Carol V. Calhoun

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.

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.