Carol V. Calhoun

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.

You can click here for the IRS announcement that said that governmental retirement plans are not required to file. Nongovernmental 457(B) plans must be limited to a select group of highly compensated or management employees, in order to avoid ERISA funding requirements (which would in turn cause the plan to fail the Code requirement that it be unfunded). Such "top hat" plans have a separate exemption from the Form 5500 requirements.

You're right, my chart, "Checklist of Federal Tax Law Rules Applicable to Public Retirement Systems" covers only qualified plans, and (except for the last paragraph) discusses only the federal tax requirements applicable to such plans. There is a separate chart comparing 401(k), 403(B), and 457(B) plans, but it is not a comprehensive list of federal tax requirements and does not cover state law issues. Unfortunately, when I started working on state law requirements, and other types of plans, there was just too much material to put into one chart (which is partly why I ended up writing the book). However, if anyone has materials they would like to share on this, I'd be happy to give them Web space--just e-mail me at cvcalhoun@benefitsattorney.com.

The book definitely covers 403(B)s and 457(B)s (not to mention excess benefit plans), as well as 401(a) plans. Although in theory governmental plans are not subject to Title I of ERISA, many state statutes incorporate at least portions of Title I, and many state courts interpret common law rules (e.g., the common law fiduciary rules) by looking to comparable ERISA provisions. The book discusses these issues at length. In general, the 457 Answer Book (to which I contributed a chapter) and the 403(B) Answer Book cover the issues of 403(B) or 457(B) plans, respectively, as applied to the plans of tax-exempt as well as governmental organizations. However, they concentrate primarily on issues of federal law. The idea behind the Governmental Plans Answer Book was to include in one book both federal and state materials applicable to governmental plans, whether they be 401(a), 403(B), 457(B), or excess benefit. If you want to know more about the book, there is a description available by clicking here, and a copy of the table of contents available by clicking here.

For all those who have asked, the Governmental Plans Answer Book is here at last! In deference to this board's policy against commercial messages, I'll avoid further description (wouldn't do to have my own post reported to me as moderator! ), but given all the questions I've gotten, I thought I'd respond in one central location.

For those who have been asking, the Governmental Plans Answer Book is here at last!

For those who have been asking, the Governmental Plans Answer Book is here at last!

This provision is intended to require aggregation of 403(B) and 401(a) plans for purposes of section 415 only if the employee controls an employer that maintains the 401(a) plan. For example, if a state university had both a 401(a) and 403(B) plan, those plans would not be aggregated for section 415 purposes. However, if a state university with a 403(B) plan had a member of the medical school faculty who also maintained a private medical practice of which s/he was the sole owner, the university's 403(B) plan would have to be aggregated with any 401(a) plan maintained by the private practice for section 415 purposes. The reason this provision is retroactive is that it was included in section 415(e) before that subsection was repealed. The subsection was repealed in order to eliminate the requirement for a highly complex aggregation of defined benefit and defined contribution plans in determining 415 limits. The elimination of the provision regarding 403(B) plans was an unintended side effect of that repeal, and Congress has now moved to correct that retroactively. As a practical matter, the change is in the interest of most employers that maintain 403(B) plans. In the absence of 414(k)(4), an employer would have to aggregate its own 401(a) and 403(B) plans in applying the 415 limits. Since few employees have their own separate businesses, requiring aggregation of a 403(B) plan only with a 401(a) plan maintained by a business controlled by the employee is a lot more favorable than requiring aggregation of the 401(a) and 403(B) plans of the employer that maintains the 403(B) plan. Moreover, the issue is commonly dealt with by notifying employees that if they have a separate business, they may have to limit contributions to a 401(a) plan of the separate business. The burden is on any employee who has a separate business to make sure that his or her 401(a) plan complies.

The state does not have the ability to alter the federal limits, or to prevent employees of nongovernmental organizations from contributing amounts in excess of the old MEA limits. However, depending on state law, you may find either that (a) state or local schools and universities are forbidden from allowing participants to contribute more than the old MEA, or (B) contributions in excess of the MEA are treated as part of the participant's income for state income tax purposes, even though they are excluded for federal income tax purposes.

Absolutely yes! It is quite common for a plan document of a local governmental plan to consist of several local statutes--often with state statutes, state and local regulations, policy manuals, and the like thrown in. So long as the documents as a whole meet those of the 401(a) requirements that apply to governmental plans, we have never had troubles getting an IRS determination letter on the plan as a whole. One thing to watch out for, though, is the extent to which the local statute can easily be amended if required by the IRS. No matter how well drafted a plan may be, it is very common for the IRS to require some trivial amendments as a condition of issuing a favorable determination letter. (Indeed, when two identical plans are sent to two different IRS examiners, it is common for each examiner to request a different set of amendments.) Such amendments must be adopted within 90 days after the issuance of a favorable determination letter. You want to make sure that whatever legislative body is involved will be in session, will have time to make the amendments, and will agree to make the amendments within that 90-day period. The last thing you want is a determination letter that says that the plan must adopt certain amendments as a condition for qualification, and then to have those amendments not adopted, or not adopted in a timely manner.

Just to clarify: a plan is never really a complete FICA alternative; the employer must still withhold and pay the Medicare portion of FICA taxes, just not the Social Security portions. And with a 403(B) or 457(B) plan with employee pretax deferrals, the employee's deferrals are subject to the Medicare portion of FICA taxes, even though not to federal income taxes. With those clarifications, your understanding is correct.

Just to clarify: a plan is never really a complete FICA alternative; the employer must still withhold and pay the Medicare portion of FICA taxes, just not the Social Security portions. And with a 403(B) or 457(B) plan with employee pretax deferrals, the employee's deferrals are subject to the Medicare portion of FICA taxes, even though not to federal income taxes. With those clarifications, your understanding is correct.

FICA alternative plans are required to provide certain minimum benefits, but the maximums are the same as for any other plan of the same type. Thus, for example, if your FICA alternative plan is a qualified (401(a)) defined benefit plan, and the minimum benefit is generated entirely by employer contributions, employees could be permitted also to make deferrals under a 403(B) plan, a 457(B) plan, or a grandfathered 401(k) plan. Indeed, they could make deferrals under both a 403(B) plan and a 457(B) plan, now that the limits for those two types of plans are no longer aggregated.