Carol V. Calhoun

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.

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.

Legislation in 2001 eliminated the coordination between the 401(k)/403(B) limit and the 457(B) limit in the situation you describe. Thus, the person could contribute the maximum in both the 403(B) plan and the 457(B) plan.

Legislation in 2001 eliminated the coordination between the 401(k)/403(B) limit and the 457(B) limit in the situation you describe. Thus, the person could contribute the maximum in both the 403(B) plan and the 457(B) plan.

This is a little off-topic, inasmuch as this board is supposed to deal with 403(B) annuities rather than nonqualified annuities. However, given that there isn't another board dedicated to nonqualified annuities, I'll try to answer here. Although I have not researched this issue recently, my initial reaction is that an ordinary loss deduction would likely be available. The courts have recognized that the purchase of an annuity may be an investment decision, and thus that a loss on such investment can be deductible. See, e.g., McIngvale v. Commisssioner, 936 F.2d 833 (5th Cir. 1991); Cohan v. Commissioner, 11 B.T.A. 743 (1928). Presumably, the reason for treating a loss on an IRA as subject to the 2% floor would be that it was a loss incurred as an employee, not a loss incurred as an investor. I'm not sure that I would agree with this view, but in any event, it should not apply to an annuity purchased outside of an employment context, purely for investment. The situation you describe appears to me comparable to that of a refund annuity. Before a change in the law, an annuity owner was taxable on a portion of each annuity payment representing the portion of the payment estimated (at the beginning of the annuity payments) not to come from basis. If the individual actually lived long enough to recover more than his or her entire basis, a portion of each payment was still excluded from income. Thus, in the interest of symmetry, a loss could not be taken if the individual received payments equal to less than basis. However, the IRS ruled that this reasoning would not apply to a refund annuity; a fortiori, it should not apply to a single sum received in lieu of an annuity (whether directly from the insurance company, or by sale of the annuity to a third party). However, again, this is just an initial impression. Has anyone else dealt with this issue?

Salary reduction (i.e., pretax) contributions to a 403(B) are an exception to this rule. They are exempt from income tax, but subject to FICA, when contributed. See Internal Revenue Code 3121(v).

This has been a big issue in a number of states. Many of them are considering corrective state legislation. However, state budgetary pressures are in some instances hampering adoption of such legislation. The new IRS 402(f) notice specifically notes that the treatment for state income tax purposes may not mirror that for federal purposes.

I think that a lot of plans follow Kirk's approach. The one issue is that you may want to have the plan provide for how long the gap will be between termination of employment and pay-out. It can be a big employee relations problem, regardless of whether it is a legal problem, if a plan's delay in processing a distribution causes the employee not to be entitled to a large lump sum to which s/he would otherwise be entitled.

Paying money out to the employer is extremely hazardous. Section 401(a)(2) (which applies to governmental as well as private plans) provides that trust assets must be used only for the benefit of participants and beneficiaries. The very limited exceptions to that rule would probably not apply to this situation. On the other hand, offsets of future contributions are not a problem under federal law. (You would, of course, also need to make sure they would not be a problem under applicable state and local law.) Because federal law does not regulate funding of governmental plans, you can reduce future contributions as much as you want, for any purpose, without triggering a federal law issue.

Yes, if they are all governmental, and if the trust otherwise complies with Rev. Rul. 81-100. The Internal Revenue Code now permits a nonqualified governmental plan to invest in a group trust without endangering the tax-exempt status of the trust.

A plan that is not subject to ERISA because the employer is a governmental entity cannot become subject to ERISA merely because its plan document says it is, or because it adopts certain of the provisions that would be required of a nongovernmental employer. However, ERISA-type provisions in a governmental plan may in some instances give rise to contractual rights under applicable state law. Worst case would be to have a state court hold that because a plan stated, for example, that "this plan shall be applied in accordance with ERISA," all of the ERISA rules would apply to the plan under applicable state law. However, a governmental plan can clearly provide for compliance with domestic relations orders without becoming subject to all of ERISA, assuming that nothing in applicable state or local law or the plan document forbids it from complying. (Indeed, because state laws are not preempted by ERISA in the case of governmental plans, state domestic relations law can in some instances require a governmental plan to comply.) Section 414(p) of the Internal Revenue Code states that if a governmental plan complies with any domestic relations order, regardless of whether that order would be a QDRO if it applied to a nongovernmental plan, the order is treated as if it were a QDRO for tax purposes. It is fairly common for state laws or plan documents to incorporate the IRC QDRO provisions by reference for this purpose. One caution on all this is that although a governmental plan is permitted by the IRC to comply with any domestic relations order, some orders issued by a domestic relations court may not constitute domestic relations orders under the IRC. This is a particular issue if the order is issued by a foreign court (i.e., not a "state"), or if the order is in favor of a former domestic partner who is not a "dependent" within the meaning of IRC section 152.

I responded to your post on another board, without realizing that the 403(B) plan was with an ineligible employer. In that case, it would not be a 403(B) plan at all. However, you would need to look at applicable state and local law to determine what the employer's obligations might be under it. For example, annuity contracts under a 403(B) plan must be owned by the employee. If this was done, the employer may not have the ability to take the annuities back, even if they do not constitute 403(B) annuities for tax purposes. Moreover, even if the employees do not have the right to keep the existing annuities or custodial accounts, the employer would probably not be able to move the existing 403(B) money to a 457(B), because a transfer from a nonqualified annuity to a 457(B) plan is treated as if it were a new contribution, subject to the normal limits under section 457. Thus, any transfer of more than $11,000 for any employee not subject to a catch-up provision would be impermissible.

I responded to your post on another board, without realizing that the 403(B) plan was with an ineligible employer. In that case, it would not be a 403(B) plan at all. However, you would need to look at applicable state and local law to determine what the employer's obligations might be under it. For example, annuity contracts under a 403(B) plan must be owned by the employee. If this was done, the employer may not have the ability to take the annuities back, even if they do not constitute 403(B) annuities for tax purposes. Moreover, even if the employees do not have the right to keep the existing annuities or custodial accounts, the employer would probably not be able to move the existing 403(B) money to a 457(B), because a transfer from a nonqualified annuity to a 457(B) plan is treated as if it were a new contribution, subject to the normal limits under section 457. Thus, any transfer of more than $11,000 for any employee not subject to a catch-up provision would be impermissible.

It gets a bit complicated. First, although rollovers from a 403(B) plan to a governmental 457(B) plan are now permitted upon termination of employment, in-service transfers are still not allowed. Thus, the old money would have to stay in the 403(B), and only the new money could go into the 457(B). Also, a termination of a plan is not a distributable event under 403(B), even though it can be under certain other types of plans. Thus, you definitely could not distribute cash from the 403(B) plan. There have been some prior discussions (you might use the search function on this board to find them) of the extent to which you might be able to distributed individual annuity contracts. Note: After writing the above, I saw your post on another board that suggested that the employer was ineligible to establish a 403(B) plan. If that is the case, the plan is not and never has been a 403(B) plan, so all rights under it would be determined purely in accordance with state law. However, transfers to the 457(B) plan would be treated as if they were new contributions to that plan, so they would be impermissible to the extent they exceeded the otherwise applicable limits on contributions to a 457(B) plan.