohibit compliance with such orders. The issue then becomes how far that exception extends. I think that most people would assume that a non-ERISA plan could comply with any domestic relations order, not merely with one that would be a qualified domestic relations order under ERISA. (See section 414(p) for comparable rules for qualified plans that are not covered by ERISA.) But what about an order that is not a domestic relations order? For example, suppose that a Vermont court issues an order in favor of a former party to a civil union. Unless the party is a "dependent," such an order would not even be a domestic relations order, much less a qualified domestic relations order, under section 414(p). Can a 403(B) plan nevertheless comply with it?

An "eligible rollover distribution" can occur only at a time when an individual is entitled to a withdrawal. So neither it nor the withdrawal provisions would apply to your situation. You are really stuck with the transfer provision, which sounds like it is not terribly helpful. I would suspect that indeed, no one was paying close attention when the other participant set up his arrangement.

The only real change in the in-service distribution rules is that you can now transfer money from a 457(B) plan to a defined benefit plan to purchase service credit while still employed. However, that change allows only for a transfer, not a distribution.

The regulatory language (it's actually in Treas. Reg. § 1.415-9) states as follows: Thus, neither plan is disqualified, but the excess contributions are taxable to the employee. However, the IRS has consistently taken the position that an employer will not be held liable for withholding on the excess if it reasonably believed that there was no excess. Thus, it appears that getting the employee to certify either that (a) s/he did not have another business, (B) the other business did not have a retirement plan, or © the combination of the 403(B) and the other business's retirement plan(s) was within the limits of section 415 should protect the employer. At that point, if the employee's statements turned out not to be true, it would only be the employee's individual income taxes, not the employer or the 403(B) plan as a whole, that would be affected.

ljr, we've actually discussed this issue before on this board. You might want to click on this link to see a thread discussing the problems of terminating a 403(b) plan: http://benefitslink.com/boards/index.php?showtopic=2347

Joel, there were actually two different provisions in EGTRRA relating to moving money from a 403(B) or 457(B) plan to a qualified plan. One allowed rollovers from a 403(B) or governmental 457(B) plan to a 401(a) plan for any purpose. Another allowed direct transfers from a 403(B) or governmental 457(B) plan to a defined benefit plan for the purpose of purchasing service credit. Thus, the transfer right should exist even in-service--otherwise, it would be meaningless to supply two different rules, one more limited in scope than the other.