Carol V. Calhoun

The joint and survivor annuity requirements definitely would not apply if the plan is not subject to ERISA. Even if the employer is an ERISA-covered employer, most salary-reduction-only 403(B) plans are not treated as ERISA plans. If the plan is subject to ERISA, the question gets more complicated. A joint and survivor annuity is required unless the plan is considered a "profit-sharing plan" under ERISA. In the case of a qualified plan, the Internal Revenue Code states that a governmental entity can have a profit-sharing plan, and that contributions to a profit-sharing plan need not be based on profits, so long as the plan itself states that it is a profit-sharing plan. However, these provisions do not apply to 403(B) plans. It is therefore unclear whether a 403(B) plan can ever be a profit-sharing plan, and if so, what would have to be done to make it one. Even if the plan is considered a profit-sharing plan, a joint and survivor annuity requirement would be required if the participant elected a life annuity.

A 403(B) plan can be maintained only by a 501©(3) organization or a public school or university. A city government is not any of these.

Alas, not being admitted to the bar in New York, I'm not able to express an opinion as to what New York law would require. It's clear that federal law would permit New York to impose such requirements; the issue is whether it has.

You really have three problems here. The first is whether the person has gone back to work for the same "employer." You might want to check out the "Fields letter" on trying to distinguish whether you have one employer or multiple employers when you have various governmental entities contributing to the same plan. Basically, the rule at this point seems to be pretty much that you can take almost any approach you want, but you have to take it consistently. See, e.g., PLR 200028042 (April 19, 2000.) Thus, if the plan is treating the all contributing employers as a single employer for other purposes, it probably needs to do so for this purpose, too. If the person has gone back to work for an entity that is treated as part of the same employer, some old guidance suggests that the person would not be treated as having truly separated from service for purposes of the rule stating that a defined benefit plan cannot pay benefits until the earlier of retirement or separation from service. (I don't have a cite right now--does anyone on this board know one?) How long the person needs to be away before they can truly be treated as separated from service is unclear. However, it has been my experience that most statewide plans require at least a 30-day break in service. Given the lack of clarity as to the dividing line, being in step with other plans at least gives you some degree of safety. Finally, what does the plan itself say? Even if the Internal Revenue Code would otherwise allow a distribution, a state or local governmental plan must also operate in accordance with its terms, and with applicable state and local law.

I think you are correct that section 403(a) would allow such a transfer. Also, this is what the PBGC requires in the case of terminating plans, so it is hard to believe that it would be forbidden in the case of other types of plans.

This would depend on (a) whether the plan is a 401 plan or a 457 plan, and (B) whether the employee's participation in the arrangement is irrevocable for the term of employment. Any ideas on what arrangements might be available, and whether they currently provide for (or could be amended to provide for) this employee's participation? Also, you'd want to look at applicable state and local law to find out whether there are any restrictions on the types of plans that can be adopted, or the election by the employee.

This would depend on (a) whether the plan is a 401 plan or a 457 plan, and (B) whether the employee's participation in the arrangement is irrevocable for the term of employment. Any ideas on what arrangements might be available, and whether they currently provide for (or could be amended to provide for) this employee's participation? Also, you'd want to look at applicable state and local law to find out whether there are any restrictions on the types of plans that can be adopted, or the election by the employee.

Are we talking about public schools or private schools? In the case of a public school, the Internal Revenue Code would require use of either a trust or an insurance/annuity arrangement to hold 457 plan assets. In the case of a private school, the Internal Revenue Code would impose serious tax detriments if either a trust or an insurance/annuity arrangement were used to hold 457 plan assets, unless such trust or insurance/annuity arrangement were subject to the claims of the employer's creditors.

In the case of in-service transfers, both the transferor plan and the transferee plan must permit such transfers before they will be allowed. Technically, a transfer at a time that the individual is not entitled to a distribution is not a rollover, so the rule that a plan must agree to roll over a distribution if the transferee plan agrees to accept it would not apply.

In the case of in-service transfers, both the transferor plan and the transferee plan must permit such transfers before they will be allowed. Technically, a transfer at a time that the individual is not entitled to a distribution is not a rollover, so the rule that a plan must agree to roll over a distribution if the transferee plan agrees to accept it would not apply.

Rose v. Long Island R. Pension Plan, 828 F.2d 910 (2d Cir. 1987), cert. denied, 485 U.S. 936 (1988), discussed whether a plan operated by the Long Island Railroad Company ("LIRR") should be treated as a governmental plan. The LIRR was chartered in 1834 as a private stock corporation, the purpose of which was to provide freight and passenger service to Long Island. In 1966, all of the LIRR's outstanding stock was acquired by the Metropolitan Transportation Authority ("MTA"), which converted the LIRR into a public benefit corporation. In determining that a plan operated by the LIRR was a governmental plan, the court relied on a six-factor test originally set forth in Revenue Ruling 57-128, 1957-1 C.B. 311, as follows: [*]whether it is used for a governmental purpose and performs a governmental function; [*]whether performance of its function is on behalf of one or more states or political subdivisions; [*]whether there are any private interests involved, or whether the states or political subdivisions involved have the powers and interests of an owner; [*]whether control and supervision of the organization is vested in public authority or authorities; [*] if express or implied statutory or other authority is necessary for the creation and/or use of such an instrumentality, and whether such auth]ority exists; and [*]the degree of financial autonomy and the source of its operating expenses.[/list=1] The Department of Labor also in theory follows the same test. See Advisory Opinion 94-02A. However, because different people with different objectives are applying it, in practice the DOL interpretations have sometimes been different than the IRS ones.

The only guidance I've seen on this involves treatment of pick-ups for purposes of USERRA, not ADEA (although both statutes are administered by the Department of Labor). I am told that at least one local office of the DOL is treating salary reduction pick-ups as employee contributions. However, this is obviously far from definitive.

Under 457, "deferrals" includes employer nondiscretionary contributions, as well as salary reduction contributions. This is different from the situation for 401(k) or 403(B) plans. As Everett says, the big issue is plan interpretation; the IRS imposes few constraints.

In my earlier post, I had obviously made the opposite assumption, primarily because use of the term "executives" is pretty rare among governmental plans. (Since there is no separate 457 board, this one tends to get all the 457 questions.) However, I just got an e-mail from John, saying that the plan he is discussing is a governmental plan. Given that fact, the definition of compensation is regulated by the Internal Revenue Code only for very limited purposes (e.g. the 100% of compensation limit of section 415©), the 415(B) percentage of compensation limit would not apply, and the nondiscrimination rules would not apply. Thus, you could include section 457(B) deferrals in the definition of compensation for purposes of calculating benefit accruals under a defined benefit plan.

Definitely not! Deferrals under a nongovernmental section 457(B) plan are not part of compensation for purposes of the nondiscrimination rules of Code sections 401(a)(4), 410(B), etc. Treas. Reg. § 1.415-2(d)(2); incorporated by reference in Code section 414(s). And because a nongovernmental 457(B) plan must be limited to highly compensated or management employees, adding in the deferrals would favor such employees as compared with nonhighly compensated employees, thereby creating problems under the nondiscrimination rules.

Does anyone find it a little scary that there are two people who spend New Year's Day discussing employee benefits?

I haven't seen one that offers training solely on 457(B) plans. ALI-ABA does an annual conference focused on plans of tax-exempt and governmental organizations, which is available either in-person (unfortunately, only in Washington, DC) or through audiotapes and course materials. It is normally given in September, although the one for 2001 was delayed until December due to the September 11 events.

Okay, I got a bit tangled up in terminology here. What I meant was just that a direct transfer between 403(B) plans, or from a 403(B) plan to a defined benefit plan to purchase service credit, should be allowed, even when there has been no distributable event. This has, apparently, been a point of controversy among those drafting the regulations dealing with transfers to purchase service credit. Because a rollover requires a distribution, it can occur only when a distribution is otherwise permissible. I'll leave it to Joel as to whether this was what he meant.

The authority for this would be Treas. Reg. § 1.402©-2, Q&A-9. This in turn is based on section 402© of the Internal Revenue Code of 1986, as added by sections 521 and 522 of the Unemployment Compensation Amendments of 1992, Public Law 102-318, 106 Stat. 290 (UCA). The rule would therefore apply to distributions from 401(a) plans. Section 403(B) also incorporates this rule by reference.

Hey, I'm convinced--I just wish IRS didn't seem to be having such trouble with this.

It could be the plan document, or it could be the contracts for the investments (e.g., mutual funds or annuity contracts) in which the plan invests. However, Rev. Rul. 90-24 would not by its terms prohibit such transfers.

The 457(B) trust fund cannot be part of a 401(a) pension fund. However, it is very common for a board of trustees of a state pension fund also to serve as the board of trustees of a statewide 457(B) plan, provided that applicable state law allows this. And in fact, if state law permits, the two plans can both invest in a group trust described in Rev. Rul 81-100, as modified by Code section 401(a)(25), if it is desired to have them invest as a unit. (Of course, you would want to look at state laws to determine whether the combined trust would be an appropriate investment for each of the participating plans.)

Compensation for purposes of applying section 401(a)(17) to nondiscrimination rules is determined on a plan year basis. Treas. Reg. § 1.401(a)(17)-1(B). Thus, in your example, the person would accrue $170,000 in compensation (i.e., the actual compensation for the first 6 months of 2001) for the plan year ended June 30, 2001, then would accrue another $170,000 (the 401(a)(17) maximum for the last plan year beginning before December 31, 2001) for the plan year ended June 30, 2002. However, there are different years used for different limits. For example, in applying the section 415 limits, the compensation used is the compensation for the limitation year set forth in the plan, or if none, the calendar year. Treas. Reg. § 1.415-2(B). Thus, you always need to look at the rules for the specific type of limit you are applying.

In the case of a private (nongovernmental, nonchurch) 501©(3) organization, a 457(B) plan must be limited to a select group of highly compensated employees. Thus, if you wish to cover all employees, you would have to use either a 403(B) or a 401(k) plan. (You could, however, use a 457(B) plan in addition to a 403(B) or 401(k) plan to allow for higher deferrals by management or highly compensated employees.) The two major advantages of a 403(B) plan, in the case of your organization, would be (a) employees could move the existing money into the new contracts, rather than having to have separate plans for old and new money, and (B) a 403(B) plan is not subject to "actual deferral percentage" (ADP) testing. ADP testing in effect limits the contributions of highly compensated employees to a 401(k) plan based on the percentage of compensation that lower-paid employees choose to contribute. While there is a safe harbor that allows a 401(k) plan that has employer contributions to avoid ADP testing if certain requirements are met, it is more easily avoided by just using a 403(B) plan. A 401(k) plan would typically be used only by a larger organization, which had more than one type of employer involved, e.g., a 501©(3) university with a 501©(4) HMO, or by an organization in which a substantial number of employees had balances in 401(a) plans of prior employers that they wanted to be able to roll over. (And even that second advantage will go away in 2002, when rollovers among various types of plans will become permissible.) You can click here for a chart with more extensive information about choosing among 401(k), 403(B), and 457(B) plans.

The only thing I can think of is that among private (not governmental or church) employers, employer involvement is typically a lot less in the case of a pretax-employee-contribution-only plan than in the case of a plan that has an employer match. (An exemption from ERISA is available in the case of certain pretax-employee-contribution-only plans with limited employer involvement.) Thus, while Revenue Ruling 90-24 is available for either type of plan, a plan with an employer match is more likely to have transfer restrictions.